3-2-19 Financial literacy: An epic fail in America
GAME
CHANGER /
Financial literacy
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Financial literacy: An epic fail in America
Lacking the skills needed to make informed financial decisions
hurts individuals and the economy. What can advisers do to help?
By Greg Iacurci — March 2, 2019
For as long as he can remember,
Zachary Beneda dreamed of joining the Air Force.
But the 23-year-old senior at Texas
A&M University, who will be headed to Japan after graduation for his first
active-duty assignment as an Air Force support officer, got a rude awakening
when he realized he'll also have to begin paying back $90,000 in college loans.
Mr. Beneda will be required to pay
$1,000 a month — about half his monthly salary as a second lieutenant.
“I was floored,” he said. “I thought
the military was going to take care of me and the burden wouldn't be as bad. I
wasn't worrying about the loans as much as I should have.”
Mr. Beneda is hardly the first to
underestimate the weight of college loans, and he won't be the last.
But it's not just college cost
confusion — financial mistakes are made every minute of every day. The
consequences of those mistakes run the gamut, from being an annoyance
(inadvertently choosing a high-interest credit card) to being financially
ruinous (investing a retirement nest egg in what turns out to be a Ponzi
scheme).
We teach our children to wear seat
belts. Schools invest in programs aimed at helping kids practice smart internet
habits. But few are talking about the dangers of too much debt or the blessing
that is compound interest.
As a result, Americans are saddled
with exorbitant loans and save too little for retirement. As the gap between
rich and poor widens, it's clear that financial literacy is one of the factors
that separate the haves from the have nots.
Financial advisers recognize the
problem: 78% strongly agree financial literacy is a concern in the U.S.,
according to a survey of advisers by InvestmentNews.
But there's a disconnect — only 4 in
10 advisers are doing anything to address the problem, meaning the majority are
ignoring the issue.
Financial literacy is an issue in our country
0.4%
0.4%
Strongly
disagree
Somewhat
disagree
3.4%
Neither
agree
nor
disagree
17.8%
Somewhat
agree
78%
Strongly
agree
Advisers involved in initiatives related to
improving financial literacy in their community
41.3%
58.7%
Yes
No
Advisers who encounter financial literacy issues
among clients
0.4%
Strongly
disagree
3.4%
Some
what
dynamic
6.4%
Neither
agree
nor
disagree
49.2%
Strongly
agree
40.5%
Some
what
agree
Source: 2018 InvestmentNews survey of financial
advisers
That apathy could come back to haunt
them. If a lack of financial knowledge is linked to a lack of wealth, as
experts believe, fewer people will have the financial assets advisers depend on
for their own revenue.
Advisers also realize that clients
with financial knowledge are easier to counsel, since they better appreciate
the need for professional financial advice.
“I think an educated client is always
going to be a better client,” said Charlie Fitzgerald, principal, founding
member and financial adviser at Moisand Fitzgerald Tamayo.
Financial literacy is a fancy term
for the basics of financial decision-making — the ABCs of finance. A “literate”
consumer will more likely make better decisions around borrowing, saving and
buying financial products.
AMERICANS FALL SHORT
But when it comes to being
financially literate, Americans fall woefully short. Although the U.S. is the world's
largest economy, the Standard
& Poor's Global Financial Literacy Survey ranks it No.
14 (tied with Switzerland) when measuring the proportion of adults in the
country who are financially literate. To put that into perspective: the U.S.
adult financial literacy level, at 57%, is only slightly higher than that of
Botswana, whose economy is 1,127% smaller.
U.S. ranks only slightly
higher than Botswana in adult financial literacy
GDP Per CapitaAdults who are financially literate
(%)0K10K20K30K40K50K60K70K80K90K100K110K020406080
Source: Standard &
Poor's Global Financial Literacy Survey
In another study, researchers found
in 2015 that only 30% of Americans were able to answer three simple financial
questions about inflation, interest compounding and risk diversification. The
academics who conducted the study, Annamaria Lusardi of George Washington
University and Olivia Mitchell of the University of Pennsylvania, called that
success rate “discouragingly low” in light of the complex financial decisions
Americans face.
Yet another study shows a downward
trend in financial literacy. In 2015, 37% of individuals correctly answered
four out of five financial questions, down from 42% in 2009, according to the
Financial Industry Regulatory Authority Inc.'s Investor Education Foundation's
most recent
study of financial capability in the U.S.
“Americans are struggling and at
times they're clueless — and that's a disaster recipe right there,” said George
Barany, director of the America Saves initiative at the Consumer Federation of
America.
MORE RESPONSIBILITY
The financial literacy crisis comes
at a time when Americans are being asked to take responsibility for their own
financial security.
Perhaps the first serious financial
decision many Americans have to make is how much debt they are willing to take
on to go to college. Unfortunately, like Mr. Beneda, many students don't
consider the ramifications of that debt until it's too late — when they have to
start paying off their loans. The result: Average college debt per
student more
than doubled over the decade through 2016, to nearly
$30,000.
