Educating investors not improving financial literacy
Calls from regulators and investor advocates for increased financial education may be misguided as renowned researcher and behavioral economist Richard H. Thaler reveals that even extensive financial education yields dismal results.
According to the article (see source below), only one-third of investors (over age 50) could answer three "basic understanding" financial questions correctly:
Questions:
• Suppose you had $100 in a savings account and the interest rate was 2 percent a year. After five years, how much do you think you would have if you left the money to grow? More than $102, exactly $102 or less than $102?
• Imagine that the interest rate on your savings account was 1 percent a year and that inflation was 2 percent. After one year, would you be able to buy more than, the same as or less than you could today with the money?
• Do you think this statement is true or false: “Buying a single company stock usually provides a safer return than a stock mutual fund”?
Answers:
“more than,” “less than” and “false.”
Conclusions:
"...over all, financial education is laudable, but not particularly helpful. Those who receive it do not perform noticeably better when it comes to saving more, for example, or avoiding ruinous debt. Even more depressing, the results of efforts aimed at low-income people are particularly weak. Those who need the help most seem to benefit the least."
".. even the most time-intensive programs — those with more than 24 hours of education and training, almost the length of a college course — had no discernible effects just two years later.."
Although the article calls for simplifying the "system", in my view the author misses the most obvious conclusion of all; smart and educated investors, high net worth investors, low income investors and everyone in between, would benefit from an adviser who can simplify the financial decision making process, put a plan into place and stick with it.
Again, I have criticism for the press about "blaming the victim" for the lack of financial illiteracy. Their cognizant dissonant view is that given enough financial education, any investor will become a do-it-yourself investor and will be hooked forever more on a continuous media stream ( by subscription of course!) of financial information and products that they (and their advertisers) can and will gladly supply.
Investor advocates and regulators increasingly, are placing demands on financial advisers that financial education/information/disclosure has to be, must be, priority number one but in reviewing the dismal results of such programs, it appears that there is a severe disconnect between the press, the regulators and the ultimate consumer of financial services.
If investors do not have interest in financial things (as the experts tell us); is it our role as advisers, to force investors to learn?
The answer is yes! Advisers will be required to educate/inform/disclose as required by the regulations. Because I do love to educate, inform, disclose to my clients, this is not an onerous task for me as I enjoy doing it. However, increasingly, I see the press asking the regulators for more and more rules, more regulations...more of everything because of “confusion” in the marketplace because there aren’t enough rules, regulations and financial education about financial products...
From what I see in the trenches here, the problem has become a sort of a negative feedback loop. The press insists investors are confused and need more information, but investors are saying there is too much information which is causing too much confusion. The regulators believes (how could it be otherwise?) that to address investor confusion, more regulation is the answer. And round and round we go!
Here is a must see video that I think neatly addresses the question of financial illiteracy in real life.
If you have seen the video, are we surprised by the renowned Richard H. Thaler’s conclusions that financial education by and large, is a dismal failure or Malcolm Hamilton’s bemused view of financial literacy as being mostly irrelevant?
My theory is simple; financial education is a yawner for most folks. Financial education is a laudable goal but it is not THE goal. Oddly, in my quarter century experience as an adviser, the average financially educated investor tends to do much better than the investors that think of themselves as super smart (and say so). Invariably, the really smart investor - well they just out-smart themselves at some point.
Amidst all the cries for simplicity, simple investing in a complex world is best done with a financial adviser.
As an adviser, I do get quite excited by concepts like asset allocation and can’t wait to explain it to you over an afternoon or so. I am sure everyone will find the subject absolutely fascinating.
Perhaps in the future, it may be a mandatory discussion/disclosure requirement prior to the purchase of a GIC. It will be riveting reading...Wait...come back!..you forgot your study book!...
About the author: http://en.wikipedia.org/wiki/Richard_Thaler
