How financial advice can help bridge the perception gap

New Zealanders’ confidence is growing despite financial literacy rates not keeping pace, Financial Services Council (FSC) research suggests.

The FSC conducted work in 2023 to work out what was happening in what seemedto be a paradox: New Zealanders were feeling confident but their literacy levels had not improved.

Participants in the research were asked questions to test their knowledge.

They included challenges designed to test people’s understanding of the impact of inflation on savings and the effect of investment diversification, as well as aspects of investment risk.

The study found that New Zealanders’ perception of their own financial confidence was higher than their financial literacy.

More than 80% were found to be financially confident even though only 62% on average had a good understanding of the financial concepts tested.

“The data showed that for those with extremely, very and reasonably confident perception, between 23% and 35% have a poor understanding of our financial concept trivia questions with a widening perception gap the more confident the respondent became,” the FSC report said.

The FSC said it showed that financial literacy would generally increase with age.

Just under 50% of the youngest participants got 75% or 100% of the questions correct, compared to 86% of those aged over 60.

The FSC said both under- and over-confidence needed to be tackled.

“Those who are financially confident tend to have support networks and time to research investments. Professional financial advice can support closing the perception gap for the overconfident and provide positive outcomes for those less financially confident that worry more.”

It said that the 20% of New Zealanders taking professional financial advice were financially stronger, received better investment returns, were more confident and better understood the language of money.

Women overall got more questions right. But earlier research from the Retirement Commission showed that might not be as good news as it might appear – it found that women were on average better than men in a range of financial capabilities related to day-to-day money management but achieved worse outcomes even after controlling for socioeconomic factors.

Although more than 80% of respondents were found by the FSC to be financially confident, 44% of respondents said they were financially prepared for retirement and only 33% of women. Just 23% were very confident they were ready for retirement.

The survey also found that people might be underestimating the impact that an adverse health event could have on their financial lives.

“There is an overconfidence about the potential impact of health issues on day-to-day finances. Just under a third of respondents that have or have previously had health/ medical insurances (60%) had a good understanding of financial concepts, a perception gap of 22%,” the FSC said.

There was 10% perception gap when it came to answering questions about investment risk but the gap when considering insurances was 22%.

“Insurance policies can protect New Zealanders and dependants and reduce financial loss should these events occur. While 98% of homeowners have insured their home, and 95% of car owners have insured their car, just 20% of New Zealanders have insured their income against sickness or disability.”