Keynote Summary
Dr. Tahira Hira – Financial Management Education
Dr. Tahira Hira, a professor of Personal Finance and Consumer Economics at Iowa State University and member of the President’s Advisory Council on Financial Literacy, delivered the luncheon keynote address on May 14. She began by referencing that in January 2009, the President’s Advisory Council on Financial Literacy issued its first annual report, including 15 recommendations for Americans. The annual report may be accessed at the following link:
http://www.treas.gov/offices/domestic-finance/financial-institution/fin-education/docs/PACFL_ANNUAL_REPORT_1-16-09.pdf

Dr. Hira noted that the financial services world is increasingly complex and changing at a rapid pace. Emerging technologies, a changing family structure and the trend towards money management decisions being shifted to the individual are further obfuscating financial choices. Against the many challenges, Dr. Hira set forth five guidelines to enhance financial literacy education:

• Create strong academic standards to produce financial professionals
• Continue to invest in financial literacy research
• Set a defined standard for the profession of financial education (much like other industries that require set education credentials)
• Create policies that are rooted in the breadth and depth of research and journals devoted to personal finance
• Require continuing education

Dr. Hira noted that ambiguity and the presence of multiple parties delivering financial literacy solutions  has helped to create a confusing education sector. Organizations focused on credit counseling and consumer interest have attempted to participate in the financial education process since the early 1900s.  “There are so many names for financial literacy, but there is a real lack of clarity regarding the mission. We also lack an instrument to measure and assess the impact of financial education efforts and the skill of those engaged in the education effort,” Dr. Hira noted. She added, “Personal finance is not math, finance, economics or information technology. It is more than numbers and facts, formulas or models. It is ultimately about a person and relationships as they relate to managing finances in an external macro environment.”

Dr. Hira noted that the focus must shift from consumption to the family and individual. She advocated that practitioners direct their efforts toward equipping families and individuals with knowledge and skills to make informed financial choices.

Dr. Hira also underscored the need for professional development and standardization of curriculum, all directed at reshaping behavior. Ensuring teachers’ knowledge of financial literacy will be important, Dr. Hira stated. She advocated that practices follow a clear definition of the mission and specified five steps central to improving teacher quality:

• Clearly define the financial literacy mission; then select the name and standardize the content
• Identify core competencies for the content
• Determine qualifications for those who will teach and advise regarding financial issues
• Prepare future professionals through the development of a certification program.
• Set standards to evaluate program quality by determining a standard set of skills a person should master upon completion of a financial education program

Dr. Hira referenced the 2004 Health and Retirement Study that measured how employees make investment decisions and compared it to a 1997 National Longitudinal Survey of Youth. Respondents in both groups were asked to answer three basic questions regarding interest rates, inflation and risk diversification. Among those 50 years old and older, only one-third answered all three questions correctly. Among those between the ages of 23 and 27, 45 percent answered all three questions correctly. Dr. Hira noted the poor performance reflects a lack of financial knowledge across ages. Of special interest, she noted that women, Hispanics and African Americans scored significantly lower on the three questions. Just 27 percent of women could answer the risk differentiation question correctly, compared to 47 percent of men. Based on this data, Dr. Hira indicated that financial education should be directed toward specific segments of the population. “There is a role for financial education in schools, because not everyone has the opportunity to learn at home,” Dr. Hira noted.

Keynote Summary, Dan Iannicola, Jr., President and CEO, The Financial Literacy Group – Federal Initiatives to Promote Financial Literacy

Prior to heading up the Financial Literacy Group, Mr. Iannicola served for five years as the Deputy Assistant Secretary for Financial Education at the U.S. Department of Treasury. As the dinner keynote speaker, Mr. Iannicola shared some of the federal government’s efforts to engage consumers, particularly youth, in financial education.

The federal FACT ACT mandated that the government establish a national hotline where Americans could easily access financial education materials from the government. In addition to establishing the national 1-888-MYMONEY hotline, a web site, www.mymoney.gov was also developed.

The national strategy was to create a blueprint for what should happen at the federal level with regards to financial literacy. Reaching out to the youth market, the www.controlyourcredit.gov site was launched to educate young Americans age 18-24 about how they can manage their credit score and how their credit score can impact them. In preparing to launch the youth-focused program, planners held focus groups with youth that shed insight into their thoughts and behaviors with regards to money, and demonstrated that youth possess a sense of false confidence.

Mr. Iannicola noted key findings from the focus groups. “There appeared to be no anxiety about debt, with the general thought being that all student debt is okay because college or trade school pays for itself,” he noted. Respondents indicated they were optimistic about their financial future based on income expectations that students assume will offset debt. Participants tended to focus only on the asset side of the equation, with statements such as, “I can always earn my way out of overindebtedness.”

In reaching out to youth, Mr. Iannicola counseled practitioners to know their audience. He advised that information makes the most impact when it is delivered peer-to-peer, while noting that beneficial intergenerational lessons can arise out of conversations with Depression-era relatives and friends. He noted that the youth market values the discovery or “surprise” value of information; they yearn to be entertained and are easily bored, having grown up in an Internet culture. They think in short-term increments, where five years seems an eternity.

However, research found that youth view the government as a trusted source for information. In contrast, they do not trust banks and financial planning entities. The findings were used to launch a series of online and broadcast media directed at the youth audience, such as www.badcredithotel.com.

