High finance, hard sell

American Demographics, Feb, 1998 by Bill Stoneman

Average Americans are finding themselves involuntarily immersed in the world of high finance. Banks, investment firms, and insurers have to do more than throw out a life preserver to pull in customers. They have to earn consumers' trust and teach them to swim.

When Sandy Erickson sells life and disability insurance in company conference rooms and cafeterias, she often encounters people who have serious misconceptions about their financial affairs. Many, for example, think the group insurance their employers buy provides as extensive coverage as an individual policy would, though that rarely is the case. "They don't understand it's just temporary, as long as they're employed," says Erickson, the general agent for Transamerica Life Insurance and owner of Dexheimer-Erickson Corporation in Los Angeles. In group presentations, Erickson explains that the sponsoring employer will allow employees to buy her insurance with a payroll deduction. She then schedules private meetings with interested individuals. That's when the questions really start coming.

Managing personal finances is getting more complicated, particularly as retirement plans increasingly require employees to make their own investment decisions. Yet millions of Americans have a shaky grasp of financial matters. As a result, the stakes are high at workplace presentations like these. People with little sophistication in financial matters comprise a substantial segment of the population. That segment will be an important battlefield as banks, investment businesses, and insurers compete for primacy in the financial-services marketplace. The group represents a significant opportunity for companies that can gain their trust, and a sizable risk for companies that cannot.

People who are not well informed about, or interested in, money matters can be tough for peddlers of financial services to reach. Yet many of them have plenty of money to invest, and when the pitch is made in the office, they actually show up and listen. Maybe it's the free doughnuts, or maybe it's the non-pressured, neutral atmosphere. Whatever the reason, "for those people who don't have an inclination to get this information on their own, this is the best way to educate them," says Jon Romer, vice president and director of marketing for Transamerica Occidental Life Insurance Company in Los Angeles. Workplace marketing has been a great success for mutual-fund companies offering retirement-plan investments, he says.

Financial-services companies are angling to position themselves as advisers who are ready, willing, and able to guide neophytes through protecting assets and building wealth. But they have a ways to go. They get in customers' faces when they're selling products, but they aren't nearly as aggressive in giving advice. They make a plethora of educational material available that they and industry associations have prepared. But the people who would benefit the most from such material are the least likely to actually see it.

FINANCIAL LAGGARDS

Millions of Americans are getting used to the idea that they must take more responsibility for their long-term financial security. Worried that Social Security won't take care of them and aware that traditional pensions are giving way to 401(k) and similar plans, they use Money magazine to help plot a strategy, check the newspaper each morning for stock quotes, and watch PBS's "Wall Street Week" to sharpen their focus.

At the same time, millions of others are making little headway and perhaps little effort to organize their personal finances. Poll after poll reveals that a sizable portion of the public does not understand basic financial terminology. Actions speak even louder than words: in the midst of a very healthy economy, banks are experiencing record delinquencies on credit-card debt. A record 1.26 million Americans filed for personal bankruptcy in the 12 months ended June 30, 1997.

Financial advisers don't have to look far to find the next household headed for trouble. "To borrow for vacations, for leisure activities, and then pay the money back with interest over time is a warning sign that people are not making good financial decisions," says Michael J. Hickey, an independent financial planner in Albany, New York.

Prospective customers who rank low on financial knowledge aren't necessarily low-income people with little education. College graduates scored an average of 54 percent on a 20-question test about mutual funds prepared jointly by the Vanguard Group and Money magazine. Though better than the 42 percent racked up by noncollege graduates, the scores are unimpressive. "Unsophisticated investors are everywhere," says James Gately, managing director for Vanguard's individual investor group.

Many people do not understand issues financial advisers regard as quite basic. For example, 42 percent of those questioned by the Vanguard/Money survey failed to pick from three choices the correct definition for dollar-cost averaging, an approach in which you invest the same amount of money in a fund at regular intervals. College graduates answered incorrectly 36 percent of the time, compared with 48 percent for people without college degrees.