The world's most affluent are getting wealthier. The population of high-net-worth individuals - often defined as those whose assets minus liabilities equal between $1 million and $30 million - grew last year to 22.4 million people, according to a recent report from Wealth-X. Their population having increased nearly 2 percent, high-net-worth individuals are valued at north of $63 trillion worldwide.
The U.S. has more high-net-worth individuals than any other country on the map, perhaps unsurprisingly, given it has the largest economy among industrialized nations, boasting 8.7 million in 2018. That's the equivalent of 40 percent of the world's high-net-worth individuals.
As the old saying goes, money doesn't buy happiness, but if nothing else, it opens the door to more opportunities for fulfillment. However, there's one thing that all the money in the world won't buy that the high net worth strongly desire - education. More specifically, financial education for their family and loved ones.
That's the conclusion of a recent study that surveyed approximately 900 people whose investable assets totaled $3 million or more. Titled "U.S. Trust Insights On Wealth and Worth," the report detailed by ThinkAdvisor found that teaching children and heirs about money management was among the top five topics high-net-worth clients most wanted to discuss and address with their advisors. More specifically, 21 percent of respondents cited this as their most pressing concern, behind only estate planning and trust options, respectively, as larger sticking points.
This may be due to the fact that schools aren't prioritizing personal finance skills quite like they used to. Indeed, according to the Council for Economic Education, just 33 percent of states require students to take at least one personal finance class in order to graduate. Additionally, just 16 states have standardized testing for economics and only seven states do for personal finance.
"90% of consumers believe person finance should be a required course in high school."
This no doubt comes as unwelcome news for many Americans, high net worth or otherwise. Ninety percent of consumers in a 2018 Equifax survey said personal finance comprehension ought to be mandatory for high school students to receive their diplomas.
Financial literacy is not something that young Americans are especially confident about. Among 18- to 29-year-olds, 33 percent in the Equifax study gave themselves a "C" in money matters. That's not much better than the average U.S. adult, as nearly 40 percent said their financial literacy was worth a "B" letter grade.
3 in 4 older Americans below average in retirement finances
Other analyses reveal similar results. Take what the American College of Financial Services found in 2017. Respondents who were 60- to 75-year-old and had investable assets of $100,000 or more were tested about various aspects of retirement planning. Nearly three-quarters of respondents not only didn't pass, but failed. The average overall score was 47 percent, with just 5 percent scoring a "B" or higher.
David Littell, retirement income program co-director at The American College of Financial Services, said an estimated 10,000 baby boomers per day will become senior citizens during the next 12 years.
"More and more Americans are retiring but so few understand basic facts and strategies when it comes to ensuring that their retirement is a comfortable one," Littell explained. "The results of this survey are alarming and a stark reminder of the need to be prepared for the decades in retirement when you are not earning a steady stream of income."
One can only imagine the poor state of millennials' financial literacy should this troublesome trend continue. The current situation lends more insight into why so many high-net-worth clients want to teach their children and grandchildren about how to better manage money so that it works for them.
Teaching the basic concepts and principles of financial management hinges on engagement. In other words, family members have to truly want to improve their skills and understanding for lessons to sink in. Here are a few strategies that can help you and your high-net-worth clients improve his or her family members' financial comprehension.
Start the conversation
If teaching children about finances is something your client has mentioned, he or she probably has someone in mind who could use financial literacy improvement. Ask your client to expound a bit on this individual. How old is the individual? Is he or she still in school, and if so, what grade? What are his or her ambitions and reactions to learning? These inquiries can give you a better idea of who you'll potentially be working with and what strategies will resonate.
Make use of mobile technology
If there's anything to which people are receptive, it's smartphones. According to the Pew Research Center, close to 90 percent of Americans own at least one smartphone, up from 88 percent in 2016 and 86 percent in 2015. The percentages are even higher among millennials.
Leveraging mobile technology and its popularity can pay dividends as an advisor. See if you can identify user-friendly financial management apps that are multiplatform and boast several features. In doing so, your clients' heirs may be more receptive to building on the skill sets or develop new ones.
Diagnose the problem
Like a doctor, you can't give care without first diagnosing the ailment. That's why you should do some testing to see clients' areas of weakness so you can prescribe a treatment that can help turn shortcomings into strengths. You may consider asking what the Pension Research Council describes as the "Big Three" questions. Here's the wording of one of the multiple-choice questions from a 2017 Forbes article:
"Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in the account if you left the money to grow?"
A. More than $102
B. Exactly $102
C. Less than $102
(The correct answer is A).
While money management may be their chief function, financial advisors, at their core, are teachers. That's why Global Financial Distributors holds ongoing informational webinars that can help you learn about and recommend the strategies that can pay off for your clientele. For more information on when these webinars take place, such as Understanding Life Insurance Premium Financing for Businesses, contact us directly.