Don’t give up on financial literacy efforts

The vast majority of people need help with the absolute basics

Financial advisers should help clients’ children develop good financial habits. That case was made in the Feb. 3 issue of InvestmentNews by Sarah Newcomb, a behavioral finance economist at Morningstar, and has been repeatedly made in this publication over the years for good reason: Most Americans are financially ignorant.

[More: Financial literacy: An epic fail in America]

The U.S. ranks 14th in the world when it comes to financial literacy, with just 57% of adults being able to pass a basic financial literacy test.
That’s unacceptable.

Studies have shown that efforts to improve financial literacy generally don’t work because people are either uninterested in the subject, too emotional about money to think about the topic dispassionately, or are only interested in learning what to do when faced with a financial decision they have to make, such as taking out a car loan or a home mortgage.

Some have advocated starting financial literacy instruction at the high school level. Florida, for instance, enacted a law last June that requires all public high schools in the state to offer personal finance as a one-semester elective course. At the end of 2019, financial literacy classes were required for high school graduation in 19 states, up from 13 states eight years ago, according to The Washington Post.

But even with the push toward making financial literacy required in schools, which is hopeful, there is evidence suggesting that finlit courses may not do any good after all.

Nobel-winning economist Richard Thaler, considered by many as the father of behavioral finance, notes that teaching financial literacy has limitations because learning decays rapidly — by some studies in just a few days. By the time it’s needed in adulthood, whatever was taught about balancing a checkbook in high school would probably be largely forgotten. After all, as Professor Thaler has asked, how much of what you learned in high school chemistry can you recall?

One rebuttal would be that while there’s precious little opportunity for the average citizen to apply the periodic table of elements to their daily lives, we all spend money every day, so those muscles will remain fresher, and so the education will prove more applicable.

[More: Why is basic financial literacy so elusive? ]

And that is why the basics are so important. Before we worry about people understanding options strategies, the average citizen needs to have enough extra money to open a savings account, let alone a retirement account. But the stark reality is that about two-thirds of Americans have less than $1,000 in savings, and 45% have zero saved, according to data from GOBankingRates.

So, how do we build financial literacy on such a weak foundation?

What financial advisers must remember is that the vast majority of people need help with the absolute basics of personal finance — bill paying, budgeting, saving, setting aside money for emergencies, not getting into credit card debt — more than they need advice about investing.

What good is knowing the difference between a warrant and an option if you’re neck-deep in credit card debt and paying double-digit interest?

Advisers deal with clients who generally are wealthier than the average American, more educated and, often more financially savvy. But, surprisingly, InvestmentNews has found that nearly half of advisers report that financial literacy is an issue among their clients, and more than two-thirds of financial advisers acknowledge financial illiteracy as a problem.

We applaud the countless advisers who devote time and energy to financial literacy efforts around the nation. We encourage others to join in the work. By doing so, advisers can demonstrate their professionalism and write a brighter and more profitable story for their clients and for the industry.