You are financially literate, or you wouldn’t be working as an FA, at least we hope so. Most of your clients don’t share your level of financial literacy and that’s one of the reasons they pay you and getting paid is a good thing. People with wealth usually know something about money or they wouldn’t have a lot of it. The more of it they have, the more they know. 

Generally, the financial literacy of most Americans is abysmal. But a recent white paper issued by the Spectrem Group, Financial Literacy: "Do the Rich Know Something We Don’t?" reports financial knowledge increases as people get wealthier.

When asked if they are “very knowledgeable about financial products,” only fifteen percent of the Mass Affluent, individuals with assets between $100K and $1MM, say ‘yes.’ Twenty-three percent of Millionaires, $1MM to $5MM, say ‘yes.’ Of UHNW individuals, $5MM to $25MM, forty-three percent say ‘yes.’¹ What makes this percentage relevant to FAs is the corollary: Fifty-seven percent of UHNW individuals don’t consider themselves ‘very knowledgeable about financial products.’

How do you help your UHNW clients in the fifty-seven percent? You educate them. Information and explanation of financial issues is hopefully a part of your bundle of services. Where to begin? First and foremost, endeavor to speak in plain English and restrain from using industry jargon. This will be difficult since this is the language we use among ourselves.  But we need to be cognizant of what we say when talking to clients. Here’s an example.

Mr. and Mrs. Jones have $20MM. They met with you two weeks ago and outlined their wealth and their goals. Now they have returned to your office to learn what your plan would be for investing their assets. You talk for five or ten minutes and say something along the lines of the following:

 “Mr. and Mrs. Jones, our thinking is you should be long equities with sixty percent of your assets in a diversified portfolio. To achieve this, we would purchase ETFs or maybe SPYs of the S&P 500 index. On top of that, we recommend thirty percent in debt. We would put that money in quality munis rated AA or better, perhaps GOs if we want to give up a bit of yield, and to be triple safe a certain percentage of munis we buy will either be escrowed to maturity or pre-re to the call. Executing this bond plan will be easy since right now muni dealers are long size of the quality paper we want. Finally, let’s keep ten percent in ninety-day bills. This allocation mix is a bit conservative and doesn’t perfectly match the allocation Markowitz theorized to reach the efficient frontier but is more suitable for you.”

OK, I’m being a bit facetious. Nonetheless, if you said all of this Mr. and Mrs. Jones might think you are suggesting they move to Canada taking all their papers with them. While we use these terms among ourselves, most people outside the industry have no idea what we’re talking about.

So remember, don’t use industry jargon when talking to clients with minimal financial literacy. Try and employ plain English even if you are explaining accrued interest on a muni bond you just bought for your client five months after the issue with a long coupon of nine months until the first payment.

We’re confident you can easily explain this. It may take a bit of rehearsal time, but you can do it!

 

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Resources: 

1  https://spectrem.com/Content_Whitepaper/financial-literacy-white-paper.aspx

 

Contributing writer: subject matter expert Charles McCain