Mr. Iannicola concluded his remarks by providing insight into some key financial services legislation pending in the 111th Congress, including:

H.R. 1728 – sponsored by Eddie Bernice Johnson (D-TX), The National Financial Literacy Act of 2009 incentivizes financial institutions and small businesses to provide continuing financial education to customers, borrowers, and employees, and for other purposes. The legislation provides tax credits to small businesses that offer financial education to employees and also provides preference in the awarding of federal contracts to companies offering financial education to employees.

H.R. 767 – sponsored by Representative Brad Miller (D-NC), The Mortgage Reform and Anti-Predatory Lending Act establishes an Office of Housing Counseling within HUD and imposes suitability requirements.

S. 414 – sponsored by Senator Christopher Dodd (D-CT), The Credit Card Accountability Responsibility and Disclosure Act, often referred to as the “Credit Card Bill of Rights,” bars over-the-credit-limit transactions, provides better disclosures with toll-free hotlines, and makes accessible Treasury-certified counselors credit counseling services.

H.R. 1645 – sponsored by Carolyn McCarthy (D-NY), and known also as Senate Bill 638 (sponsored by Patty Murray (D-WA)), the Financial and Economic Literacy Improvement Act of 2009 provides school-based funding for educators to develop financial and economic standards and assessments; create teacher training programs to embed economic literacy education into core subjects; and evaluate the impact of education.    

H.R. 1325 – sponsored by Shelia Jackson-Lee (D-TX),  H.R. 1325 requires financial literacy counseling for borrowing and for other purposes. The legislation fosters federal requirements for student loan recipients. Financial institutions would be required to provide at least four hours of counseling to each borrower prior to, or at receipt of, the loan. Counseling would include information on banking, budgeting, credit cards, loans, grants, education tax credits, scholarships, renting and investing. 

H.R. 2117 – sponsored by Eddie Bernice Johnson (D-TX), the Naturalized Citizens Assistance Act requires financial literacy programs be offered to newly naturalized citizens of the U.S.

Keynote Summary – Werner F. M. De Bondt, Director, Richard H. Driehaus Center for Behavioral Finance, Consumer Behavior in an Economic Crisis

He posited that there are likely several factors that have converged to create the economic downturn including behavioral factors. Dr. DeBondt referred to the soaring confidence and optimism that led to the collapse of the housing market and ultimately to the subprime crisis. He noted that in the absence of self-regulation, the statistical risk models in place to monitor risk failed. The failure of the models, DeBondt stated, was not balanced out by sound judgment. “The models failed and corporate governance was not in place to monitor the systemic risk,” he issued.

Dr. DeBondt noted that the economic problem extends far beyond a real estate issue. He cited excessive consumer debt rooted in a culture of over-spending, as well as very inadequate preparation of retirement planning as two consumer behaviors that continue to put the economy at risk.

Additionally, he cautioned that the psycho-physics of time preclude people from thinking far into the future when it comes to risk planning. “People don’t look very far ahead and many investors don’t think about tomorrow. Portfolio wealth can be an accumulation of accidents,” he stated.

There is a relationship between investor sentiment and market returns according to Dr. DeBondt. “The road to wisdom includes a structured decision making process that avoids error and takes into account other people’s likely errors,” he stated.

What approaches can practitioners take to improve their financial literacy efforts? Dr. DeBondt advocated for a healthy balance of information, with sufficient data available but not too much to obfuscate the issue. A more competitive market will further promote financial literacy efforts, he believes. Dr. DeBondt referenced work in sociology and psychology that may assist in helping explain consumers’ decision making behaviors. Finally, he noted an increase in a paternalistic approach to financial literacy that aims at helping individuals, albeit with a subtly coercive element. “Under the paternalism approach, we will help people, but we will provide them with a way to opt out.”

Dr. DeBondt said that more evidence is needed before determining the value of socialization’s effectiveness in financial literacy education. Rather he urged practitioners to define the skills that should be covered, the instruments that will measure financial literacy and the evaluation methodologies used to assess educational effectiveness. “It is important that we specify at the outset what we are aiming for. Is it a middle class myth that individuals can succeed on their own within the ownership society? In the ownership society, you are truly on your own.” he noted.

Dr. DeBondt concluded by discussing the interconnectedness in today’s global environment. He noted that the field of financial ergonomics is requiring that human-devised systems integrate with new technologies. He predicted that technology will continue to dictate how financial literacy evolves. Political issues will also play a role and Dr. DeBondt referenced global wariness of market fundamentalism. “Europe is angry about what they perceive as ’Cowboy Capitalism’,” he noted, saying that close attention will be paid to policies advocated by President Barack Obama and Britain’s Prime Minister Gordon Brown.

Dr. DeBondt cautioned practitioners to avoid overconfidence in their ability to transform financial literacy. “There are so many large entities out there with missions; the large credit card issuers, etc. Sometimes all you can do is shoot small stones at people with tanks,” he noted. Aside from practitioners’ efforts, Dr. DeBondt said there is an opportunity for individuals to take charge of their financial literacy. An understanding of one’s ability to determine what he/she knows and doesn’t know is critical to avoiding these problems, he cautioned. He quoted economist Paul Slovic: “A full understanding of his limitations will benefit the decision maker more than will naïve faith in the infallibility of his intellect.”