People who are older, better educated, have good jobs, high incomes and an above-average level of household wealth are odds-on to be knowledgeable about financial matters.
However, that is only half the issue. ANZ and the Australian Securities and Investments Commission (ASIC) have pointed out that behavioural ‘barriers’ prevent even knowledgeable people from making good financial decisions.
In a 2011 report, Financial Literacy and Behavioural Change, ASIC says: “Knowledge is not enough. People don’t always act in their own best interests.”
The barriers to good decision-making that ASIC identified include information and choice overload, complexity and uncertainty, time pressures, under-confidence and over-confidence, and the inability to exercise self-control.
These barriers can add up to trouble.
The Australian Institute of Criminology provided a good example of the problem in its 2012 report, Serious and Organised Investment Fraud in Australia, which sets out the common ‘actors’ in scams and their likely victims. Australia is an attractive location for fraudsters, because of the overall high level of household wealth and, in particular, the high level of self-managed superannuation funds.
The profile of the typical victim was a big surprise. The Institute of Criminology says victims are typically “educated, computer literate and have undertaken preventative research that provides them with a sense of assurance”.
A large percentage are middle-aged or older men, who are self-funded retirees or small business owners.
They are people who consider themselves financially literate; they usually have above-average incomes and savings; and they are inclined to take more risks with their investments.
The issue for these people, and for their professional advisers, is not to be better educated about financial and investment matters but to be helped to become better decision- makers.
Research on financial literacy typically focuses on consumers, especially school students, investors and retirees. It has rarely addressed firms.
In its Financial Literacy and Behavioural Change report, ASIC reviewed 25 research documents; it found none dealing with small business owners.
Nevertheless, it is possible to extract from the research some important lessons for accountants dealing with financially challenged clients.
In particular, ASIC reviewed available research on how to change behaviour. Its take-away? Information on its own is not enough. Here are some of the key ASIC findings:
- The most effective strategies involve simplifying complex decisions into a series of easy steps and then working through them methodically.
- ASIC worked out that getting people to make commitments to take action helps overcome the barriers of complexity and being time-poor.
- Prompts help change behaviour, ASIC found. “Reminders are an important tool to help fight procrastination and inertia,” it claims. These prompts can be delivered by making follow-up calls or emails or sending out online or printed newsletters.
- SIC also cited research that said people are more likely to continue with tasks that make them feel good. So, prompts should aim to provide positive feedback.
- The research suggested that tangible services, such as help lines, provided encouragement and removed barriers. One UK study cited by ASIC found that people struggled to remain engaged with professional advice because they felt it was like homework. Approaches that used several different ways to communicate helped overcome this feeling.
ASIC warns that much of the work on behavioural change is speculative. “Although the financial literacy movement has gained momentum over the past few years,” it says, “there is little reliable, conclusive research about whether financial literacy campaigns and programs result in sustained changes in behaviour and improved financial outcomes.”
One source of information about the financial literacy of business owners is the Australian Financial Security Authority (formerly Insolvency & Trustee Service Australia). In a 2011 study, Profiles of Debtors, it asked people whose bankruptcies were business-related what they thought caused their failure.
Most referred to economic conditions, but some did attribute their problems to a lack of business ability, failure to keep proper books, excessive interest costs and inability to collect debts.
That is pretty basic stuff. It suggests that the financial literacy of small business owners is fertile ground for research and intervention. Accountants can take steps now to minimise their risks and help their less numerate clients.
