Financial Capability
Discover what Financial Capability is and how building greater Financial Capability within your client base can create more satisfied clients.
What is Financial Capability - a definition
Financial Capability is a measure of an individual’s financial knowledge and their ability to take control of their financial situation. It is not just about financial literacy, although this is critical. It extends to a person’s ability to act on their understanding in a meaningful way.
It is a mixture of education, experience, understanding, self-belief in making wealth choices and the extent to which they have access to third-party support networks, including accountants and financial advisers.
Financial Capability generally improves with increased knowledge of financial concepts (such as asset allocation and risk), an optimistic and focused concentration on the future and with the support of trusted third-party advisers who can impart financial knowledge, wisdom and experience.
Financial Capability can be explained as:
1. Financial literacy
A person's awareness & knowledge of financial concepts and the options available to them.
My understanding of the the different approaches and strategies to invest my money (asset allocation) is..
2. Future focus
A person’s motivation and ability to cope and plan for their future.
How would you best describe your typical attitude towards life on each of the following dimensions?
3. Financial engagement and support
A person’s engagement with their finances and the network that supports them to take action.
How engaged do you feel with your investments and investing activities?
The Advisable Australian - A new way to think about investors
To learn how building greater Financial Capability within your client base can create more satisfied clients and some of the strategies financial advice firms can use to improve Financial Capability, download our special report, The Advisable Australian Volume 1 - A new way to think about Australian investors.
How Financial Capability impacts Australians
Generally speaking, the higher an individual's Financial Capability, the more likely they are to take action with their finances, be more confident and engaged with their investment decisions, have greater tolerance for risk, and are more comfortable managing their daily finances.
Those with lower Financial Capability are more likely to worry about money more frequently. More than a quarter (25.9%) of low Financial Capability individuals worry about money daily and 15.5% worry about it weekly.
Whilst those with higher Financial Capability are more confident of achieving their financial goals (55.0% of the very high group say they strongly agree that they are confident in achieving their goals compared to only 6.8% of the low). The higher Financial Capability groups are more likely to believe Financial Capability allows them to do the things they want and enjoy their life (49.7% of the very high compared to 11.2% of the low).
Those with lower Financial Capability worry more about money and wealth
How frequently do you worry about money?
Higher Financial Capability individuals are more confident of achieving their financial goals
I feel confident that I can achieve my financial goals
This flows on to their personal wellbeing. The lower The Advisable Australian’s Financial Capability, the more likely financial issues are to adversely impact their mental health, physical health, family life, social life and work satisfaction. Low Financial Capability individuals are almost twice as likely to have reported adverse impacts to mental health from financial issues when compared to very high Financial Capability individuals (58.6% versus 29.8%).
In practice what this culminates in is individuals being able to enjoy their life more. Greater knowledge, higher confidence and engagement leads to more satisfaction with their finances. That satisfaction leads to individuals being able to enjoy and do the things they want in life.
Lower Financial Capability means financial issues are more likely to adversely impact health and family/social interactions
Have financial issues ever adversely affected your...
Those with higher Financial Capability are far more likely to have a financial circumstance that allows them to enjoy life
My finances allow me to do the things I want and enjoy in life
Understanding the Financial Capability groups in Australia
From our Financial Capability survey and research, Advisable Australians fall into four naturally occurring Financial Capability groups. The majority lie within the medium to high groups, but that’s not to say that the very high and low Financial Capability groups are insignificant.
Financial Capability groups by size
|
Group |
Percent |
Number of people* |
|
Very high |
17.7% |
1.52m |
|
High |
32.3% |
2.77m |
|
Medium |
36.3% |
2.12m |
|
Low |
13.8% |
1.18m |
* Figures derived from ABS statistics based on survey responses
How advisers can benefit from improving Financial Capability
For those that have high Financial Capability and receive advice today, the benefits for advice firms are more than just happy clients. By building greater Financial Capability within your client base you can create more satisfied clients, who will be much more likely to recommend your services to others.
To learn what financial advice firms can do to improve financial capability in their client base, download our special report, The Advisable Australian Volume 1 - A new way to think about Australian investors.
Overall, how would you rate your satisfaction with your financial planner?
Explore the other dimensions of the Advisable Australian
The Emerging Affluent - The fight for the future market
Discover the Emerging Affluent, the next generation critical future market, and how to target them. Download our special report, The Advisable Australian Volume 2 – The fight for the future market: The Emerging Affluent.