The idea behind the financial literacy movement sounds like common sense. The financial world is complicated? People don’t do the right things? Then educate them! Teach kids about budgets and living within their means, offer employees an investment information session—and voilà! Twenty years later, credit card debt and the retirement savings crisis will be things of the past, and we’ll all be on the road to financial nirvana.
There’s only one problem: Financial literacy doesn’t work. One recent study published in the journal Management Science found that studying financial literacy has a “negligible” impact on future behavior and that within 20 months almost everyone who has taken a financial literacy class has forgotten what they learned. For a working paper, Shawn Cole at Harvard Business School, Anna Paulson at the Federal Reserve Bank of Chicago, and Gauri Kartini Shastry at Wellesley College discovered that high school classes imparting financial wisdom don’t seem to make a whit of difference when it comes to how we handle our finances. Others have found that lessons in financial literacy don’t lead to much in the way of increased test scores on the subject.
So why do we persevere? Here’s one answer: The organizations most interested in promoting financial literacy are the ones that benefit the most from laws that assume consumers can be educated—and don’t need legal protection from corporate financial predators.
This was on display at a Wednesday luncheon hosted by the Financial Services Roundtable, the lobbying organization representing several dozen leading financial firms, to announce a joint financial literacy venture with the Consumer Financial Protection Bureau. The roundtable will work with the federal watchdog agency “to advance a vision for stronger and more capable consumers,” as CFPB head Richard Cordray put it.
It’s a worthy goal. It’s also one that the Financial Services Roundtable and many of its members spend more than a little bit of time and money making sure doesn’t happen. The CFPB has even found that for every dollar spent on financial education by the government, schools, and, yes, the financial services industry, the banks, brokerages, and other financial firms spent $25 marketing themselves.
How does this work in practice?
Take Discover Financial Services, whose chairman and chief executive officer David Nelms spoke proudly of his company’s efforts to educate Americans on money matters at the Wednesday event. One of the reasons to promote financial literacy? “In terms of the benefits, obviously if consumers are better with their finances they are going to qualify for our products more in the first place,” he said.
So I decided to take a look at Discover’s online financial literacy materials. There was some good advice—a three- to six-month emergency fund should be a must-have for all of us. But if you can’t do that? Well, in a section titled “Credit Cards: The Benefits of Using Plastic,” I discovered the company was promoting the use of credit cards as an emergency fund, not to mention as a budget management tool. Really. “Credit cards can also help consumers stretch their monthly income,” the site chirped.
This is the same Discover Financial Services whose subsidiary Discover Bank came to an agreement with the CFPB in 2012 to refund $200 million to customers and pay a $14 million fine for using what was described as “deceptive” techniques to sell customers on such things as credit score tracking and identify theft protection. How deceptive? Well, service reps implied the products were free and frequently forgot to mention that customers who were self-employed, unemployed, or suffering from various medical conditions were not eligible to use the products being pitched at them. There was also a trick in which Discover’s customer service specialists talked really fast when giving out price information—so fast that the person on the other end of the line couldn’t process it.
Another financial education specialist present on Wednesday? BB&T Bank, the parent of brokerage Scott & Stringfellow, which came to a $350,000 settlement with the Financial Industry Regulatory Authority in 2012 after it was accused of marketing nontraditional exchange-traded funds to customers without properly educating the representatives selling them. That result? Customers who were seeking “capital preservation” ended up being peddled riskier investments than they wanted.
As for the Financial Services Roundtable, the organization has taken a prominent role fighting the Department of Labor’s attempts to require financial advisers giving advice on individual retirement savings to act in consumers’ best interests, something known as the fiduciary standard. It’s something that would almost certainly help their customers more than any financial education effort—since, after all, it would no longer be up to people seeking financial advice to figure out when the financial counsel they are offered isn’t optimal.
That’s not, however, how the Financial Services Roundtable sees it. They claim expanding the fiduciary standard to cover individual retirement accounts would cause “unnecessary confusion.” They forgot to mention that consumers are already confused, with a 2010 study finding 3 out of 4 consumers are convinced that people giving financial advice need to act in their clients’ best interests when, in fact, the chances are fairly good they do not.
The result of all that confusion? A recent White House memo estimated that brokers who don’t need to act in their clients’ best interests are costing Americans between $8 and $17 billion in lost retirement savings annually, thanks to such practices as collecting higher commissions for placing clients in less than ideal investments.
Even if all these shenanigans weren’t taking place, it’s hard to see how financial literacy would work. Financial experts disagree about the correct financial behavior in many situations. Then there are our greater economic circumstances. Medical bills—not shopping sprees—are one of the leading causes of bankruptcy. As a result of all this, even noted behavioral economist Richard Thaler claims that “financial literacy is impossible.”
I get that the CFPB has to go along with this charade. After all, Congress mandated financial literacy be part of the agency’s mission when it was legislated into existence as part of the Dodd-Frank Act. But the rest of us don’t need to settle for faux financial empowerment. We can demand real protection instead. As Lauren Willis, a Loyola Law School professor and leading critic of the financial literacy movement, put it in a recent Los Angeles Times op-ed she wrote with Theresa Amato, executive director of Citizen Works, “We don’t expect people to be their own doctors or lawyers; why would we expect them to be their own financial advisors?”