“Worst Financial Literacy Article” candidate?

Surging to the top of the list is Paul B. Farrell on MoneyWatch. The post is completely surreal. Let the performance begin:

He quotes numbers, out of the air, with no source!

Financial-literacy programs are getting popular again. Warning: They don’t work. Maybe for 7% of us. But for the rest of Americans, they are a big waste of your time, and your money.

Where did he get that 7% number? Most of the academic research finds positive effects (see below). Also, most financial literacy programs are actually free, if not incentivized, for those who attend them. That’s right – you usually get compensated in some way for coming! And studies have found that the highest effect comes from the first 1 to 3 hours, indicating a very good use of time.

He makes the most incredible non-sequitors!

Even with the best-of-intentions, financial-literacy programs like Jump$tart, RichFitUSA, long-time APCPA accountancy programs, and the President’s Council on Financial Literacy will never work. Never. Want proof? Just think about the past decade: Factor in the 2000 dot-com crash, the 30-month recession, the 2008 meltdown and guess what: On an inflation-adjusted basis Wall Street lost 20% of America’s retirement money in the 2000-2010 decade.

What!?  The proof that financial literacy programs don’t work is that equity market experienced a crash? That they didn’t experience a gain over a very specific 10 year window? That makes no sense whatsoever. Any sensible financial literacy program would recommend a mix of stocks and bonds, and such a portfolio would be up over that period. The purpose of financial literacy programs isn’t to prevent market crashes, so how (how!?!?!) does a market crash show they don’t work?  Surely the measure of a financial literacy program is that it… improves financial literacy.

He makes glib, incorrect statements!

Your brain is your worst enemy, always irrational, easily manipulated.

You play. You lose.

Incorrect. Part of your brain, perhaps the reptilian stem, isn’t very good at investing. But your neocortex – that part which makes you human? That’s money, baby. In fact, if your brain were always irrational and easily manipulated, I probably wouldn’t be shaking my head in astonishment at this article! Part of a financial literacy program would have told Mr. Farrell equities make a good part of a portfolio, but they are risky, and thus experience ups and downs. You play, you win, over a long enough time-frame.

I review the actual evidence about financial literacy/education programs below, but let me give  7 reasons why wall street wants their clients to be financially literate.

  1. Financially literate people invest. Financial illiterates stuff their money into mattresses. (not risk-free). More customers are better.
  2. Financially literate clients are smarter, and more satisfied, because they have more realistic expectations.
  3. On average, you don’t make money selling complex investments to someone who doesn’t understand them. Clients easily sue to be reimbursed for being sold products which are too complex (only if they lose money, of course). You want clients to understand what you are selling them so they can’t claim they didn’t.
  4. Most advisors are paid a percent of AUM. Wealthier clients means more pay. Financially savvy clients means more wealth.
  5. Financially literate clients can understand opportunities, such as tax advantages and trust structuring, so you can provide more services.
  6. Financially literate clients understand that risk means you should expect falls in the value of your risky investment. At least at some point in it’s life. A risky investment which seems non-risky is the most worrying.
  7. Financially literate clients are less work. You don’t spend hours on the phone explaining everything to them.

Most  investment advisors I know would prefer a base of financially savvy clients to a base of financial illiterates. They are just better business. And financial literacy programs work, especially for those who care enough to take them.

But fiction is so much more fun than fact, ain’t it?


An actual review of the evidence:

Annamaria Lusardi has spent a lot of time studying financial literacy, and a good summary can be found here.

Financial illiteracy is widespread among the U.S. population and particularly acute among specific demographic groups, such as those with low education, women, African-Americans, and Hispanics. Moreover, close to half of older workers do not know which type of pensions they have and the large majority of workers know little about the rules governing Social Security benefits. Notwithstanding the low levels of literacy that many individuals display, very few rely on the help of experts or financial advisors to make saving and investment decisions. Low literacy and lack of information affect the ability to save and to secure a comfortable retirement; ignorance about basic financial concepts can be linked to lack of retirement planning and lack of wealth. Financial education programs can help improve saving and financial decision-making, but much more can be done to improve the effectiveness of these programs.

Please see the blog of Annamaria Lusardi, super-maven of Financial Literacy.

From the Handbook of Consumer Finance Research, Chapter 4.

Overall, the evidence is mixed on “hard” efficacy, though positive on average. Lagged post-treatment studies, while the most valid, are also the most expensive and rare. Most pre-test/post-test studies find positive impact, as long as the topic is valid (i.e. teaching high-schoolers about investment accounts shows no impact, which isn’t surprising).

Bernheim et al (2011) fine evidence of the positive effect of financial education (given to high schoolers statewide) on savings rates and net worth during peak earning years.

Studies of workplace financial education are more prevalent and more convincing (Todd, 2001). Improved savings rates, participation in, and contributions to  voluntary savings were higher amongst employees who participated (higher effects on lower income participants, indicating higher income participants already had enough knowledge.) in financial literacy courses than those who didn’t.

Duflo & Saez (an experiment amongst UMich staff) indicate that financial literacy courses definitely have positive effect, but part of the effect is due to social pressures and incentives.

Median savings rates are 22% higher for employees whose employer offered financial education.

Mortgage borrowers who received counselling prior to home purchase, on average, had a 19% lower delinquency rate than non-counselled borrowers.


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