How Prepared Are We For The Financial Future

Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures?

Full Report

Ingrid R. Goodenow, FLMI Distribution Research 860-285-7835 [email protected]

Polly Painter-Eggers Distribution Research 860-298-3988 [email protected]

HARTFORD

MIAMI

TORONTO

LONDON

MELBOURNE

SHANGHAI

300 Day Hill Road, Windsor, CT 06095-4761, U.S.A. P.O.Box 208, Hartford, CT 06141-0208, U.S.A. Phone: 860-688-3358 • Fax: 860-298-9555 • Web: www.limra.com ©2007, LIMRA International, Inc. This publication is a benefit of LIMRA International membership. No part may be shared with other organizations or reproduced in any form without LIMRA’s written permission. 007511-0307-250-LRN0

A 2007 Report

ANOTHER INCONVENIENT TRUTH ARE CONSUMERS PREPARED FOR THEIR FINANCIAL FUTURES?

© 2007, LIMRA International, Inc. 300 Day Hill Road, Windsor, Connecticut 06095-4761, U.S.A. 390 Queens Quay West, Ste. 209, Toronto, Ontario M5V 3A2, Canada 2nd Floor, Cardinal Point, Park Road, Rickmansworth, Hertfordshire WD3 1RE, United Kingdom 28 Wattle Valley Road, Canterbury, Melbourne VIC 3126, Australia China Merchants Tower, Suite 917, 161 Lu Jia Zui East Road, Pudong, Shanghai 200120, China This publication is a benefit of LIMRA International membership. No part may be shared with other organizations or reproduced in any form without LIMRA’s written permission. 007511-0307-250-LRN0

Printed in U.S.A.

CONTENTS Page METHODOLOGY............................................................................................................. 5 ANOTHER INCONVENIENT TRUTH................................................................................. 6 How Ready Are We? .................................................................................................... 6 Managing the Money at Home ..................................................................................... 7 Consumers’ Top Priorities ............................................................................................ 8 Consumers’ Secondary Priorities.................................................................................. 9 Age Impacts Priorities................................................................................................... 9

WHAT ARE CONSUMERS THINKING? .......................................................................... 11 Taking Action — or Just Thinking About it? ............................................................. 12

THE ROLE OF THE FINANCIAL ADVISOR .................................................................... 15 Who Do Consumers Look to the Most for Financial Advice?.................................... 15 How Advisors Are Helping ........................................................................................ 17 Opportunities for Financial Advice ............................................................................ 18 Seeking Professional Advice ...................................................................................... 20 The Confidence Gap ................................................................................................... 21 Bridging the Divide between Knowledge and Action ................................................ 22 Targeting Levels of Financial Awareness................................................................... 22 Conclusion .................................................................................................................. 24

RELATED LINKS .......................................................................................................... 25

FIGURES Page Figure 1 — Among Couples Who Manages Finances ........................................................7 Figure 2 — What issues are most important to you? ........................................................10 Figure 3 — Consumers Knowledge of Financial Objectives ............................................12 Figure 4 — Steps Consumers are Taking..........................................................................14 Figure 5 — Consumers Who Seek Regular Financial Advice ..........................................15 Figure 6 — Financial Advisors Used on a Regular Basis .................................................16 Figure 7 — How Primary Advisors Help..........................................................................18 Figure 8 — When Consumers Plan to Call Advisors........................................................19 Figure 9 — Financial Triggers: Differences between Men and Women...........................20 Figure 10 — Who Consumers Plan to Seek Out ...............................................................21 Figure 11 — Matching Literacy Levels with Needs .........................................................23

Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures?

METHODOLOGY LIMRA electronically surveyed more than 1,000 members of a national consumer panel in order to gauge consumers’ financial literacy and their own assessments of their financial preparedness for the future. All participants were at least 25 years of age with a minimum household income of $75,000. Research shows that households with incomes at this level or more are far more likely to rely on a financial advisor than those whose household incomes are less than $75,000 per year. They are also more likely to be presented with a myriad of solutions by financial services organizations. Data has been weighted by gender, age, household income, level of education, and marital status.

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Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures?

