While some advisors see client financial education as a primary service, others are not convinced that the practice has real value. Decades of academic research only serves to intensify the debate because studies can be found to both defend and refute the effectiveness of financial education. How do we make sense of all these (often conflicting) findings? Thankfully, a more recent and careful meta-analysis of over 200 studies on the effects of financial education points to an answer. This article summarizes these findings, as well as original work performed by Morningstar researchers, and offers practical steps to put the findings to use in your own practice.
Effects of Education
What does the research really say about the value of teaching financial concepts? Hundreds, perhaps even thousands, of studies have been conducted to measure the impact of financial education on people’s financial behavior. Some of these report increases (albeit small) in critical behaviors like saving and debt reduction, while others find no effect of education on behavior. To better understand what this collective body of work can tell us, a team of three prominent researchers carefully examined the results of 201 individual studies on financial literacy and education. The meta-analysis led to two important conclusions:
- Whenever an effect was found for financial education on behavior, it was very small. In many studies, there was no effect whatsoever.
- As with other types of education, the knowledge gained was quickly forgotten.
Given this rather devastating verdict, it would be easy to write off financial education as useless. Yet we can’t ignore the obvious fact that financial knowledge matters. Without it, people would be at the mercy of unscrupulous salespeople and predatory products. Without financial literacy, financial experts could not add value, and if knowledge truly had no impact on behavior, experts would make the same bad decisions as novices.
Why, then, do education efforts appear to have little or no effect on behavior? And coming back to the practical question at hand: What does this mean for advisors and other professionals working with investors? It may be that current efforts aren’t working, but others could work to help investors. Or that financial literacy is a lost cause, and industry professionals shouldn’t waste their time. There are three things complicating financial-literacy efforts:
1 How It’s Taught Is Not a Factor
One might propose that the problem is in the methods used to teach. However, the meta-analysis looked at many types of financial education: counseling, high school classes, seminars, workshops, multisession courses, and more. It would appear that the mode of information transfer is not a large factor in the effect of that information on behavior.
2 What Is Taught Has Limited Practical Use
The standard measures of financial literacy are based on simple multiple-choice questions about fundamental financial concepts. They read very much like a high school math quiz and test a person’s understanding of interest rates, inflation, and risk. While these are important concepts for investors, they have little to no bearing on day-to-day financial habits or spending behaviors.