InvestmentNews Editorials

Setting a standard for financial literacy

Mar 4, 2012 @ 12:01 am

PUTTING ASIDE THE IRONY of a debt-laden and spendthrift federal government's launching yet another initiative to raise Americans' financial literacy, it is time to come up with a clear and consistent definition of

what financial literacy is and a set of standards to measure it.

Time is pressing, because the Securities and Exchange Commission — in a mandate buried in the 849-page Dodd-Frank legislation — is supposed to study the existing level of financial literacy among retail investors and report its findings to Congress by July 21.

Rather than assessing the state of financial literacy, which we all know to be abysmal, the federal government — working through its Financial Literacy and Education Commission — should work harder to develop a strategy for getting all public, private and governmental entities to agree to a universal definition of the term.

Currently, organizations use the term “financial literacy” differently.

For example, the Government Accountability Office for years defined financial literacy as “the ability to make informed judgments and to take effective actions regarding current and future use and management of money.”

More recently, however, the GAO has started espousing the definition put forth in 2009 by the President's Advisory Council on Financial Literacy: “the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.”

The Jump$tart Coalition for Personal Financial Literacy, a well-known nonprofit organization, defines financial literacy similarly (but not exactly) as “the ability to use knowledge and skills to manage one's financial resources effectively for lifetime financial security.”

Meanwhile, the National Financial Educators Council defines financial literacy as “possessing the skills and knowledge on financial matters to confidently take effective action that best fulfills an individual's personal, family and global community goals.”

CONFUSION

Having multiple definitions is confusing and self-defeating.

Adopting a universal definition would give all those interested in making Americans smarter about investing and managing money a clear idea of what exactly is being discussed when the term “financial literacy” is tossed about.

A single, consistent definition also would make it easier to assess progress toward the goal. Although many researchers attempt to measure financial literacy, those measurements often are based on vastly different criteria, making it difficult for policymakers to draw meaningful conclusions about the general state of financial literacy.

One logical way to come up with a consensus definition is to convene a summit of the best and brightest minds working in the field of financial literacy. In addition to representatives from the nonprofit, private and government sectors, participants should include academicians, researchers and, of course, financial advisers.

Financial planners and advisers have a vested interest in seeing an improvement in the nation's financial literacy. With such knowledge comes a better chance to amass and retain wealth, thereby increasing the pool of potential clients.

More importantly, however, financially literate clients have greater odds of safely navigating the increasingly complex financial world in which we live.

Congress is rightly worried about the financial naiveté — if not downright ignorance — that Americans displayed in the years leading up to the financial crisis of 2008-09. That naiveté, of course, was made clear by the fact that too many Americans deferred saving for retirement in order to buy homes they couldn't afford or make investments that were entirely unsuitable for them.

No one would argue that too few Americans know how to manage a budget, adhere to a savings program or invest prudently. But the goal of improving the way Americans deal with money will remain elusive as long as government policymakers, financial industry professionals and academicians embrace varying ideas of what it means to be financially literate and measure such literacy by varying standards.

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