ANOTHER INCONVENIENT TRUTH With retirement looming for an estimated 75 million baby-boomers, the nation faces the daunting task of planning for its financial future. Social security dangles by a tenuous thread as boomers prepare for their twilight years. People are living longer; all-the-while health care costs are going up. Health insurance and prescription drug costs are the two largest health care expenses for the average household. The average household spent $374 for prescription drugs and $1,168 for health insurance payments1. Add to the mix the increasing numbers of companies who are scaling back on pensions and other retirement benefits and one can not help but wonder — how is this all going to work? For consumers, the writing is on the wall. With fewer government resources to support the elderly in their retirement years, people will be asked to bear more and more of the financial responsibility for themselves whether they’re ready or not. Are they aware of the many choices they may have to face? Do they have the knowledge to make those choices? In an effort to gauge the country’s level of financial literacy, LIMRA asked upper and middle-income consumers how prepared they think they are to address these challenges. Results show that, for most, financial planning is at best an unpleasant chore often put off or too daunting, which often leads to inaction. So, are consumers seeking professional advice? The answer is yes — and no. The complexities of the economic future pose a different kind of challenge to financial planners. Finding innovative and efficient ways of attracting and maintaining clients is becoming even more elusive as the complexities grow. While advisors may be able to identify potential clients, the strategies they employ to secure those relationships will ultimately determine how successful they are.

HOW READY ARE WE? Middle to upper-middle income consumers (households with income of $75,000K or more) are inundated with offers from financial services companies and a broad spectrum of financial advisors wanting to help them set and meet their financial goals — to the point of saturation. With television, radio, telephone, print media and Internet marketing campaigns all competing for attention, consumers may be overwhelmed with their options. Most ads, however, have common themes: it’s time to look at your spending and saving habits, net worth, and whether or not you’re saving enough for retirement. How are today’s consumers responding to the call? It appears they are hearing the messages, but not necessarily translating their awareness into action. _____ 1

Who’s Buying Health Care, New Strategist Publications, Inc., 2005

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Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures?

MANAGING THE MONEY AT HOME Working on household finances appears to be a job for one person. Sixty-three percent of consumers managing their money at home say they have the sole responsibility for getting the job done. Among couples a similar pattern emerges. In nearly two out of three couple households, finances are managed by only one of the couple. This figure is equally distributed among men and women. Only 39 percent of couples report that managing money is something they do together. One characteristic that most money managers have in common, however, is that they tend to be better educated. In fact, 72 percent of those who handle the finances have college or post-graduate degrees versus those who don’t handle the finances with less education. Figure 1 — Among Couples Who Manages Finances Wife, 31%

As a couple, 39%

Husband, 30%

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Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures?

CONSUMERS’ TOP PRIORITIES Regardless of age, life stage, or affluence, there are some recurring themes among all consumers when identifying their key financial goals for the future. Rising healthcare costs are a major concern for all, so that having adequate hospital and medical insurance coverage is first and foremost on their minds. People are also concerned about paying down their debts so that they will be able to save for retirement (See Figure 2). Understandably, younger consumers are looking ahead, more concerned about how they are going to make it financially until retirement. Older consumers are concerned about maintaining their health and lifestyle through retirement. Additionally, the subject of debt remains a key factor across all age groups. Younger people fear accruing it and older people face the challenge of dealing with it. Other key findings cross over different demographics depending on the financial topic: •

People of all ages regardless of marital status are most worried about three issues: • Their ability to pay for hospital and medical coverage • Their ability to maintain current lifestyle in retirement

(this result excludes Mature Couples) • Being debt-free •

Young Couples and Young Households believe that having enough savings in case of job loss was of utmost importance to them. This may be due to their lack of experience in the job market. They may see themselves as a target for any potential lay-offs or downsizing situations. It’s also possible they may not yet have built up enough savings to fall back on. Not surprisingly, Young Households also reported that funding their children’s’ college education was a critical issue for them.

•

Singles with No Children and Mature Couples are most concerned about having enough money to live on throughout their life spans. Singles without children do not typically have an additional income source to rely on if they are suddenly unable to work due to illness or an accident. The older group, however, may be uneasy about the rate at which their financial resources are dwindling while their life expectancy remains uncertain.

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Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures?

CONSUMERS’ SECONDARY PRIORITIES Aside from Singles with no Children and Mature Couples, all other groups reported that having an adequate income stream was only a moderate concern. • Most people see protecting family income in case of a wage-earner’s death as being moderately

important. Single

parents, however, see this possibility as a major concern.

