ASIC’s Barriers to Making Good Financial Decisions

It was pleasing to see, as brought to my attention by the editor of Property Observer, Jennifer Duke in her fine article last week – The five factors inhibiting every investor in today’s advice-laden world, that ASIC did have a good understanding on consumer investment behaviour when it comes to financial decisions they make.  And the report card is definitely a fail for most Australians.

ASIC believes, as highlighted in Jennifer’s story (which in my view is a must read) that there are five barriers to making good financial decisions by investors.  They are:

1. Behavioural Biases
2. Low Levels of Financial Literacy
3. Access to good quality financial advice and information
4. Information and choice overload
5. Length and complexity of disclosure

Source: ASIC’s submission to the 2014 Financial System Inquiry

I’ve got to give ASIC some real credit, its summary of barriers holds true in my dealings and observations with investors on the finance and property side.  It’s something that I have written about before and for many years has been a driving passion on mine to try and educate those who are lacking on points 1 & 2.

I have countless observations when it comes to ‘Behavioural Biases’, but I wanted to just focus on a couple, speaking from an advisor’s point of view.

The ‘biggie’ for most Australians is that money has a level of control on them.  There is a well-known saying in financial services – “Your State of Wallet, Plays with your State on Mind”.  This couldn’t be truer and I have written about this before.

Money or the lack of it, does affect an individual’s psychology in a several ways.  For some, they get very anxious about money and, even when in later life they have ample amounts of it, they continue to let money control their decisions.  Often this type of people don’t take any risks, and they are very ‘tight’ with money.  There’s a fair bet they will not relax around money or spend it, even in retirement.  Those heavily affected will more than likely take it to the grave, because it has so much control over them.

How do I know when I’m dealing with someone like this? A clear example is when I meet someone who has been saving for years to buy their first home.  Their savings are usually substantial in the hundreds of thousands range.  Some might think this is good, but in reality, in almost every case the areas which these people have wanted to buy has outstripped their savings by at least two to one.

So in reality, they have actually lost tens or hundreds of thousands of dollar in wealth because over the 15 years they have been saving, the property prices have significantly outpaced the amount they are able to save each year.

Another big Behavioural bias, which for the record also has links to financial literacy, is what I tag as the ‘Financial Faking It’.  All of us handle money daily, so we all perceive that most of us know how to manage our money.  No one wants others to know that the reality for many people is that they aren’t in a good financial position at all, so these people fake it.

Now, there are different levels of ‘fakers’ in my book – the hard core ones; they openly lie about how good things are going for them, both financially and, one could hazard a guess, personally also.  The middle of the road fakers, on the surface things look OK, as they will usually put their heads in the sand  and be very low key about their money issues.  Both of these levels need financial help and they need it fast.

The final level of ‘fakers’ are pretty much the rest of us (on occasion).  True? – none of us want to be seen by our peers as financial failures in a world where image, status, indulgence and success are everywhere.  A quick search on anyone’s Facebook will back me up on this statement.  If it’s not someone checking in at some international destination, then it’s definitely a snapshot at an amazing or highly desirable destination.

Given these perceived indulgences and successes we see our peers enjoying, it’s easy to understand why many people are reluctant or embarrassed to discuss money matters with their friends or family, let alone to speak to a financial advisor to get help if their money matters aren’t in great shape.  Again, they are fearful of being seen as someone who is failing, when on the surface it appears most others are not.

On the financial literacy front, I’m hoping you can see the close link between behaviours and financial literacy. For people with ‘Financial Faking It’ behaviour, when you drill down beneath the surface, you will usually find a lack of financial literacy and understanding of all the moving parts around superior money management and wealth creation.

But get this, in true ‘faker’ style, when the federal government conducted an investigation into how well people managed their money and investments, via a self-assessment questionnaire, the vast majority of Australians said they do a great job!  The 2007 Financial Literacy Foundation Report documented:

– 90% said they had the ability to budget
– 88% said they had the ability to Save
– 69% said they had the ability to Invest
(yet in the same report 66% said they would not consider risk and return when making an investment decision)

What’s interesting here is my personal observations are fairly consistent with these findings.  That is, when I initially speak to new clients or meet people when I’m presenting around the country, the number of people who think they are doing OK and think they can potentially go it alone, is significantly over proportionate to the single figure percentage who actually achieve financial independence.

The honest truth, is very few of the people I meet have the knowledge, skill set, experience, time and persistence required to go it alone and generate the financial returns they are seeking.  If I could be even more critical, it still amazes me that so many people in Australia don’t even have their existing finances in order. For instance, they have ‘lazy’ money here and there, and they don’t take any interest in the investment strategies within their superannuation funds and there are just two simple examples of the lack of application, awareness or interest in their financial futures.

For those Australians out there that had made their own truthful and honest assessment of their financial abilities and have sought advice from reputable practitioners, I salute you, as this article isn’t for you – yet you have read on to continue to build your knowledge.

For those who are still on the fence, here are a couple of questions to ponder:

• What plans are you making for your future and how much money are you going to need?
• What happens when your income stops and retirement starts – where is the money going to come from then and how much, more or less, is it going to be compared to the income you are enjoying today?
• What are you doing to make your money work as hard as it can for you?

Remember, Knowledge is empowering if you act on it.