What can private banks do to help educate clients navigate the reefs and shoals of complex wealth management? This publication spoke to industry figures to find out.

High net worth clients want to learn more about finance and must be better informed to withstand future shocks as memories of the 2008 market blowup fade, industry practitioners say. 

A decade on from the crisis, however, financial literacy remains patchy. Around four-in-ten adults in England and Northern Ireland cannot correctly answer basic questions and wide swathes of the population struggle to make informed financial decisions (source: University College London and University of Cambridge.) Globally, the knowledge gap is even worse: a study in 2014 by McGraw Hill Financial said 33 per cent of adults worldwide are financial illiterate.

While some might assume that private clients know more about money than the wider mass of the public, wealthy individuals' challenges can be more complex. And there are financial literary issues up the wealth scale. According to a Spectrem Group whitepaper, Financial Literacy: Do the Rich Know Something We Don’t, only 23 per cent of US millionaires and 43 per cent of US ultra-high net worth households said they were “very knowledgeable about financial products”. Also in 2014, State Street , the US financial group, released The Folklore of Finance report, which surveyed high net worth individuals globally – and found that they scored a 67 per cent in a financial test – seven per cent higher than a failing grade.

"It is important that the clients understand what they are getting into. And I think the learning points of the financial crisis have been on both sides," Charles Boulton, managing director and UK market head of HSBC Private Banking, told this publication. 

"I don’t think advisors made it clear enough about the risks associated with an investment. But on the flip side, I think a small minority of investors did not seek to fully understand what they were buying and their advisors did not provide enough focus on financial education. Are people’s memories starting to fade a little on 2008? Probably. We are nine years into an equity bull market. There is no doubt that some of those fears have subsided from the crash, and memories have faded a little. Certainly in the aftermath there was a rise in risk aversion and more questions were asked – and we need to stay alert,” he said.

HNW clients appear hungry for knowledge. According to GlobalData, during its world wealth management survey in 2018, it found over three-quarters of high net worth clients globally want to be financially educated, and wealth managers risk losing clients if they fail to do so.

Killik & Co’s Tim Bennett, head of education, said during an interview with WealthBriefing that client demands for financial education will soar, and firms have to fill the void within the sector.

“It seems as if we’re confronted by headlines about financial illiteracy every day, and it is crucial that this is remedied, said Bennett. “The demand for high quality financial education can only increase and it is an area where we are keen to fill something of a vacuum in our industry when it comes to high quality provision. Our aim is to make investing accessible to everyone and we firmly believe that offering knowledge about how markets work and the best ways to approach them is key to this.” 

Bennett added: “Financial education helps to break down the barriers between the client and their advisor and also reduces the ‘them and us’ perception that has been a challenge for all financial firms since the loss of trust that was engendered by the last financial crisis. Firms can no longer hide behind a ‘black box’ of knowledge and expertise – many clients expect to be brought along on the journey and education is a key part of that.”

How to educate
According to RBC Wealth Management’s 2017 Global Wealth Transfer report, general family conversations are the most typical method of learning about finance. Most HNW individuals do not learn about wealth and finance in a structured way until they are 27 years old.

Who should step up to educate the wealthy?

HSBC Private Banking and Killik & Co say they believe in educating its clients. Both Boulton and Bennett spoke about what their institution is doing in this space.

“We run seminars at a high level for clients to understand the broad planning implications, we write articles surrounding planning,” Boulton, who has been at HSBC since 2006, said. “Most importantly there is the one-to-one aspect, making sure there is an appropriate team around the client to go through planning in detail and take individual circumstances under consideration. Once you have laid the foundations of wealth planning, you can focus on investments. There are similar things you can do help clients’ high level understanding in the same way that we approach wealth planning. The very important part of the education process is the part that takes clients’ individual needs into consideration and filling any gaps there.”

Bennett, who has been at Killik & Co since 2013, said: “We are known for our commitment to financial education, both for clients and the general public. Our online knowledge hub contains free, detailed Killik guides on investment aimed at beginners and more experienced investors alike, covering a broad range of topics from how to invest in equities to the best ways to build a retirement fund. We also host regular events and produce weekly, free video podcasts on a huge range of investment and wealth planning topics.”

Future of education
Technology and inter-generational wealth transfer are two major forces in today's wealth sector. As far as tech is concerned, according to the PwC Strategy and Global Wealth Management Survey 2016, some 69 per cent of HNWIs are now using online/mobile banking. But banking online is not always the safest option, as cyber-security breaches show. There has been a rise in attacks, including in 2017 when Equifax, the credit reporting firm, in the US, Yahoo!, JP Morgan, and a host of other organisations were hit.

In a bid to keep clients aware of the dangers of online banking, Boulton says cyber-security education is one of the key areas for high and ultra-high net worth clients.

“One of the areas we are finding ourselves spending a lot of time talking with our clients about is technology and the impact of cyber-security,” said Boulton. “This isn’t about how they invest their assets but about the operational risk they face. That is something we all have a responsibility to stay on top of as it changes all the time, and I think we have to educate our clients so they don’t fall into potential traps and scams and have the right security and processes in place. I think that is an area we can all get better at, and it is certainly something we have been focusing on more and more.”

The second big change is wealth transfer. In North America alone, an expected $30 trillion is seen as going to the younger generation in the next few years.

Educating younger adults, such as the famed Millennials, may be necessary. In 2012, a study by the National Endowment for Financial Education in the US said only eight per cent of Millennials had extensive financial knowledge.

“Another area that is talked about a lot is how we rise to the education and information needs of the next generation of clients, I think we can all do that better,” said Boulton. “Globally, we are facing a major intergenerational wealth transfer, and we therefore need to think about how we engage and educate the next generation, and what form of communication channel they will prefer for that. If there was an obvious gap that we weren’t filling, then we would be looking to fill it.”

This publication recently discussed the topic of financial education during an interview with Martin Gronemann, partner at ReD Associates, a consulting firm that works with private banks and wealth managers, who said clients don’t feel they are confident in making financial decisions.