• Most everyone believes that it is somewhat important to have adequate savings in place in case a

wage-earner becomes disabled. Established

Couples rated this slightly higher.

AGE IMPACTS PRIORITIES While consumers shared many concerns across different demographics, Age stood out as a critical driver when gauging financial plans for the future. •

Older Households and Singles with No Children are more concerned about having enough money to last throughout their lifetimes as well as having adequate hospital and medical coverage. Younger households focus more on maintaining their lifestyles and planning for retirement.

•

Single Parents, on the other hand, are more concerned with protecting their income in case of death.

•

Young Households are more interested in college savings plans than other groups.

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Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures? Figure 2 — What issues are most important to you?

Top three objectives per life stage 1

2

3

4

5

6

7

Single No Children

Single Parent

Young Couple

Young Household

Established Couple

Mature Couple

All Stages

Having hospital/medical coverage Being debt free Having hospital/medical coverage (in retirement)* Having adequate savings in case of job loss Maintain current lifestyle (in retirement)* Having an adequate income stream I cannot outlive Protecting family income in case of death Protecting family income in case of disability Funding long-term care expenses Funding (grand)children’s' college education Paying my or my spouse/ partner’s burial expenses *Responses based on Household Incomes of $75,000 or more

*These questions were asked only of consumers under age 65

White = Least Important Range

Life stages: 1 — Not married with no children under 18 living in household 2 — Not married with 1 or more children under 18 living in household 3 — Married, under age 35 with no children under 18 living in household 4 — Married with 1 or more children under 18 living in household 5 — Married, aged 35 to 55 with no children under 18 living in household 6 — Married, age 56 and older with no children under 18 living in household 7 — All Stages

10

Purple = Most Important Range

Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures?

WHAT ARE CONSUMERS THINKING? With mounting economic and environmental challenges facing consumers today, the need for people to understand the reality of their financial futures is greater than ever. Do people believe they are knowledgeable about the financial options they have in order to prepare for a lifetime of financial security? In our study, we didn’t go as far as to test their knowledge, but we did ask how knowledgeable people think they are when it comes to making financial decisions. We also asked what steps they have taken to prepare themselves for their future financial stability. In general, there are not many financial topics that people feel “very knowledgeable” about. Whether it’s managing savings and investments or purchasing life and long-term care insurance, it appears that consumers still have some things to learn (See Figure 3). Consumers think they know the most about… Saving. Just over half (54 percent) feel they are “very knowledgeable” about saving. Among this group, wealthier and more elderly people believe they’re even smarter about saving. Filing income taxes. Only 45 percent feel they are very knowledgeable about filing taxes. And while 43 percent say they are somewhat knowledgeable, that leaves 12 percent of the population feeling very uneasy every April 15th. The confidence some people have about taxes may be due in part to the popularity and availability of software packages for consumers to manage their own tax returns. Consumers think they know something about… Planning for retirement. Fifty-one percent believe they are “somewhat knowledgeable” about preparing for the later stages of their lives. Life insurance. Like retirement, 51 percent feel that they have some knowledge about this topic. Health insurance. Ninety-one percent believe they are at least “somewhat knowledgeable” about health insurance today. Investing. Just 48 percent feel somewhat knowledgeable, while 31 percent report they know little or nothing about investing. Males (by an almost two to one margin) feel more knowledgeable about investing than females. College-educated people always felt more knowledgeable than those with less education. 11

Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures?

Consumers say they don’t know much about… Long-Term Care insurance. Forty-seven percent say they know very little or nothing at all about LTC insurance, although 40 percent report being “somewhat knowledgeable” about it. Disability Insurance. Forty-seven percent say they know something about this insurance while 36 percent say they know little or nothing about it. Figure 3 — Consumers Knowledge of Financial Objectives Saving

54%

Filing your income taxes

45%

Health insurance

26%

Social Security

24%

17%

M edicare

16%

Long-term care insurance

14%

Very

17%

51%

25%

47%

40%

Somewhat

3% 3%

22%

48%

30% 36% 38%

Not very

1% 3%

21%

50%

36%

3%

8%

51%

22%

Disability insurance

9%

50%

30%

Life insurance

4% 0%

43%

41%

Planning for retirement

Investing

42%

6% 6% 12% 9%

Not at all

*Responses based on Household Incomes of $75,000 or more

TAKING ACTION — OR JUST THINKING ABOUT IT? Most people have at least considered the options available to them when it comes to ensuring their future financial stability. Many consumers have made plans for savings and retirement. They’ve even covered their life insurance needs. However, there are a few holes in their plans, particularly when it comes to long-term care and disability insurance needs (See Figure 3). This makes sense when you compare how poorly informed consumers believe they are about those options. Whether it’s due to the fact that people are avoiding the issue or they just don’t have enough information, these specialized types of insurance continue to elude consumer attention.

