One of the facts which the Royal Commission into banking and financial services identified is a lack of financial literacy amongst many Australians.   Consumers have failed to understand the basics of what they are investing in, how they pay for the professional service they receive, and what they should expect from their financial adviser.


It has been proven that a client’s financial wellbeing can be lifted by enhancing their financial literacy AND encouraging changes to their behaviour.


An adviser’s role is to understand a client’s literacy level and to build a level of trust to help address the gaps in their knowledge.  Once this trust is established, the role of the adviser is to spend time explaining why their strategy or advice is appropriate.


Often, I find with conservative clients they are seeking preservation of capital as a goal, but actually, require exposure to assets with higher levels of growth and income to fund their retirement income needs.  The fear of losing everything overcomes the understanding that looking at the bigger picture and taking a long-term view can result in a much better outcome for them.  The gap in their knowledge is generally brought about by past experiences or a lack of understanding of financial concepts.


The GFC changed the face of investing.


In the past 120 years, the fall in equity markets in 2008 was more significant than at any other point in history — a global fall of around 50%.  So, a fully invested client with $500,000 would stand to see their portfolio fall to $250,000 if fully invested in equities (shares) just before the market crashed.  This fear of losing everything, or half of everything plays on people’s minds, but the reality is most clients are invested in a well-diversified portfolio of cash, shares and bonds. Even during big falls in markets, their portfolios would not have fallen as much as a fully invested share portfolio.  But still, people do become fearful that they may lose some or a large chunk of their retirement savings.


The move into cash does not solve the problem.  Why? Because cash rates are low, as low as 1.5% and when a client requires around 5% – 7% of their investment savings to meet their living expenses, a low returning investment will only seek to deplete their capital faster.


It is essential that an adviser explains the concept of risk-return and that by taking on a small amount of risk and lifting the return to around 5%, can be the difference between your retirement savings lasting all your life or only some of your life.


Consumer behaviour also plays a vital role in financial wellbeing.    Psychology has found that humans tend to have unwarranted confidence in their decision making.  In essence, an inflated view of one’s abilities.  When it comes to investing, people may have an overly optimistic view of what their portfolio should earn, expecting returns far more significant than the market can deliver without taking on commensurable levels of risk.  They may be influenced to ‘bet big’ and then when things don’t turn out as expected, quickly retreat and sell down to cash. This buying high and selling low is the greater destroyer of capital and retirement savings.  The role of an adviser is to educate clients and help them make informed decisions about the long-term performance of their portfolio.  One way of achieving this is through a well-diversified portfolio. Diversification is the single most significant way of reducing risk.  When you overlay an investment strategy such as Dynamic Asset Allocation (DAA) over a well-diversified portfolio, DAA can smooth out returns over the long run, as well as reduce risk.


While Australia’s financial literacy is rated higher than the average rate of OECD countries, there is still a substantial amount of people who are not confident in managing money.  The role of an adviser is to identify the level of financial literacy and to help bridge that gap by putting in place strategies that give the client confidence that their overall goals and objectives will be achieved.  Ultimately though, encouraging clients to become more financially literate, to ask profound questions, to undertake their own research, will provide a better outcome for everyone.


For more information please contact Michael Spinks, Adviser, Collins SBA on 1300 265 722 or email