Financial Capabilities Increasing, But Advisors Still Needed

Despite myriad challenges, including the coronavirus pandemic and rising interest rates, Americans’ financial capabilities are surprisingly sturdy.

The recent FINRA Investor Education Foundation’s National Financial Capability Study confirms as much and while that’s clearly good news, there’s ample evidence suggesting registered investment advisors (RIAs) are as relevant as ever. Perhaps even more so today owing to challenges such as inflation, longer life expectancies and the need for durable income, among others.

Interestingly, the FINRA survey indicates many adults were able to bolster personal finances during the pandemic. On the other hand, some demographics are still struggling. Both points underscore Americans’ need for advisors and vast opportunities for RIAs.

Further highlighting the importance of advisors in today’s environment is the unevenness of the economic recovery and the point that many Americans were able to fortify personal finances with the help of government stimulus. While that was a prudent move on their parts, checks from Uncle Sam aren’t continuing into perpetuity, confirming advisors are very much needed and relevant.

Important Survey Details

Data suggest Americans are shoring up emergency savings and cash positions, but advisors should not trend isn’t linear across all groups.

“Fifty-three percent of respondents reported having three months of emergency savings in 2021, compared to 49% in 2018, and 35% in 2009,” according to the National Financial Capability Study. “Further, 54% of respondents said they did not find it difficult to cover expenses and pay bills, compared to 50% in 2018 and 36% in 2009. But 20% of respondents indicated that they were laid off or furloughed in 2020 or 2021 due to the pandemic, and 26% experienced a large, unexpected drop in income.”

Add to that, as experienced advisors know, clients’ employment status plays a pivotal role in their near- and long-term financial outlooks. Unfortunately, millions of Americans lost jobs during the COVID-19 crisis and today’s low unemployment rate is deceivingly low because some folks aren’t reentering the workforce.

“Of those who were laid off or furloughed due to COVID-19, 64% reported difficulty covering expenses and paying bills, compared to only 39% of those who were not laid off or furloughed,” adds FINRA. “Those laid off or furloughed also had substantially higher levels of financial anxiety and were much more likely to overdraw their checking account (38% compared to 17%) and fall behind on mortgage payments (40% compared to 10%).”

That’s further confirmation that now is an opportune time for advisors to nurture relationships with clients that may be out of work or just now reentering the labor force. After all, these clients have special circumstances and advisors showing they care about those circumstances could go a long way toward fostering fruitful long-term relationships.

Demographics, Knowledge Matter

The National Financial Capability Study further reveals that demographics play a significant role in financial positioning, capabilities and potential need for advisors’ guidance.

“Younger adults, those who have a high school degree or less, and those who identify as African American or Hispanic/Latino were most likely to experience unexpected income drops in 2021,” notes the survey.

In search of older, more affluent clients, some advisors tend to overlook these groups, but younger, prescient advisors looking to build practices while doing good in their communities can find substantial opportunity with demographics other advisors are overlooking.

Beyond demographics, another trend that’s clear is that the more financially knowledgeable a person is, the better of their personal finances usually are. That further cements the validity of advisors and their roles in educating clients.

Financially knowledgeable Americans “spent less than their income (53% vs. 35%) and set aside three months’ worth of emergency funds at higher levels (65% vs. 42%). Those with higher financial literacy were also more likely to have taken steps to plan for their long-term financial future by, for example, calculating retirement savings needs (52%, compared to 29% among those with lower financial literacy) and opening a retirement account (70% vs. 43%),” concludes FINRA.

Related: Young Generations Have Great Expectations About Wealth