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Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures?

Consumers have done this: • 76 percent have developed a plan to pay

down debt, though that leaves 24 percent

of people who are not dealing with their financial futures. Eighty-two percent of consumers between the ages of 25 and 34 are taking steps toward managing their debt, which is more than any other group. • A majority have decided how they’re going to invest their savings in addition to •

establishing an emergency fund. Well over half have determined their life insurance needs, though that leaves 33 percent of people who have done nothing to address this need. As might be expected, younger consumers (between the ages of 25 and 34) make up the majority of those who haven’t thought about it. Once people reach 35, however, their interest in life insurance continues to rise with age.

• 58 percent of people have calculated their retirement

needs, though 36 percent have

only considered what they should do. Consumers have only considered — or never even thought about… •

Long Term Care Insurance. Of the 79 percent of people who haven’t purchased LTC insurance, just about half have considered it. But, it has never even occurred to almost one quarter.

•

Disability Insurance. Fifty-five percent of consumers have thought about it, but almost one quarter have never even considered it.

•

College expenses. Even though 40 percent of consumers have made plans to pay for their children’s (or grandchildren’s) college education that leaves 60 percent without plans. (These results may be somewhat biased in that parents and grandparents were given equal weight. Also, households without children have understandably not considered this as strongly.) Results for married couples with children under 18 (still at home) are somewhat higher. Forty-nine percent have already set up a college fund, 45 percent have considered it, and only 6 percent have no plans.

13

Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures? Figure 4 — Steps Consumers are Taking Developed a plan to pay down debt

76%

16%

8%

Determined how to invest my savings

69%

28%

2%

Established an emergency fund

69%

28%

3%

Determined my life insurance needs

67%

Created a monthly budget

60%

Calculated how much I need to save for retirement

Have done this

40% 29%

Have considered but not done it

*Responses based on Household Incomes of $75,000 or more

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6%

36%

45%

Calculated (grand)child's college expenses

9%

33%

58%

Determined my disability insurance needs

Determined my long-term care insurance needs

24%

40% 33% 49%

6% 15% 27% 22%

Have not thought about it

Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures?

THE ROLE OF THE FINANCIAL ADVISOR While many consumers say they have not taken any steps themselves to prepare for their future financial stability, others have turned to outside advice. Sixty-one percent of consumers earning $75K or more seek professional financial advice on a regular basis. Not surprisingly, of those seekers, many more have either seriously considered taking action or actually taken steps necessary to prepare for their future financial security. Whether or not they are satisfied with the course of their decision-making is another matter. Figure 5 — Consumers* Who Seek Regular Financial Advice Seekers, 61%

Non-seekers, 39%

*Responses based on Household Incomes of $75,000 or more

WHO DO CONSUMERS LOOK TO THE MOST FOR FINANCIAL ADVICE? Among the sixty-one percent of advice-seekers, people rely on different professional advisors for different reasons (See Figure 4). There are ten different sources of financial advice consumers choose from, but there are a few that stand out among the crowd. In some cases, there are demographic cohorts that make certain advisors well-suited to certain customers. For example: •

Accountants are the top choice among all consumers, no doubt driven by tax-filing needs. Thirty-six percent of people rely on them.

•

Financial Planners are the second choice with 29 percent of consumers. Not surprisingly, there are some significant cohorts among this group who are more likely to have an advisor: • Households with income at $150K or more (particularly $200K+). Estate planning

figures prominently in this group. • 32 percent have college or post-graduate degrees.

15

Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures? •

Lawyers are the advisor of choice by people over the age of 65 as well as people in the highest income brackets ($150K or more).

•

Investment Managers and Stockbrokers are each utilized by only 8 percent of consumers, most frequently by the highest income earners of $200K or more.

