Some important lessons on financial education
One of the big themes in all areas of business has been financial literacy and education, particularly in terms of bringing some degree of financial education to the school syllabus.
It seems logical to start when children are young with a few simple lessons on money and easily associated subjects – perhaps ‘budgeting’, perhaps an explanation of what ‘interest’ is and a few ideas on key lifestyle events.
With that in mind, I was very interested to read an article by Michael Kitces (a leading financial planner and writer from the US), signposting some research done in America on “just in time training”.*
The research suggests that long-term financial education is ineffective because, as with all subjects, if we do not use the knowledge quickly then it is lost. Now this makes some sense – how much of your French GCSE or the Shakespeare you learnt in O level English do you remember?
The research showed that only 0.1% of subsequent financial decision making could be attributed to financial education. So we get to a point where there has been early financial education but still potentially poor outcomes in the future.
The more successful solution seems to be the provision of education nearer the time of relevance – so ‘just in time’. This is difficult for unexpected events, say divorce and bankruptcy, but is perhaps easier for ‘knowable’ outcomes such as getting a first job and starting to save, purchasing a house, repaying debt and preparing for retirement.
Another issue highlighted by the US research was the problem of who should deliver the information. Should it be product providers or financial advisers? There could be a perception that providers might have vested interests, although I think many providers do produce some first-class education material that is without bias. If advisers are going to provide it, are customers willing to pay for it or would it be viewed as an add-on to the paid-for advice service?
In the UK we have recently had the suggestion of more pre-retirement guidance, from earlier intervention by Pension Wise and TPAS, to providers offering their own guidance. In addition, the Treasury recently introduced a consultation paper on the introduction of a ‘Pension Advice Allowance’ of £500 which can be taken from the contract to pay for financial advice. Interestingly, this can be used several times and can be used for overall retirement planning without needing to relate directly to the product the money is withdrawn from. This might help with the provision of ‘just in time’ information and assistance.
I am not saying that we should ignore the school curriculum, but we must be aware of potential limitations and alternative approaches. Some basic education around debt, saving and taxation at school is almost certainly more valuable than some of the outdated content that remains on the curriculum. However, the research suggests that school education is not going to help people understand the tax implications of pension withdrawals, how to sustain an income in drawdown and how to best structure death benefits for beneficiaries when people get to retirement.
Indeed, I would argue that Pension Wise and provider-produced education material can only go so far for most people when you get to that level of detail, which is why there will always be demand for high quality financial advice.
*Financial Literacy Financial Education and Downstream Financial Behaviors by Daniel Fernandes, John Lynch and Richard Netemeyer