Flashing back to last week, only 30 percent of Americans could correctly answer three simple financial questions. The problem spans the globe. The Swiss and Germans garnered the best scores, 50 percent and 53 percent respectively, but we beat the Swiss, Italians, Japanese and French. The Russians really stink with only four percent of their citizens getting three correct answers. Now you see why Putin gets 60 percent of the vote.
After over two decades, the financial literacy movement has barely budged the needle with financial savvy remaining dismally low. Like Operation Market Garden in World War Two, financial literacy could just be a bridge too far. Economist and author (Nudge: Improving Decisions about Health, Wealth and Happiness) Richard Thaler labels the effort “impossible.” He’s not alone. Lois Vitt, author of “Encyclopedia of Retirement and Finance,” chastises the movement as hypocritical. Even the venerable Jane Bryant Quinn observes most people aren’t interested in investing. Quinn notes her futility trying to convince consumers to avoid index annuities ‘no, no, no’ versus industry salespeople. Jump$tart is a Clinton-era financial literacy initiative. Former board member Lew Mandell jumped ship. Mandell says the financial knowledge movement does little useful and now concludes financial literacy is difficult to achieve.
One of the crusade’s harshest critics, Lauren Willis believes the financial industry encourages financial literacy to stave off government regulation. The credit card industry derives seventy percent of the profit from people who don’t pay their balances off every month. There is little incentive for them to have educated consumers. The original version of Dodd-Frank proposed easy to understand “plain vanilla” documents for credit cards and mortgages. The financial services industry lobbied to have those provisions stripped out but on the other hand funds financial literacy programs.
I am not saying we should surrender. Sometimes, I theorize, knowing what you don’t know helps you avoid bad decisions. In the three questions posed last week, one answer was “Don’t Know.” Women answered “Don’t Know” more often than men and are statistically better investors than men. Sorry guys, the numbers don’t lie.
Regulations aren’t always the work of the devil especially with financial products. Salespeople pitch index annuities (see Mrs. Quinn’s comments) as an investment but they were specifically excluded from mutual fund disclosure requirements. Thank two Democrats, Tom Harkin and Barney Frank. Whole life insurance is often pitched as a retirement product. If you want to do that then fine, disclose the costs in plain English like mutual funds do (allegedly).
Investors make financial decisions based on fear and greed which explains the popularity of index annuities. Your greed allows the industry to peddle Class C shares. Nope you don’t pay a commission … just above-average costs for 10 years. We could and should expose kids to financial concepts in math class from the fourth grade on. Inflation, expense ratios of mutual funds, rates of return, Rule of 72 and credit card fees make math and algebra realistic.
All the regulation in the world won’t stop greed and your greed, not someone else’s, causes trouble. As W. C. Fields warned, “You can’t cheat an honest man.”
Even though Buz Livingston is a fee-only Certified Financial Planner this should not be considered personal advice. For specific advice visit us online at www.livingstonfinancial.net or at our new office in