Financial education poses a quandary for the financial services industry. On the one hand, education makes consumers more involved in finance and more understanding of the financial benefits and avenues open to them.
But on the other hand, greater levels of financial education mean consumers may be less likely to pay an adviser or other professionals to explain the world of finance and help them feel their way through it.
The government and the finance industry has encouraged financial education. But last week, Lauren Willis, a professor of law at Loyola Law School in Los Angeles, presented a paper on the subject at the American Economics Association 2011 annual meeting. In “The Financial Education Fallacy”, Willis says if the “inefficacy” of financial education programmes were known and truly understood, other forms of regulation would move to the fore.
Instead, Willis says, the industry continues to spend money on programmes as they “fear the other forms of regulation they believe they would face if they could not point to financial education as the cure for consumer financial woes”. (article continues below)
Financial literacy education is therefore still advocated over other methods of regulation. Willis says biases and other non-rational influences are the real factors that determine financial decisions. If there was something like effective financial education, she says, it would be extremely costly, mainly owing to the “abysmal state of most consumers’ financial literacy”.
Her previous research suggests there is no causal chain from education to higher literacy to better behaviour to improved final outcomes. “Effective education would need to be tailored and given in a one-on-one setting. Replacing the educators with professional advisers seems a more cost-effective route,” she says.
Regulating professional advisers further would be expensive, she admits, but so would regulating financial educators.
In Britain, the Financial Services Authority (FSA) led the development of the National Strategy for Financial Capability implemented in 2006. Toni Williams, a professor of law at the Kent Law School, has repeatedly raised questions about regulators’ use of consumer education to make consumption of financial products more responsible. She calls for further research on the international growth of financial literacy education as a regulatory project.
The FSA says education must improve relevant knowledge and understanding and better knowledge must change behaviour. Yet it acknowledges that whether education typically induces better outcomes or tends “is hard” to determine.