Financial Literacy Effectiveness & Providing Just-In-Time Training By Financial Advisors

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Strategic Wealth, which provides an evidence-based approach to private wealth management for near- and current retirees, and Buckingham Strategic Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors through the scaling phase of growth.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

Read all of Michael’s articles here.

Financial Illiteracy And The Ineffectiveness Of Financial Education Programs

There’s little doubt that the financial world is getting more complex. The past several decades have witnessed an explosion of increasingly sophisticated choices in everything from borrowing options (from credit cards to peer-to-peer lending to payday loans and various forms of exotic mortgages) to savings and investment opportunities (from mutual funds and ETFs to the plethora of tax-preferenced accounts including IRAs, 401(k)s, 529 plans, HSAs, and more) to the broad impact of the infamous (yet opaque) credit score.

The growth of financial complexity in turn requires an increase in the depth and breadth of financial knowledge and sophistication for consumers to navigate these various financial products and services. Yet it appears in practice that we’re failing to keep up, as evidenced by everything from rising levels of financial stress amongst consumers, to the sad fact that the number of bankruptcies grew 5-fold between 1980 and 2005.

The struggle to keep up with financial complexity, coupled with the fact that financial life skills are rarely taught in school, has led to significant growth in programs that provide financial education – from adult interventions to financial literacy programs for middle- and high-school children – in an effort to raise the public’s financial literacy level, at a cost that some estimate could collectively be billions of dollars. Yet despite the cost, it’s hard to argue with the virtues of being better educated – teaching key financial concepts, and how to make better short-term and long-term financial decisions – to deal with an increasingly challenging financial environment.

Except that, as it turns out, it’s not clear that our efforts at solving financial illiteracy are actually yielding material results. In a recent meta-analysis of over 200 prior studies on financial literacy programs, conducted by Daniel Fernandes, John Lynch, and Richard Netemeyer, and entitled “Financial Literacy, Financial Education, and Downstream Financial Behaviors”, 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 – like so much formal education – the knowledge we don’t use will atrophy over time. Just as few likely remember the details they learned in school about Shakespeare’s plays or the Battle of Gettysburg (if they didn’t end out with jobs that deal with those topics on a regular basis), so too do people forget much of the important detail associated with financial education over time. In fact, the researchers found that within a year, the benefits of a 6-hour financial education program were no longer statistically significant (i.e., no longer distinguishable as having any positive impact at all!); after about 18 months, the benefits of even 24 hours of focused financial literacy programs have typically vanished.

The situation likely isn’t helped by the reality that it’s difficult for many to connect classroom learning to real-world applications that may only be relevant years later. Not to mention that many financial decisions have a significant emotional component, which means we may not necessarily be thinking with the rational financially literate part of our brains when the time for a key financial decision actually comes!

In addition, the researchers found that even the overall correlation between being financially literate and effective financial behaviors (e.g., having an emergency savings account, knowing what you need for retirement, and having a good credit score) may actually be attributable to underlying personal traits, including an individual’s natural propensity to plan for the future, willingness to take at least prudent investment risks, and who have confidence in their ability to search out and find information when it’s needed. Which in turn means that those who exhibit positive financial behaviors and have strong financial literacy may score well in both because they’re simply already naturally inclined towards doing both. (Though technically the research is not clear on the causative direction of the relationship; it’s also possible that teaching financial literacy positively impacts these traits, which in turn help lead to better financial behaviors.)

Nonetheless, the fact that some of the benefits of financial education may be driven by certain natural traits that favor financial literacy in the first place, and that the benefits of a financial education intervention (in the absence of an immediate opportunity to apply it) tends to deteriorate within a year or two, suggests that it may be time for an alternative approach to financial education that more directly pairs the financial education to the individual in their moment of need (before it has time to be forgotten!).

Just-In-Time Financial Education To Improve Financial Behaviors

The idea of “Just-In-Time” financial education is that rather than trying to intervene early to improve financial literacy – when the education may not be relevant and is likely to decay (thus being forgotten by the time it’s actually need) -  it should instead be delivered at the moment that the financial choice itself is presented.

With just-in-time training, the financial education is certain to be relevant (since it would be targeted accordingly to begin with), and doesn’t risk being forgotten by the time it’s actually necessary (because it’s immediately applicable). In addition, just-in-time financial education can be delivered far more efficiently – rather than provide several days of education with the hopes that “something” is retained a year or few later when it actually matters, a mere hour or less of targeted education may be able to have a similar impact, which provides the same benefit but a small fraction of the time and labor cost for the financial education itself.

For instance, perhaps the best time to teach about the differences between fixed and adjustable-rate mortgages and how much mortgage is affordable is not in a high-school or college financial literacy class, but at the point someone is actually getting ready to buy a house and actually needs a mortgage. Similarly, financial education about how credit cards work can be provided at the time someone tries to open their (first) credit card, the difference between checking and savings accounts can be offered when someone goes to the bank to open an account, and just-in-time financial education can even provide contextually relevant but more nuanced educational opportunities (e.g., Betterment’s “Tax Impact Preview” educational warning on the capital gains tax consequences of changing a portfolio allocation at the moment someone logs into the app to make that change).

