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.