The Bakersfield Californian
January 16, 2014
A recent Securities and Exchange Commission study found that a majority of investors “have a weak grasp of elementary financial concepts and lack critical knowledge of ways to avoid investment fraud.”
The SEC study was conducted as part of the Wall Street reform law passed by Congress in the aftermath of the 2008 global financial crisis. The goal was to improve Americans’ investment knowledge.
The findings were similar to other recent surveys which concluded most Americans – including those considered to be well-educated and upper-income – have poor financial literacy.
“By and large, people are pretty clueless,” said Olivia Mitchell, executive director of the Pension Research Council at the University of Pennsylvania and the coauthor of one of those recent studies.
One of my financial planning clients, a 50-ish boomer, often jokes about her early financial training. As a student at a California State University, her “general education” requirements included completing a few courses in economics.
A social science major, who later became a Bakersfield teacher, she recalled her professor droning on about such things as micro-economics and international trade. But she can’t recall receiving much information that she could apply to her lifelong, personal financing needs.
This is a shame, particularly now that the world of personal finance has become increasingly complex and people are more responsible for their own financial futures. Gone are the days when defined-benefit pensions commonly supported Americans into their old ages. In many cases these plans have been replaced by 401(k) investment funds and other financial vehicles that are managed by workers.
And with this transition has come the creation of complex – sometimes deceptive – investment opportunities that require people to ferret out hidden fees and conflicts of interests.
The 2008 financial meltdown can be partially blamed on a combination of financial illiteracy and complex investment schemes. As an example, consider the basic need to understand the pitfalls of loan requirements – to finance student debt or to pay for home purchases. Lack of financial literacy proved to be catastrophic for many Americans in the meltdown.
With the passage of Assembly Bill 166, the Legislature took a good step toward improving the financial literacy of California’s next generation. The bill, which Gov. Jerry Brown signed into law, now requires public schools to provide personal finance classes. Students from seventh grade and up will learn how to plan and balance a budget, as well as manage student loans and credit cards.
But what can be done now to improve the financial literacy of boomers – that huge generation of Americans heading into retirement?
- Each individual ultimately is responsible for his and her future. Boomers must begin to educate themselves. Courses, such as the one I teach through the Levan Institute for Lifelong Learning at Bakersfield College, provide the fundamentals of financial retirement planning.
- Utilize workplace resources. Companies often provide their workers with financial literacy training. This training many come in the form of workshops, online “retirement calculators,” and referrals to contract financial advisors.
- Seek professional help. Financial planners are available in the community who can advise investors on managing funds. However, investors must exercise caution in selecting an advisor. They must be competent; free of conflicts; and willing to educate their clients. Beware of the advisor who talks fast, uses “insider jargon” and gives confusing information.
While studies show too many Americans are financially illiterate, it is not too late to catch up.