Christine Benz, director of personal finance at Morningstar, talks to Professor John Lynch from the University of Colorado.
You can watch the video here.
You have done some really interesting research on financial-literacy education, whether it works, whether it doesn't work. The general takeaway is not encouraging….
It's not encouraging. What the data basically show is, in the first place, the average American consumer is extremely low in financial literacy. So, if you do a national survey, you will see very simple questions about compound interest, about the time value of money, and so on. Most people don't know that stuff.
Educational efforts to help lift people up in that area haven't necessarily been successful?
That's the interesting thing. That's the natural response when you see that the world has become more complicated and people need to be more literate. The natural response is to say we'll fix the problem by financial education, and we've done research that shows the depressingly small effects of financial education. It has very, very little effect on financial behaviour, and whatever effect it has happens if the education is close in time to the financial behavior you are trying to influence.
Let’s talk about what you call "just-in-time" financial education and why you think it can be more effective than a general-interest financial literacy curriculum.
Financial education is no different from other forms of education. If you don't use it, it goes away. For example, school-based financial education has some sort of broad-based curriculum, and the recipients of that education aren't in a position to use it right away.
No money, no assets.
You might be teaching a kid about a mortgage, for instance, but what our research shows is that there is no impact of financial education of any length on behaviour that's outside of two years from when you finished the education. So, if you are hoping you are going to teach somebody something that's going to stick with them into adulthood, that turns out to be a fantasy.
But if you get a little closer to the point of decision-making and you deliver that education at the time when someone is considering whether to take out a mortgage, it may have the potential to be a little more effective?
That's right. You will see that if you are looking at the effect of a one-hour session on behaviour that's taking place within a month compared with having 15 hours with the person and looking at behaviour that's, let's say, a year down the road, the short session can be just as effective if it's right away.
So, part of what we want to do is try to identify in people's financial lives specific events where you can be just in time. For example, let's say somebody is about to retire, and they are thinking about the issue of de-cumulation and thinking about annuities and so on; that's a point in time where they will be receptive to financial education embedded in some kind of advice model.
One angle that you have pursued in your research is couples' financial-planning decisions and the fact that, in many couples, they divide and conquer the stuff that they need to get done. So, in many households, you've got one partner who is the main financial decision-maker and the other one is concentrating on other things. What implications does that have for that household?
First of all, almost everything that's been written about financial education and financial literacy looks at the individual adult as the unit of analysis. If they are analyzing me, they are saying, "John Lynch is this age, he's got this income, and so on"; but the point of this project is that people are making decisions in a social context--in particular, the couple context. And we find these super interesting results.
We find that when couples first get together, they will typically divide up responsibilities for various tasks including money, and the person who gets the money job is absolutely no more capable than the person who doesn't get the money job.
If I'm the one who's bad at cooking, then I might wind up being the money person or something like that. The interesting result we find, though, is that once the couple has divided up those responsibilities, whoever is in the financial driver seat gets better and better and better over time in financial literacy.
The longer you are together, the lower and lower your financial literacy becomes [if you're the one in the passenger seat]. Our evidence shows that this plays out in the ability of individuals to make financial decisions if separated from their partner.
So, if I've been relying on my wife for close to 40 years, even though that seems like it's working well for me when I can rely on her, if I'm on my own, I'll do worse and worse the longer we are together. Not only do I do badly, but even when I'm in the situation where I have access to really valid information to help me make a particular decision, if I've been in this passenger seat, I'm at a level of ignorance in which I literally cannot engage with that material.
It's a very interesting quandary how people in the financial-advising space, for example, get through to somebody who has been in the passenger seat for so long that they literally have a difficult time following and just paying attention to what you are talking about.
What are some best practices for couples who are in this situation? How can they help ensure that the skills of the one who is not in the driver seat don't completely go fallow during that period?
I listened to a talk during the Morningstar Institutional Conference where Merve Akbas mentioned how couples find it aversive to make financial decisions together. Her point was that people find it easier to divide and conquer; one person will make the decision. But I think if you can engage yourself, collaborate if there's some big decision to make, so that both completely understand what's going on and why you're doing it, that's going to be a positive in the long run.
As long as the couple is together, the divide-and-conquer approach isn't a problem; but if the marriage ends in divorce or the death of a partner, eventually the person in the passenger seat is going to be on his or her own.
In many situations, the answer is to hire an adviser to take things over. But the person who hasn't been the financial decision-maker may not be well equipped to choose a good adviser.
That's right. Basically, you need to know something to be able to screen advisors and know who really is trustworthy--and also to understand the advice to able to act on it.
So, if you've been relying on your partner for so long and now you don't have your partner and are relying on a financial adviser, it's not a pretty picture. I would say that people in that situation are definitely at risk of making some disastrous financial decisions.
You can't say, "I'll have some just-in-time financial education when I need it," and then in 40 years when it's time to know what I'm doing, go talk to my adviser and hope I'm going to catch on right away.
You can watch the video here.
Experts share their outlook and investing insights for various asset classes in 2016, and give perspectives on the asset management industry. Read more here.
