Free financial advice for the masses? It isn’t as far-fetched as you think. Yale University economics professor Robert Shiller has put together a proposal that suggests just that. He argues that much of this financial meltdown could have been avoided, or at least minimized if our citizens had a better financial education — especially those with lower incomes.
The general premise of the proposal is that the government should subsidize the use of financial advisors for the general public. And just how much would this cost? Well, initial estimates put it at $15 billion. It sounds like a lot, but when you hear about the billions being thrown around on a daily basis to fund all sorts of projects, it doesn’t seem so crazy.
A Lack of Education
Shiller points to the fact that many of the problems that got us into this mess could have been avoided with financial literacy. A better understanding of the negative impact of debt, creating a budget, and how mortgages work could have gone a long way in keeping people out of trouble. Of course, the education is available, but people still have to seek it out.
Shiller cited recent research showing how abysmally low many Americans score on financial literacy tests:
A paper by Kris Gerardi of the Federal Reserve Bank of Atlanta, Lorenz Goette of the University of Geneva and Stephan Meier of Columbia University asked a battery of simple financial literacy questions of recent homebuyers. Many of the respondents could not correctly answer even simple questions, like this one: What will a $300 item cost after it goes on a “50 percent off” sale? (The answer is $150.)
Whether or not people will seek out advice is one of the main sticking points regarding this proposal. There is financial advice available to anyone who wants it. Some free, some will cost money, and others will be pushed on you with a sales pitch. The problem is that people generally don’t seek out help until there is a problem, so even if you made advisors free, will people go? Look no further than going to the doctor. How many people go years without seeing a doctor just because they don’t get sick? Many people even have insurance and may not even pay for a doctor visit, yet they’ll wait 5 years between checkups. I think the same thing could be possible with a plan like this and a lot of people still wouldn’t take advantage of it.
Finding the Right Advisors
So, who would be these financial advisors dishing out free advice, and how can the public be sure they are getting true objective advice that’s in their best interest? Shiller’s plan calls for a $75 per hour subsidy for the participating advisors. It might seem like a lot, but many quality planners often charge at least double that rate per hour. Would good talent be willing to work for a pay cut for the sake of educating the public? I’m sure many would, but you may also find a lot of good people don’t want to bother since they can work their existing client list and make close to double the money.
And then you have to deal with the fact that you may have unqualified advisors who would love a shot at $75/hr pay trying to weasel into the system when they may not be the best for the job. Shiller says in his proposal that subsidized advisors would be required to prove they are free of conflict and not affiliate with any product manufacturers. In addition, they would be required to sign a statement that promises client loyalty and to only accept the subsidized hourly fee and no commissions or kickbacks.
Could it Work?
This idea isn’t new, but if there is any time to bring it up and hope for funding, it is now. The government is throwing money at everything, some of which people argue will have little long-term effects. So, if we’re going to try and stimulate the economy and prevent another financial collapse like this one, why not try and tackle the problem from the source? Sure, we can create jobs, stop people from being foreclosed on their house, and improve the stock market, but how long will it be before people go fall back on their old habits?
There are obviously many issues to consider with this proposal, and making sure it was set up correctly and run in a way that truly benefits the general public is a monumental task, but I think something like this is worth a shot. We’ve seen how ineffective other government spending has been, so why not think outside of the box a little bit and take a different approach?
What do you think? Is this a good idea, or would it open the doors for more problems? And even if it was made into a reality, do you think people would actually use it and benefit from it?
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
I don't know if financial advisors for the general public is feasible, but I like the idea of teaching personal finance classes in high school. Also, it would be great if the could make financial products less confusing.
The best way to teach everyone is by starting out in the public school system. I think the federal government needs to make personal finance a prerequisite to graduate high school.
It's not a bad idea to educate people about personal finance, but shouldn't the school system be responsible for this?
adding this to the "stimulus" package makes as much sense as anything else in there.
Agreed that more people need to be educated on personal finance.
I think there are more inexpensive, efficient, and scalable ways to educate the public. The adviser/client relationship isn't always geared towards education. How about everyone who receives economic stimulus benefits must pass a financial literacy test that is based on a book sent out to every taxpayer?
On the surface the idea sounds good, though I think it is probably too late for a lot of people. I would rather see
financial courses offered at the high school and college level and, yes, they should be mandatory.
NAPFA should back this bill. That is the National Association of Personal Finance Advisors. They are a fee only org. You can't work on commission and be in their org.
Like the others though, no one would actually use it.
First, $15 Billion doesn't just sound like a lot, it really is a lot.
Second, the assumption that people who borrowed too much to buy too much house must have been lacking for professional advice and financial literacy flies in the face of reality. Five years ago just about every established expert was saying that houses were a sure thing.
David Bach's The Automatic Millionaire (2004) says "you aren’t really in the game of building wealth until you own some real estate" and goes on to list names, phone numbers, and websites of outfits that can help you buy a house with little or no money down.
And Suze Orman, in her The Laws of Money, (2004) had a section enititled “Home Buying: One of the Best Known Investments.”
The point is, there was and is no shortage of personal financial advice and coaching out there. It's just not very good.
While I think it's good to educate people on personal finance, I think this should be tackled nationwide at a younger age when people are required to go to school such as their freshman years of high school. This stuff should show up right next to math and reading on those annual standardized exams. I don't recall getting much of a financial education in high school, and I did go to a fairly decent public school. Somewhat randomly, I took Shiller's finance class in college and do think that he has a lot of good ideas and is one of the people with better advice.
I would agree with Travis on the previous comment. It would be a great math class to be taught to all students in school. I am lucky where I work that our 401k advisor has really steered me right, even in difficult times.
It would be great to have free financial advice offered with a Saturday or night class. Or a reasonable fee could be used as a donation to a charity on a special event instead. It would help those who are having trouble in this economic turmoil. Besides, it's always good to learn something new about $$.
I like the idea, although like you I'm not sure how many people would take advantage of it. But I'd like to think it would at least help some people.
I'd also propose mandatory finance classes before a student could graduate. I think with both of these programs we would be looking at a brighter financial future for everyone.