Would subsidized financial advice have prevented the mess we’re in?
Posted on January 22nd, 2009 – 5:59 PMBy Kara McGuire
Yale prof, author of “Irrational Exuberance,” and co-creator of the Case-Shiller Home Price Index Robert Shiller had an opinion piece in the New York Times that I just got around to reading. He thinks the government should spend $15 billion on subsidized financial advice for the masses.
Here’s an exerpt:
SUBSIDIZED financial advisers should be licensed by self-regulatory organizations that verify their qualifications. Licensing will be imperfect, and some incompetent advisers will end up with subsidies. Still, the net effect of getting professional advice to the public is surely positive.
To qualify for a subsidy, the advisers would have to sign a statement promising loyalty to their clients and agreeing to accept only the subsidized hourly fee, and never any commissions or kickbacks. The subsidies might come to $75 an hour, at a very rough estimate, and if 50 million Americans averaged four hours of consultations, the eventual cost might be $15 billion a year — a substantial expenditure, but a worthwhile one.
If personal financial advisers had been subsidized years ago with the best incentives, they still might not have stopped their clients’ bubble thinking during the boom. Many advisers probably thought that housing investments were a good bet. But it’s still likely that advisers who built long-term relationships with their clients, and who pledged to look after their welfare, would have been a helpful influence, suggesting caution to those who were getting over their heads in debt, and warning that adjustable-rate mortgages could be reset upward, just as the fine print said. For these reasons, financial advisers probably would have reduced the severity of the housing bubble.
Professional financial advice is now generally accessible only by the relatively wealthy. Changing this would be an important corrective step. Giving the general public access to trained advisers would be a boon for the nation in this time of doubt and distrust.
Given how much we’re spending on other things these days, what’s $15 billion to educate the public on money matters? Think it would be $15 billion well spent?
21 Responses to "Would subsidized financial advice have prevented the mess we’re in?"
I would favor some form of education, but not of advice. People need to understand why things are, rather than simply be told what to do.
-Ryan
Throw that $15 billion at the HS educatoin system and start mandating they have financial literacy to pass HS.
Then offer ongoing educatoin through the same system and people would actually take advantage of it.
Kind of like ESL but for everyone!
No, it wouldn’t have. Our economy is built on borrowing and consumption. It has been for years. Any GOOD financial advice would entail borrowing and consuming less, and saving more — which is exactly what is happening right now. The result is many industries that were bloated from the over-consumption and over-borrowing are going away. Unfortunately, this adjustment is neccessary to reallocate labor to more producive pursuits. In the short term, this means a recession as labor and capital are redirected to economically viable industries. We simply may have avoided the severity of this recession by addressing these imbalances earlier.
MC is right. I don’t know about now, or any differences between schools, but decades ago my H.S. taught absolutely nothing about finances, personal or otherwise… not even a thing about credit card use or balancing a checkbook- NOTHING! Come to think of it, the curriculum was mostly bogus. We did have a good math teacher though.
The trouble is that until just a year or two ago, all financial advisers I was aware of were urging people to buy a house, and if the person protested that s/he couldn’t afford it, the financial adviser would come up with some scheme where the customer “couldn’t lose.” I resisted, because my income is quite variable, but the pressure was STRONG from all sides–advisers, banks, financial writers, real estate agents, even friends and relatives. What poor advice would these advisers come up with now?
This is idiotic. Real estate agents are suppose to have their clients’ best interests in mind, yet they helped inflate home prices (because it put cash in their pockets). Home appraisers did the same thing. My financial advisor, while helpful at some times, has also missed some other tax issues (she’s really now more of my contact person at the company than an advisor).
You could pay for people to give financial advice, but (a) that doesn’t make it good advice, and (b) that doesn’t mean people will follow it. 3 years ago, they would have said to refinance your house to pay down credit cards, and that you’d be able to refinance afterward. Not such great advice looking back, is it?
The fatal flaw in Mr. Shiller’s argument is that even if everyone did get 4 hours of advice per year, the vast majority of the people would either:
1. Not understand the advice or
2. Not follow the advice
And another flaw is that somehow he could get the majority of his advisers to be competent. I’m sure that a great many of advisers out there were chasing the tech bubble and the housing bubble just like the common man.
Bubbles are inevitable - they are the very predictable result of people seeing success and wanting part of it. Of course, hot commodities gets overvalued and a correction is necessary. And the housing bubble in this instance was made much, much worse by Congress demanding that lenders lend to people who had no business owning homes and by having its pseudo-wards Fannie & Freddie buy up all kinds of junk loans. It was the biggest Ponzi scheme of all - no one gets hurt as long as home prices go up 10%/year.