• Only 8 percent of middle class consumers rely on their Employers the most for financial

advice, mainly by people under the age of 55. Figure 6 — Financial Advisors Used on a Regular Basis Accountant

36%

Financial planner or advisor

29%

Life insurance agent/broker

16%

Lawyer

13%

Banker/loan officer

11%

Investment manager

10%

Stockbroker

8%

Employer

8%

M utual fund broker Other

7% 2%

*Responses based on Household Incomes of $75,000 or more

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Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures?

HOW ADVISORS ARE HELPING Of those people who currently rely on a financial advisor, particular situations call for different kinds of advice. People tend to go to their primary advisors when making investment decisions and shopping for financial products (See Figure 7). Likewise, there are situations that stand out where people don’t talk to their financial advisors. Interestingly, financial advisors aren’t widely viewed as “counselors”, despite the fact that many advisors may see themselves in that role. It also may come as a surprise that people don’t go to their financial advisors for their insurance needs. This may be driven by the age old concept of insurance being sold, not bought. Advisors help the most when it comes to… • Getting impartial advice. • Choosing appropriate investments. • Matching products with individual consumers’ needs’.

Advisors help somewhat when it comes to… • Identifying how much people need to save. • Providing encouragement on financial goals. • Helping people monitor their financial progress toward their goals.

Advisors don’t help at all when it comes to… • Serving as a financial “counselor” • Identifying insurance needs.

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Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures? Figure 7 — How Primary Advisors Help* Providing impartial advice

44%

Selecting appropriate investments

43%

33%

24%

Identifying what products are best for my situation

42%

36%

22%

Providing encouragement to maintain my financial plan or strategy

36%

Helping me monitor progress toward my goals

33%

Recommending a specific company's product or service

32%

Identifying how much I need in savings

44%

42%

19%

Serving as a "financial counselor"

18%

22%

41%

26%

37%

24%

Identifying my insurance needs

12%

31%

43% 38%

43%

34%

A great deal

33%

48%

Somewhat

Not at all

*Responses based on Household Incomes of $75,000 or more

OPPORTUNITIES FOR FINANCIAL ADVICE People who aren’t seeking advice are under the impression that something dramatic must happen that will push them into it. Among the 39 percent of consumers who are not actively seeking financial advice, there are two occasions that would prompt them to do so (See Figure 8): • Being on the receiving end of a financial windfall and/or • Managing the family estate after a death in the family

Not to minimize the impact of a financial windfall or a death in the family, but consumers who would seek advice only under these circumstances obviously don’t see the benefits an advisor could have on a daily basis. These consumers don’t seem to appreciate the small ways in which their income stream could be managed more efficiently over the long-term. For whatever reason, they are fixed in shortterm thinking.

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Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures? Figure 8 — When Consumers Plan to Call Advisors Receipt of inheritance or other large sum of money

54%

Dealing with death of spouse or other family member

47%

Starting or selling a business

36%

Purchase or sale of primary or second home

35%

Dealing with a serious illness

26%

Filing income taxes

24%

Saving for retirement

22%

Preparation for marriage or divorce

17%

Paying for college expenses

11%

Career change or loss of job

11%

Birth or adoption of a child

8%

*Responses based on Household Incomes of $75,000 or more

Different Financial Triggers for Men and Women Not surprisingly, men and women don’t always agree when it is the best time to call on an advisor. For example, even though a mere 8 percent of the population would consult an advisor before the arrival of a child, 80 percent of those are women. Similar differences, though not quite as sizable, are observed when it comes to purchasing a home, dealing with a death in the family, and starting or selling a business. Most notably, however, women are far more likely to consult a financial advisor before getting married or divorced (See Figure 9). Our results support the age old notion that men are more likely to “go it alone” during a crisis or major life change than women are.

