FINANCIAL EDUCATION | Top U.S. Priority

The cover of the first issue of The Journal of
Financial Education, now on Volume 40. Art
work © 1973 by Brigid Marlin.

The New York Times today has a story on what State Treasurers are doing to educate people in their state about financial matters and help them establish and manage a bank account.

The cost of financial illiteracy is becoming stark as more baby boomers retire. From now till 2030, the people at Pew estimate 10,000 baby-boomer Americans are turning 65 every day.

The new retirees may discover that because of the financial meltdown of 2008 they don't have enough money to retire on. To stretch out withdrawals from their  savings, they may have to stay at their jobs longer than they planned, or sign up for low-paid work with few barriers to entry, like a greeter job at Walmart,

Financial institutions don't make it easy. Incentives for the people who deal with customers are not always structured to give the customer the best deal. The classic case was in 2008 when a retail unit of a financial firm was issuing, and pressing clients to buy, collateralized debt obligations at the same time as traders for the firm's own account were selling them short.

Forty years ago when I was a young professor at Baruch College, City University of New York, I created The Journal of Financial Education to help create a place where new ideas for teaching finance could be discussed. Volume 40 of the journal has just appeared. I couldn't be prouder. The new editors are Richard Fendler and Milind Shrikhande of Georgia State University. The journal is now run by Professor Jean Heck of St. Joseph's University in Philadelphia.

The problem is that finance professors are asked more often to teach about how to make money on Wall Street rather than how to keep Wall Street regulated in favor of the consumer, or how to educate the consumer to maneuver among financial alternatives.

For the past quarter-century we have had the National Endowment for Financial Education to help people manage their money better. It has workshop materials for people who are teaching financial literacy. But at the same time we also have people selling financial products that are riskier than they appear, and a lot of the safeguards against predatory financial-product sellers have been eroded.

America needs to do more on both fronts:

• Return to a tighter financial regulatory environment, back to the system that was put into place by the Glass-Steagall Act in 1933. 
• But the first line of defense against predation is better public understanding of how the financial markets works. We will continue to see millions of people lose their savings in bad investments or not save enough because they didn't plan ahead, until the average level of financial literacy is raised.

Interestingly, financial literacy is rated higher than the United States in Brazil, Mexico and Australia. Pakistan and Indonesia rank at the bottom - see chart!

Financial Advice for People Who Are Not Super-Rich

The 52-year-old Journal
 of Financial Education

In 1969 I moved to New York City with a Ph.D. in hand to be a finance professor at Baruch College of the City University of New York.

During the next few years I was continually surprised by the gap between the sophistication of financial theories and the primitive misunderstanding of financial markets among the general public.

In 1972 I decided to do something to help improve financial literacy and  started a new journal, the The Journal of Financial Education. I wrote a letter to members of an association of university-level finance teachers and got a response rate of about 10 percent.  Now, 52 years later, the journal is still going strong.

At that time, a popular view was the idea that the stock market was a "random walk". Princeton Professor Burton Malkiel's book with those words in the title appeared in 1973. Getting an edge on the market legally was thought to be difficult or impossible. What carried investors was a general rise in the stock market, not so much anyone's ability to predict a particular stock. Along with the potential of more return went greater risk and at the end of the day you paid for your greater potential with more volatility, and one balanced off the other.

My view today is that it is possible to do better than the average investor, through methods both legal and illegal:

• Better and faster information and execution of trades
• Smarter investment analysis.
• Activities that are illegal but are not enforced. 
• Activities that should be illegal but are not.

Michael Lewis's new book on the Flash Boys shows how front-running makes huge profits even if the advance information is only a matter of fractions of seconds. Traders make a profit by being ahead of the market. Large profits are possible at the expense of slower traders.

The problem for the small investor is figuring out how they should proceed, with questions like:

• Who are the smarter money managers?
• Are they leaving anything for their clients after they take their fees and profit shares?

People who can't beat the market when they pick stocks on their own are unlikely to be able to pick with any assurance the best money market managers, offering reasonable rates. Index funds came into fashion, led by Vanguard and its founder Jack Bogle, as a way of keeping down the cost of mutual funds. That's one option, minimize trading and money management fees.

Finding financial advisers without a stake in your decision are another alternative. But these advisers in the past have only been interested in middle-sized and large investors. Now there are new start-ups that offer financial advice for smaller investors.

Here's a description of one of them called FutureAdvisor that looks interesting.

Three cheers. It's about time that the little guys had more choices in how they are guided in making decisions.