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“My parents really didn't tell me
anything,” said Mr. Beneda, who is the oldest of three children. “I feel like I
was the test dummy.”
Student loans are now the
second-highest household liability, after home mortgages, and student debt is
the most common form of consumer debt to become delinquent.
“It's something we should worry
about,” said Brigitte Madrian, dean of Brigham Young University's business
school. “It could have a ton of spillovers on other economic behaviors that are
important to the economy overall.”
CONSUMER CREDIT
Even before they get out of college,
students are faced with another important decision, one which can have
consequences throughout their lives: how to handle consumer credit.
“When you get to college, there are
literally people from different credit card companies on campus giving you a
coupon for free pizza if you sign up for a credit card with them,” said
Courtney Allen, a 22-year-old senior at Flagler College. “All you see is free
pizza if you give them information.”
Sometimes teenagers are opening
credit card accounts even before they get to college. Pat Curran, a high school
teacher in Jacksonville, Fla., who has been teaching economics for nearly four
decades, remembers one student who obtained a credit card with a $1,500 credit
limit. She didn't have a job or understand that she'd have to pay back the
expenses charged to the account — with interest, no less.
“It was a wild moment,” Mr. Curran
said. Shortly afterward, he wrote a credit-card lesson into his curriculum.
Given the climate of easy credit,
it's not surprising that the average household credit card debt rose to $8,284
in 2018, a 25% increase from $6,642 in 2011, and is now the highest it has been in
nearly a decade.
Americans are called on to make many
other important financial decisions in their lives: leasing versus buying a
car, renting versus owning a home, taking out a fixed-rate mortgage versus an
adjustable rate, and the best type of life and health insurance to purchase.
SAVING FOR RETIREMENT
But perhaps one of the biggest
financial decisions they have to make is how to save for retirement. Over time,
pensions have all but disappeared for U.S. workers, unless they are in a union
or work for a government entity. This shift means workers have to save the
majority of money on their own in a 401(k) plan or individual retirement
account. In addition to deciding how much they want to save, they have to
decide how to invest it.
Americans are not doing a very good
job of it. The median retirement savings for Americans between ages 55 and 64
is $104,000, according to a 2015 study — an amount that would translate into
only $310 a month if invested in an inflation-adjusted annuity.
Compounding the problem is the fact
that Americans are living longer, which means they will more likely need to pay
for things like long-term health care and stretch their savings over a longer
period than previous generations.
All of this long-term planning is on
Americans' shoulders, although studies show even managing one's money
day-to-day seems like a challenge for most. Roughly four in 10 working U.S.
adults would not be able to scrape together enough money in a month to cover
the cost of a midsize budget emergency — a car or home repair, medical bill or
legal expense — according to a 2017 report from the Global Financial Literacy Excellence Center.
LACK OF EDUCATION
Part of the problem is that few
schools incorporate financial education into their curriculum.
Only a third of states require high
school students to take a course in personal finance, according to the Council
for Economic Education.
Most teach the subject as one portion
of another course of study, such as math, economics or social studies, while
only five states require a semester-long, stand-alone personal finance course.
17 states require a
personal finance course to graduate high school
+-
Source: Council for
Economic Education
FINANCIAL LITERACY RESOURCES
Many organizations aim to spread financial
literacy across the country and around the globe — and offer curricula and
tools to make it happen. Here are a few of the largest.
Dave Ramsey, Foundations in Personal Finance: The group
equips educators at middle schools, high schools and colleges (as well as the
home-schooled) with resources to help young people develop good financial
habits. (Daveramsey.com/school)
The relative unimportance
policymakers and educators place on personal-finance courses is a primary
contributor to the nation's dismal financial literacy. Early education around
the effect of high versus low interest rates, short- versus long-term payments,
credit scores and budgeting, for example, would prepare consumers for big
financial decisions such as financing college, buying a home or saving for
retirement. Early mistakes can set people up for years — if not a life — of
financial struggle.
“It's kind of sad, to use a more
pejorative term, that you graduate from high school — or more importantly, you
graduate from college — and you don't have an appreciation for these basic
concepts that are going to be important to your own lifestyle,” Jay Clayton,
chairman of the Securities and Exchange Commission, said at an investor
roundtable last summer.
The financial services industry bears
some of the responsibility, too.
Institutions have erected barriers of
entry for Americans to participate in important parts of the financial system.
Banks, for example, have moved out of poorer rural areas. And banks requiring
large account-opening deposits and minimum balances, and high overdraft fees —
primarily affecting low-income minorities — keep many from even opening bank
accounts. That's despite evidence that bank account ownership correlates with
improved levels of financial literacy.
According to a 2017 report published by
the Organization for Economic Cooperation and Development, 15-year-old
American students who hold a bank account scored 40 points higher in financial literacy
than students without one.
But unfortunately some financial
firms, including some corners of the financial advice industry, see more
opportunity to profit when dealing with non-savvy consumers.
MARKETING TO IGNORANCE
The financial services industry
engages in consumer education efforts — but that's dwarfed by the resources
devoted to marketing its products. The industry spends roughly $17 billion
annually to market products and services to consumers, but only $670 million on
financial education, according to a 2013 report published by the Consumer
Financial Protection Bureau.
