Many financial advisors are involved in providing financial education, from delivering a financial literacy course in schools, or lending our expertise to create financial education resources. An activity that for us is no doubt driven by seeing first-hand the damage that can be caused by financial illiteracy and making ignorant financial decisions.
Yet a recent meta-analysis of over 200 prior studies on financial literacy programs finds that providing long-term financial education is remarkably ineffective. In fact, the researchers found that interventions to improve financial literacy explain a statistically significant but practically irrelevant 0.1% of subsequent financial behaviors.
The problem appears to be driven primarily by the fact that, as with so much of our education, concepts and skills that we don’t use can quickly atrophy. Which means trying to make children financially literate when they’re in school may still result in them to grow up and struggle with financial illiteracy as adults.
So what’s the alternative? An approach called just-in-time training, which aims to provide financial education at its moment of maximal relevance and usefulness – when the financial decision itself arises, and the education can be immediately applied.
The caveat, though, is that the likely provider of financial education in such circumstances would be the financial services product provider, who may have an untenable conflict of interest against helping someone to become financially literate, if doing so might actually talk them out of buying the company’s product. Or alternatively, there’s a risk that the financial services company could frame the financial choices in a manner that “nudges” the consumer towards a not-necessarily-beneficial outcome.
Yet arguably, this may be a perfect role for financial advisors to fill, particularly as financial advice increasingly shifts from product sales to bona fide independent third-party advice. For instance, just as drug companies can market their products to consumers, but still have to recommend “consult a doctor before taking this drug”, so too might financial services product providers be required to direct consumers to consult an (independent) financial advisor before buying at least the more complex financial services products (while “robo-financial-education” technology solutions might help to step in for simpler product and financial decision education). And financial advisors can also help consumers navigate the often emotional and not-always-rational aspects of financial decision making as well.
Which raises the question: while financial advisors have historically supported financial literacy programs on a pro bono basis, should a key element of the financial planning business model include not only offering financial advice and helping consumers to evaluate their financial trade-offs and decisions, but also as a financial education provider of just-in-time training on key financial concepts as well?