Our Financial Educators are Salesman, and That’s a Huge Problem.
Who’s to blame for the crisis of 2007?
Was it the big banks? The rating agencies? The government? Was it you?
Finger pointing has some benefits (catharsis, for one), but I worry that in our lust to tar and feather some scapegoat, we’re actually missing a broader issue: Education.
When I was young, I was fortunate enough to attend well regarded schools. Even in that environment, financial education was always considered secondary. In math class, we once spent a little bit of time discussing interest. In social studies, we discussed the great depression and the history of the stock market, but only as a small sub-unit. Until College, there was never a dedicated finance course, not even an elective. I shudder to think what people who didn’t have my privileged educational opportunities got. Probably nothing.
Yet, our society is built on finance. Checking accounts, retirement funds, credit cards, student loans, mortgages, most people have some (or all) of these things.
Finra’s website has a six question basic financial literacy quiz. The national average for correct answers is an embarrassing 3.16. You can take the quiz yourself, it requires knowledge of interest rates, mutual funds, bonds, and some basic math.
Finance is not rocket science. It’s actually more like pseudoscience. The industry thrives on jargon. Hell, some companies have worked obfuscation into their business models. To properly understand 2007, for instance, you have to know what a collateralized debt obligation is, which is fancy-speak for a type of structured asset-backed security, which is fancier speak for product you can legally trade (security) that is based on the value of pool of other things (asset), in this case mortgages. That’s three layers of Wikipedia to get to a pretty straightforward definition.
So, how do we learn about financial stuff?
I was once at a sizable Bank of America branch and told, point blank, that I needed at least three credit cards to establish good credit in order to someday get a mortgage if I wanted to own a house. This, by the way, is utter nonsense. I have perfectly good credit and have one credit card that I rarely ever use. That got me thinking about how much information is sent to me in the mail, how many different banks and lenders provide me with numerous pamphlets packaged with congratulatory messages celebrating how qualified I am for their credit cards. Some of it is pretty obviously advertising, but some of it really does blur the line into what advertisers often refer to as “advertorial”.
Then it hit me, most people learn everything there is to know about finance from banks, whether it be their marketing material or direct conversations with representatives. For wealthier folks, it’s often the case that representatives are given titles like “Advisor” or “Wealth Manager.” For the less wealthy, it’s marketing pamphlets or a series of clerks, assistant managers, and the like.
This problem also occurs in business to business transactions. One of the reasons AiG failed, for instance, was because the banks themselves were educating AiG on the mortgage-backed products they were insuring. Why did AiG go along with it? I would suggest it is because society is conditioned to look to banks for authentic financial information.
Banks have massive conflicts of interest about teaching you finance in a legitimate, unbiased way. Imagine you know nothing about what a calorie is, and the only people providing you with information worked for Arby’s. They might tell you some level of truth. They could even be good, decent people. Really, though, they also want you to eat and enjoy the hell out of a salty roast beef sandwich, fries, and a soda because it makes them money and they believe in their own product. This is why it’s important that the USDA has its own set of nutritional guidelines. It’s not immune from bias (corporate influence is a problem, for sure), but it’s better than learning about a balanced diet from Kellogg’s or McDonalds.
The Consumer Financial Protection Bureau (CFPB) is the financial equivalent. They provide some educational resources. Unfortunately, they focus more on educating the educators instead of the consumers directly. I hope they realize this and invest more heavily in providing direct education to citizens, particularly teenagers.
Moreover, schools NEED to make this a part of their curriculum. Our rising student-debt problem is not a joke, and the students themselves need to be better equipped to avoid destroying decades of their lives for the sake of a college education that isn’t going to pay them back.
Since the above doesn’t currently happen, here are some pieces of information with which to education yourself, as well as your family members, about basic finance. If schools or the government can’t solve this, maybe individual efforts can:
- The SEC’s section on basic investing: Do you not know what a mutual fund is? Or even a stock? This will help.
- Duke University has a Personal Finance website with good information about the basics of credit and debit cards.
- Wikipedia: An oldie but a goodie, any term in a financial document you do not understand is listed and defined in wikipedia, just search for it.
- Simple and Compound Interest calculation: If you’re comfortable with math, you can use this to help determine how much interest is either helping or hurting you.
Honestly, it’s hard to expand on the above list, a testament to how bad the issue is. Search engines are often mired with information that comes directly from banks or other lenders. If you have a favorite, neutral source for information, feel free to respond with it. I would love to enhance this list.
The fact remains that if we do not address financial education, we are doomed to repeat the mistakes of 2007 at every level, from the consumer to the CEO to the regulator and back again.