That translates to $25 spent on
financial marketing for every $1 put toward financial education — meaning the
public has little access to unbiased information.
While there are ethical financial
advisers who recognize investors' vulnerabilities and aim to protect them, a
significant portion of the industry is “designed to take advantage of that lack
of sophistication,” said Barbara Roper, director of investor protection at the
Consumer Federation of America.
Advisers/the industry
are not doing enough to
improve financial
literacy
38.4%
34.2%
19.0%
5.7%
2.7%
Strongly
agree
Somewhat
agree
Neither agree
nor disagree
Somewhat
disagree
Strongly
disagree
Advisers are mostly reaching out to educate
adults
45.0%
23.0%
42.2%
34.9%
Children
of clients
Elementary/
middle-school students
High school
students
College
students
57.8%
70.6%
56.9%
56.9%
Young adults
Adults
Retirees
Pre-retirees
Source: 2018 InvestmentNews survey of financial
advisers
Conflicts of interest, for example,
are pervasive in the advice industry. Current rules allow brokers to put their
financial interests ahead of a customer's when selling a financial product. In
other words, they may choose the mutual fund or annuity earning them the
highest sales commission, even if it's not in the customer's best interest.
Brokers are allowed to do this under the guise of being a “financial adviser.”
These sorts of conflicts are
disclosed, but are often too complex for investors to understand. Important
concepts like investment cost, risk and liquidity are beyond the reach of those
lacking basic financial literacy.
“Investors are left to just trust and
hope for the best,” Ms. Roper said.
INNOVATIVE RESPONSE
Recent innovations have sought to
address low levels of financial literacy — or even sidestep the issue entirely.
Employers have foisted more responsibility on workers to manage their
retirement savings in 401(k)-type plans — but have also increasingly adopted
workplace financial wellness programs to help boost adults' financial savvy,
automatic enrollment to tackle savings inertia, and target-date funds to ease
decisions around investing.
But those improvements only cover a
certain portion of the adult population, not the millions of Americans without
workplace retirement plans. Automated investment platforms — so-called
robo-advisers — give all consumers access to relatively low-cost professional
money management and financial advice. Mobile technology has connected
Americans with easy, simple digital savings programs and mobile banking
capabilities. It's a good start.
And many advisers want to help. While
around 40% of financial advisers are currently involved in initiatives related
to improving financial literacy, 42% of those who aren't involved said they are
interested in getting involved now or in the future, according to the InvestmentNews survey.
GOOD FOR THE INDUSTRY
Nearly three-quarters of respondents
said it's beneficial for the financial advice and planning industry to be
involved.
Financially savvy consumers are more
likely to take the recommendations of their adviser, and hence make better
clients, practitioners said. And, as previously illustrated, financial literacy
leads to wealthier consumers — thereby boosting the potential client pool for
the industry.
Further, promoting financial
education to kids in the K-12 school system could boost diversity in the
financial planning profession — both in age, gender and ethnicity — at a time
when the vast majority of advisers are white, male and more are over the age of
70 than under 30.
“It gets kids thinking of personal
financial planning as a career,” said Michael Zmistowski, personal financial
planner at Financial Planning Advisors. “We're getting old; we need
replacements and we're not cranking them out fast enough.”
And exposing young kids to financial
planning gives attention to the prospect of needing a financial planner in the
first place.
Through literacy efforts, advisers
also can improve their client relationships.
Thomas Henske, partner at Lenox
Advisors Inc., teaches clients how to talk about money and instill good
financial behavior in their kids — which connects the adviser and client on a
deeper, emotional level, he said.
And there are plenty of ways advisers
can spread their knowledge more broadly. Mr. Fitzgerald, for example, recently
taught a lesson on the basics of taxes and tax returns to economics students at
Winter Park High School in Florida.
D.A. Davidson & Co., a regional
brokerage, piloted a financial literacy program for teens in July at local
YMCAs in California. It's expanding the program next summer to cover half of
the YMCAs in Southern California, and is making the curriculum available to all
its advisers by May so they can do outreach at their local community centers.
Jason Chepenik, managing partner at
Chepenik Financial, started the 4.01k Race for Financial Fitness in 2015 to
help raise money for Junior Achievement. It's since expanded from Orlando to
eight cities across the country, and raised more than $250,000 this year.
The vast majority of advisers — 81% —
said they were interested in getting involved purely because it is personally
rewarding to help others.
“This needs to happen,” Mr. Curran
said. “And I'll probably work on it until my dying day.”
HOW ADVISERS CAN GET INVOLVED
The InvestmentNews 40 Under 40
financial literacy task force spearheaded an initiative this year to offer
advisers a concrete way to participate in the fight against financial
illiteracy.
The informal group, which came together after the most recent
gathering of 40 Under 40 winners last May, asked advisers to nominate nonprofit
groups that have a financial literacy mission and offer direct opportunities
for advisers to contribute.
What sparked your interest in financial literacy and what's
stopping you from doing even more to educate your community?
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