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Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures? Figure 9 — Financial Triggers: Differences between Men and Women None

70%

Career change or loss of job

30%

48%

52%

Paying for college expenses

43%

57%

Saving for retirement

43%

57%

Filing your income taxes

42%

58%

Dealing with a serious illness

42%

58%

Receipt of inheritance or other large sum of money

42%

58%

Starting or selling a business

40%

60%

Dealing with death of spouse or other family member

39%

61%

Purchase or sale of primary or second home

38%

62%

Preparation for marriage or divorce Birth or adoption of a child

33%

67%

20%

80%

M ale

Female

*Responses based on Household Incomes of $75,000 or more

SEEKING PROFESSIONAL ADVICE Who are non-seekers likely to consult on that occasion when they may need advice? Financial planners or advisors were the first choice for 51 percent of non-seekers, followed by lawyers (45 percent) and accountants (34 percent). This paints a somewhat different picture from those who are currently seeking advice. Accountants and financial planners are currently the advisor of choice among active seekers. This may be driven by the triggers that would make these individuals seek out advice, such as a financial windfall or death in the family. Under these circumstances, consumers may feel that financial advisors typically offer a more diversified approach to financial planning than an accountant would.

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Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures? Figure 10 — Who Consumers Plan to Seek Out 60% 50%

Financial planner or advisor

51%

Lawyer

45%

Accountant

40%

Investment manager

34%

Life insurance agent/broker

30% 20%

Banker/loan officer Other

17%

Mutual fund broker 10%

8%

6%

0%

3% 3% 2% 1%

Employer Stockbroker

*Responses based on Household Incomes of $75,000 or more

THE CONFIDENCE GAP On the surface, it appears that many upper and middle-class consumers have made some admirable plans when it comes to managing their financial portfolios. But, somewhere along the line a disconnect developed between the actions people are taking and their opinions about those actions. People recognize the importance of making financial plans, but they are not sure whether or not they have done the right thing. Consider the following: • 69 percent of consumers have determined how they’re going to invest their savings, but only

54 percent think they know a lot about saving. • 67 percent feel they have determined their life insurance needs, but only 26 percent feel “very

knowledgeable” about the subject. In fact, 68 percent of people report having some or not very much knowledge at all when it comes to life insurance. • 58 percent feel they have established their retirement needs, but only 30 percent of people feel

very knowledgeable about the subject.

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Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures?

BRIDGING THE DIVIDE BETWEEN KNOWLEDGE AND ACTION Most people (with household incomes of $75K or more) have made at least some plans to ensure the future of their financial security. They have been inundated with information from the financial services industry that has elicited a general awareness among people about the importance of making financial plans. Most have some ideas about their options and have even taken steps toward establishing a plan for the future. So, why don’t they feel more knowledgeable about their finances? Keep in mind that most people are going it alone when it comes to managing the household finances. They may feel isolated in their decision-making, creating unease. Furthermore, whether consumers themselves are responsible for their financial planning or their financial advisors, people do not appear to be comfortable with the decisions that have been made. Unfortunately, this is not an endorsement for the financial advisors of the world, considering that almost two-thirds of middleclass consumers seek professional advice outside their family on a regular basis. One could argue that most of those people leave everything up to their financial advisors and let them worry about it. But, that doesn’t really get to the heart of the matter. When it comes to financial literacy, people need to have certain skills: they need to be informed; be able to distinguish between a good financial decision and a bad one; and, feel confident in those decisions once they’ve made them. The question ultimately lies in who is responsible for the financial literacy of the country — consumers, the people advising them — or both?

TARGETING LEVELS OF FINANCIAL AWARENESS Based on our findings, middle to upper-income consumers typically fall into one of three categories when it comes to financial literacy. Among these categories, there appears be a built-in progression regarding levels of expertise. For consumers who are basically oblivious about their financial futures, an education in the basics of financial literacy would be the most logical starting place to get them involved. Other research, particularly when it comes to life insurance needs, supports the necessity to educate consumers before selling products to them2. Procrastinators, who have the knowledge but not the desire to act, need encouragement and a call to action. Lastly, those who do have an education in financial literacy and have begun to take steps need more specific guidance in how to make the right choices for their individual needs (See Figure 11). Financial advisors and financial services companies should consider these different levels in order to target their markets more effectively.

_____ 2

Every Excuse in the Book, LIMRA International, 2005. 22

Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures? Figure 11 — Matching Literacy Levels with Needs

Suggestions for Advisors and Financial Services Companies: • Market products and services targeted to consumers needs based on a client’s needs’ assessment.