Notably, the point of just-in-time education is to provide more than just an explanation of a product’s features and benefits, and/or “educational disclosure” in the fine print about how it works. The purpose is to provide just-in-time financial literacy skills that allow someone to have better context about the decision itself – for instance, not just about how payday loans work, but also their alternatives, and not just about how the mortgage works, but also how much house and mortgage is prudent to take on in the first place. Signing up for a 401(k) plan wouldn’t just provide a list of investment choices and disclosures about the expenses and performance, but also more general financial education about how stocks and bonds work, the impact of long-term compounding returns, and the tax treatment of 401(k) plans.

Unfortunately, though, a significant problem with the idea of just-in-time financial education is that it will often rely on the company providing the product or service to deliver it – and companies selling financial products don’t exactly have a positive financial incentive to educate someone that the product might actually not be the best thing for them after all! And we know from the growing body of research on “choice architecture” that how choices are presented can greatly impact the financial decision that is ultimately made. Which means financial services companies could potentially undermine or obfuscate the relevance of just-in-time financial education by how the education is framed and delivered, particularly if the “best” choice really should be to buy a completely different alternative product, or no product at all. And of course, some products are so complex that it may not be feasible to get sufficiently educated to make a well-informed decision based only on just-in-time education alone.

The Role Of Financial Advisors And Technology For Just-In-Time Financial Literacy Training

The fundamental conflict of interest for a product provider to offer just-in-time education that could turn out to undermine the sale of the company’s product raises interesting questions about the role of (independent) financial advisors.

After all, arguably financial planning done well has a heavy component of providing financial education, helping people consider trade-offs and long-term ramifications to their financial decisions, which are the exact issues that one would hope be considered when making significant financial choices. And the training and expertise of financial advisors – at least those who have voluntary certifications beyond the basic regulatory licenses – leaves them well positioned to help consumers navigate, particularly the most complex financial products and decisions.

In other words, perhaps just as drug companies can market to the public but ultimately direct consumers to “consult your doctor before taking this drug”, so too might the implementation of just-in-time financial education for consumers entail the use of a financial advisor. For instance, consumers might be advised to consult an independent financial advisor before purchasing a complex annuity product, or allocating money to an illiquid hedge fund, or taking on an exotic mortgage (or any mortgage at all). In point of fact, the government has already adopted a version of this approach for reverse mortgages, which requires the completion of a 1-hour counseling session to get educated about both the reverse mortgage and its alternatives. (Though sadly, financial advisors – even those who are CFP certificants – do not even qualify as HECM reverse mortgage counselors!)

Notably, a key requirement for the effective use of financial advisors as a deliverer of just-in-time financial education (particularly for consumers who otherwise lack financial literacy and would rely heavily on the expertise of the advisor) is that the financial advisor actually operate under a fiduciary standard as an independent advisor. If the financial advisor was still functioning as a salesperson for the product company, at the same time he/she is supposed to be giving financial education and advice, the relationship risks being tainted by the same conflict of interest that could undermine other seller-provided just-in-time financial education.

Of course, in some situations, the financial need or product involved may not be so complex that it requires a full consultation with a financial advisor to begin with. In these scenarios, technology solutions may help to fill the void as well. This could include objective third-party tools like Saving For College’s 529 Comparison solution or FeeX to evaluate investment costs, and may eventually evolve to the point that the software monitors an individual’s entire financial picture (e.g., using account aggregation tools) and uses algorithms to determine when relevant financial education should be presented (such as offering education about the value of an emergency savings account for someone who doesn’t have one, or the consequences of credit card interest for someone who’s only making minimum payments). In essence, the financial technology solution becomes a form of “robo-financial-educator” to both identify just-in-time financial education opportunities, and then deliver them.

Still, even financial education through technology will be limited for the foreseeable future, in a world where often the biggest financial challenges are behavioral, not merely informational and educational. And in this context, arguably given the way humans are hard-wired, it will be a long time before we’re willing to have a computer tell us that we’re being irrational (even if we are). And even then, sometimes it may still take the empathy of another human being to have a conversation and help us explore the possibilities and figure out what our goals are in the first place. In other words, the computer may be able to answer our questions and provide education (and identify those educational opportunities), but at least given today’s technology, it takes another human being to help us realize the questions and issues we aren’t even asking about.

Ultimately, the optimal solutions to aid in just-in-time financial education and better decision-making will likely entail both the use of technology tools and human financial advisors – as we’re discovering is the case in the world of “robo-advisors” as well, where technology can make some parts of the process very efficient, but the necessary-yet-often-irrational behavioral challenges of individuals are still better suited to the financial advisor as counselor and educator (though not salesperson).

Nonetheless, the key point remains that as the word gets more and more complex, the long-term solution really may not be trying to make everyone financially literate – given what are already somewhat dismal results for the effectiveness of such financial literacy programs and initiatives. Instead, the solution may be more about providing a combination of just-in-time financial education when it matters most, and the assistance of financial advisors as both experts and counselors to guide consumers through the decisions that are too complex, or too behaviorally driven, to be solved by information and education alone. Though obviously, this still doesn’t resolve the broader societal challenges about whether everyone has a sufficient opportunity to advance their financial situation in the first place, whether financially literate or not!

So what do you think? Is it time to re-evaluate the benefits of financial literacy programs? Could financial advisors have a different role to play, as a provider of just-in-time training for financial education? Please share your thoughts in the comments below!