How Financial Literacy and Trust Lead to Smarter Investments and Better Wealth

Knowing and understanding products, services and concepts and the ability to apply this knowledge to make sound decisions is what financial literacy is all about.

SINGAPORE – Investors can be forgiven for feeling confused and befuddled these days, given the vast array of financial products on offer – from equities to bonds, currencies, derivatives and commodities... and plenty in between.

Add to this the seemingly endless sub-sets focused on different themes, sectors and so on and it’s no wonder many people feel overwhelmed.

Ms Daphne Lye, solutions lead at MoneyOwl, which is now under Temasek Trust, says that a key danger in all of this is that investors get “information overload” and just “don’t do anything”.

While some may prefer the safety of the status quo and keep their savings in the bank, others like private investor Stephen Chen are taking a more active approach.

Mr Chen, who has been managing his personal and family investments since 2007, says an investor has to learn more about the products and services available, and the bankers and wealth managers serving him. 

It is ultimately his investment portfolio so he has to do his part, Mr Chen adds.

Knowing and understanding products, services and concepts and the ability to apply this knowledge to make sound decisions is what financial literacy is all about.

It is also about reading the fine print and asking the correct questions, notes Ms Lye, adding that some questions you can ask your financial adviser are: “I can invest myself, why do I need to go to you?” and “If I invest with you, what are the extra costs I need to pay?”

Fresh research from Dr Joelle Fong, an assistant professor at the Lee Kuan Yew School of Public Policy, shows that boosting financial literacy helps strengthen household balance sheets.

Dr Fong used data from a nationally representative sample of 2,500 respondents in a 2021 survey commissioned by the MoneySense national financial education programme.

“This is the very first evidence we have that financial knowledge drives some of the financial behaviours, and they are desirable and positive financial behaviours, not bad behaviours,” she notes. 

The paper, which will be published in the April 2025 edition of the Pacific-Basin Finance Journal, found that financially savvy individuals are more likely to allocate their savings to assets like stocks and unit trusts, life insurance and private retirement annuities.

This group also takes on more debt – credit card, unsecured bank loans or mortgages – but they are also far more likely to repay a loan promptly.

“They repay it on time so they do not incur the high interest,” Dr Fong says, adding that “financially literate Singaporeans are using debt very cleverly. It is good debt”.

However, Ms Tan Huey Min, general manager of Credit Counselling Singapore, thinks it ultimately boils down to the individual.

He can have the financial knowledge but still make a bad decision. “It is this belief that ‘I know better’,” she says. 

Those in this group think “they are smarter; they want it fast, they want more, and they have the financial knowledge”.

They usually end up investing with borrowed money to get potentially higher returns but if markets go against them, they will be saddled with even more debt, Ms Tan adds.

Ms Lye says the financial institutions have been doing their bit on financial literacy.

Banks and insurers have articles to educate people on financial topics, but they are quite basic, she adds, noting: “They generally just say, you must save now, you must invest now, you must plan for retirement. It is very broad.”

Ms Lye says there is also a concern that financial advisers only follow the suitability rule, which requires them to recommend products that are appropriate for their clients’ investment profile.

“But I think as consumers, we expect our advisers, because they know more than us, to have a higher standard which is fiduciary or act in our best interests,” she says.

Dr Fong says that sometimes it boils down to trust: “Do you trust the financial representative selling this financial product to you?”

And on a wider scale, “do you trust that the Monetary Authority of Singapore (MAS) has regulated the financial sector well to prevent this kind of mis-selling incidents?”

If you do, then you may not need to understand the financial product per se but trust that it is okay, Dr Fong adds.

Mr Chen, the private investor, adds: “Some of us are not very good at understanding products and services.

“But most of us do understand how to choose friends and partners, including good service staff who can make helpful recommendations.”

So, at the very least, we ought to assess whether we can trust that banker or adviser and “whether there is an alignment of our values with theirs” so we can partner with them to achieve our financial objectives, he says.

Article repurposed from The Straits Times by Chor Khieng Yuit