Financial Literacy: Just-in-Time Is the Ticket

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. I'm here at the Morningstar Institutional Conference. Recent research has some sobering implications for couple's financial decision-making processes. Joining me to discuss that topic is John Lynch--he is a professor at the University of Colorado.

John, thank you so much for being here.

John Lynch: Thanks, Christine.

Benz: There has been a lot of research done over the past several years--and you have done some really interesting research--about financial-literacy education, whether it works, whether it doesn't work. The general takeaway is not encouraging.

Lynch: It's not encouraging. What the data basically show is, in the first place, the average American consumer is extremely low in financial literacy. So, if you do a national survey, you will see very simple questions about compound interest, about the time value of money, and so on. Most people don't know that stuff. So, financial literacy is low.

Benz: And then educational efforts to help lift people up in that area haven't necessarily been successful either?

Lynch: That's the interesting thing. That's the natural response when you see that the world has become more complicated and people need to be more literate. The natural response is to say we'll fix the problem by financial education, and we've done research that shows the depressingly small effects of financial education. It has very, very little effect on financial behavior, and whatever effect it has happens if the education is close in time to the financial behavior you are trying to influence.

Benz: So, that gets to this idea of what you call "just-in-time" financial education. Let's talk about what that means and why you think it can be more effective than a general-interest financial literacy curriculum.

Lynch: So, this is going to sound painfully obvious, but financial education is no different from other forms of education. If you don't use it, it goes away. So, much financial education--for example, school-based financial education--has some sort of broad-based curriculum, and the recipients of that education aren't in a position to use it right away.

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Benz: They have no money, no assets to invest.

Lynch: No money, no assets. You might be teaching a high school kid in a course about a mortgage, for instance, but what our research shows is that there is no impact of financial education of any length on behavior that's outside of two years from when you finished the education. So, if you are hoping you are going to teach somebody something that's going to stick with them into adulthood, that turns out to be a fantasy.

Benz: But if you get a little closer to the point of decision-making and you deliver that education at the time when someone is considering their choices--whether they are taking out a mortgage or allocating a 401(k)--it may have the potential to be a little more effective?

Lynch: That's exactly right. You will see that if you are looking at the effect of a one-hour session on behavior that's taking place within a month compared with having 15 hours with the person and looking at behavior that's, let's say, a year down the road, the short session can be just as effective if it's right away.

So, part of what we want to do is try to identify in people's financial lives specific events where you can be just in time. For example, let's say somebody is about to retire, and they are thinking about the issue of decumulation and thinking about annuities and so on; that's a point in time where they will be receptive to financial education embedded in some kind of advice model.

Benz: One angle that you have pursued in your research--I think it's an interesting one for our Morningstar.com audience--is couples' financial-planning decisions and the fact that, in many couples, they divide and conquer the stuff that they need to get done. So, in many households, you've got one partner who is the main financial decision-maker and the other one is concentrating on other things. What implications does that have for that household?

Lynch: Well, that's an extremely interesting scenario. First of all, almost everything that's been written about financial education and financial literacy looks at the individual adult as the unit of analysis. If they are analyzing me, they are saying, "John Lynch is this age, he's got this income, and so on"; but the point of this project is that people are making decisions in a social context--in particular, the couple context. And we find these super interesting results. In the first place, we find that when couples first get together, they will typically divide up responsibilities for various tasks including money, and the person who gets the money job is absolutely no more capable than the person who doesn't get the money job.

Benz: So, it's random.

Lynch: I wouldn't say random--I'm sure there are good reasons for it. But if I'm the one who's bad at cooking, then I might wind up being the money person or something like that. The interesting result we find, though, is that once the couple has divided up those responsibilities, whoever is in the financial driver seat gets better and better and better over time in financial literacy. (And ironically, I'm the one who's in the passenger seat, by the way, in my marriage.) The longer you are together, the lower and lower your financial literacy becomes [if you're the one in the passenger seat]. Our evidence shows that this plays out in the ability of individuals to make financial decisions if separated from their partner.

So, if I've been relying on my wife for close to 40 years, even though that seems like it's working well for me when I can rely on her, if I'm on my own, I'll do worse and worse the longer we are together. Not only do I do badly, but even when I'm in the situation where I have access to really valid information to help me make a particular decision, if I've been in this passenger seat, I'm at a level of ignorance in which I literally cannot engage with that material. So, I think it's a very interesting quandary how people in the financial-advising space, for example, get through to somebody who has been in the passenger seat for so long that they literally have a difficult time following and just paying attention to what you are talking about.

Benz: So, what are some best practices for couples who are in this situation? And I know, anecdotally, that it's very common that couples do divide and conquer in this way. How can they help ensure that the skills of the one who is not in the driver seat don't completely go fallow during that period?

Lynch: Well, it's interesting. I listened to another talk during the conference that Merve Akbas gave. She was just mentioning how couples find it aversive to make financial decisions together. So, her point was that people find it easier to divide and conquer; one person will make the decision. But I think if you can make yourself engaged, if there's some big decision to make--

Benz: Collaborate.

Lynch: If you can collaborate on that kind of thing so that both members of the couple completely understand what's going on and why you're doing it and so on, I think that's going to be a positive for people in the long run.

Again, our message is that as long as the couple is together, the divide-and-conquer approach isn't a problem; but since it is quite likely that marriages end in divorce or the death of a partner and so on, eventually the person in the passenger seat is going to be on his or her own. So, we try to think about what's going to happen then.

Benz: Right. And I'd like to discuss that because I know, in many situations, the couple's answer is, "Well, he or she will hire an advisor to take things over at that point." But that's not as simple as it sounds. The person who hasn't been the financial decision-maker may not be well equipped to choose a good advisor.

Lynch: That's exactly right. Basically, you need to know something to be able to screen advisors and know who really is trustworthy--and also to understand the advice to able to act on it. So, if you've been relying on your partner for so long and now you don't have your partner and are relying on a financial advisor, it's not a pretty picture. I would say that people in that situation are definitely at risk of making some disastrous financial decisions.

Benz: So, would one idea be for the financially active partner to maybe help prescreen advisors to identify appropriate advisors in advance?

Lynch: Yes, I think that's an interesting angle. One of the angles is also, of course, what's the compensation model for the advisor? There are compensation models where it's fee-only versus some other commission-based thing. So, you should maybe have some conversations about exactly that situation--"If it comes to that, here are some categories of advisors that you might prefer over others."

So, I agree with you. But then beyond that, there are going to be actual investment decisions. One implication is that you can't say, "I'll have some just-in-time financial education when I need it," and then in 40 years when it's just in time to know what I'm doing, go talk to my advisor and hope I'm going to catch on right away.

The one positive thing in this is that there is some evidence that when partners know that something is about to happen--for example, if they have a partner who is ill and they know that they are going to soon be on their own--there is evidence that people who have been in the passenger seat up their game and get to the point where they are able to cope more effectively. So, I would say that's another implication of this: If you are in a couple and, say, there's a health issue or something like that, getting to it later is better than getting to it never. And so--

Benz: Use that as a catalyst to get a little more involved.

Lynch: Exactly.

Benz: John, thank you. This is such an important topic. We appreciate you being here to discuss your research.

Lynch: Thanks so much, Christine. I appreciate it.