In other words, don’t try to sell products to an uneducated consumer; rather, try to educate first. A procrastinator doesn't need educating, but encouragement to take action. An educated consumer already has knowledge and has taken action. Working with him on the finer details of his financial plan would benefit him the most. • Match needs with products, particularly when it comes to insurance. Consumers don’t typically

think of how insurance plays a role in their financial futures. This is an opportunity for advisors to educate as well as fine-tune their customer plans. Whether insurance needs are short-term or long-term, advisors should address insurance concerns when looking at the overall picture. • Emphasize how consumers can help themselves, rather than focusing on selling people more

products than they can handle. Educating people also helps to build relationships. • Clarify the scope of your business to consumers. If you are able to manage a broad specter

of financial needs, market yourselves as such. • Consider offering workshops and/or courses to consumers so they can become more active in

their own decision-making. In turn, advisors can benefit by working with educated consumers so that the focus of discussions can be on what choices to make, rather than clarifying what the choices are. • Take initiatives to raise participation rates of employers who sponsor 401(K) plans, making

enrollment automatic. Employees should opt out rather than opt in. • Consider offering educational workshops directly on-site at the workplace that are tailored to

diverse consumer needs. • Target the specific needs of end consumers when building partnerships with employers to build

in more efficiency. As with financial advisors, it is important to know your audience so that you’re not trying to sell products to people they don’t need or want. 23

Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures?

CONCLUSION Preparing for the future financial needs of the population has become a great challenge facing consumers and financial service providers alike. Consumers feel uneasy about their situations regardless of whether or not they’ve prepared themselves. Financial advisors should take note and heed the call to action. The key to success will be matching needs with the particular financial services that best meet those needs. Understanding whether or not individual consumers require educating, encouragement to act, or specific advice should be the driving force behind any plan to target new or existing markets. Clearly, consumers and advisors both have some responsibility in achieving the overall goal: a financially prepared and literate population that can approach the future with confidence.

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Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures?

RELATED LINKS The following links are valid as of 01/22/07.

LIMRA Every Excuse in the Book (2006) Last year, LIMRA identified the potential for new life sales among 48 million U.S. households who say they don't have enough life insurance. New insights into why they don't buy the coverage they say they need and what it will take to convert them into buyers is the focus of LIMRA's latest study of the underinsured life market. This report highlights what consumers desire when going through the life insurance buying process, and points out the changes the industry will need to make if they want to reach these potential customers. http://www.limra.com/members/abPdf/5370.pdf

Triggers and Thresholds for Financial Advice (2004) Financial advice is a staple of the financial services industry, but people do not seem to make much use of financial professionals in their financial decision making. This report summarizes the evidence on use of financial advice by consumers. A model is presented that captures what must happen for consumers to make use of a financial advisor. http://www.limra.com/members/abstracts/4741.aspx

Generations X and Y — The Financial Attitudes of Tomorrow’s Market Today (2003) Generations X and Y have the potential to impact the financial services industry in the U.S. With close to 46 million persons born between 1965 and 1976, Generation X makes up 16 percent of the U.S. population. The 31 million adult members of Generation Y, born between 1977 and 1984, represent 11 percent of the population. Together these two generations comprise more than one quarter of the U.S. population. In the next 20 years, as the majority of baby boomers enter retirement, the financial services companies will face at least two challenges: to retain the money they have already accumulated from their clients and to get new money invested in their products. As Generations X and Y will greatly impact the success of the latter, it is important for the life insurance and financial services industry to understand the financial attitudes and behaviors of these two generations. This report examines how Generations X and Y feel about today's financial environment. http://www.limra.com/members/abPdf/4252.pdf

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Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures?

Issues Surrounding the Use of Financial Advisors (2001) To better understand what factors consumers weigh when deciding whether to seek assistance from a financial advisor, the kinds of help they desire, and the attributes they consider important in the selection of a financial advisor, LIMRA International conducted a series of eight consumer focus groups in one Canadian and three U.S. cities. The groups were segmented by life stage to capture differences in opinions and attitudes among young couples, young families, older families, and empty nesters. Within each of these categories, participants in one group were more upscale than those in the other. Discussions in the groups centered on what participants perceive to be their current financial needs, who in the household is involved in financial decision making, and what issues are apt to surround the selection and use of an outside advisor. http://www.limra.com/members/abPdf/3430.pdf

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Another Inconvenient Truth: Are Consumers Prepared for Their Financial Futures?

Full Report

Ingrid R. Goodenow, FLMI Distribution Research 860-285-7835 [email protected]

Polly Painter-Eggers Distribution Research 860-298-3988 [email protected]

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