So this disaster is the fault of the PUBLIC? wtf? Yes, I’m sure it has nothing at all to do with Wall Street’s greed and fraud.
This education would have done little to divert our current problems. Derivatives were bought by educated investment boards. Not hyper-extending for a mortgage is pretty common sense, and the LENDERS should have been more prudent.
This idea, in a word, is B.S.
Overhall the University system! The cost of state university systems has grow disproportionately with the cost of living and wages. Over 80% of university grads are working jobs not related to their majors. Grads are starting their working life with too much student loan debt. Households with two college grads are entering their working life with over $100,000 in student loan debt (easily) and if they got their masters it’s even worse. Bless this young couple with two kids and tack on $100,000+ in daycare expenses, (if they both want to work and use their degrees). Consumer debt is only a part of the problem. Rediculous education and daycare expenses are a large contributor to our current plight for those that fit this demographic and psychographic profile. Forgive a portion of student loan debt, freeze state university tuition for ten years and make all daycare expenses a tax write-off and that will stimulate the economy.
I am amazed by this article. I have been a financial advisor for nine years and have never charged a dime for my professional financial advice. I make my money only by commmission on what I sell.
The education system needs to focus more on life skills instead of teaching useless information. 90% of the things tought in schools are never used after leaving. Maybe if people had been tought basic life skills in their schooling than the economy wouldn’t be such a mess.
Frank Lee said: “decades ago my H.S. taught absolutely nothing about finances, personal or otherwise…”
The small rural H.S. I went to in the 50s did. In addition to exercises in budgeting, keeping a checkbook, etc we even covered the stock market. For 6 weeks we WATCHED the stock market [on the newspaper stock pages, this was the pre-internet stock quote days] then we were given a fake $50,000 to invest in a stock portfolio and track for 6 months. They also, as I recall, covered basic bookeeping for running a small business. They didn’t cover credit cards; there were none.
With small town rural classes like this, perhaps that’s the reason so many farmers are quite shrewd financially, and many city slickers are clueless when it comes to money.
Ka-bloggers: Just wanted to apologize about comments sitting in moderation. Been out of pocket and the software moderated practically EVERYTHING today!
pdxtran: Good point. I was wondering the other day what happened to those people whose advisers suggested they take home equity out of almost paid off homes to invest in the stock market.
juan valdez: You also make a good point, but what I’m wondering is this: If banks are qualifying for billions in bailout money with little explanation, why shouldn’t some of the money go to financial advice that would help Americans the next time someone wants to sell them a product they don’t understand? Maybe it would give them the confidence to say “no,” or “I’m uncomfortable with that,” or “what you are suggesting is criminal.”
Larry Anderson: your job is exactly the kind that wouldn’t be subsidized. If/when I decide to use a financial planner, the arrangement will be fee-only. I want their incentives aligned along with mine, not trying to sell me products that aren’t in my best interest.
I took advanced mathmatics in HS (graduated in 97) but never did we spend any meaningful time on $$ and life skills.
And the problem with Colleges is that so often the students who enter it don’t know what they’ll do post grad or for that matter what kind of wage that will command.
Despite this, many of them are convinced having a degree equals future wealth… so many I have known to have graduate with more debt than their college educated incomes warrent. Don’t you think HS financial literacy would help address this?
People are graduating from HS with no real direction and no real idea of what the financial investment college is on a risk/reward standpoint.
We need highly skilled people and highly skilled jobs in the wake of this econonmic nightmare and our education system is poorly positioned to deliver.
A SIMPLE START that won’t cost the government a penny: Unless things have changed, it is ILLEGAL for companies to offer any financial advise about their 401(k) investments. Have congress pass a law to allow it.
Well Rip, you got a quality education back in the days when I take it they concentrated more on the three R’s (and before they threw money at schools like it was going out of style) while my contemporaries and I (’80’s grads) got ripped off. And it wasn’t for lack of being a good student.
In contrast to today’s bloated school staffs my school was pretty frugal: The administration consisted of the Superintendent, the Principal and the Secretary/Admin.
As an example of the frugality they re-used paycheck envelopes: On payday the Super gave each teacher their paycheck in an envelope with their name typed on it. Before the next payday the teachers dropped their envelope off at the office for re-use. No envelope no pay check.
When the Super retired after 40-some years, for his retirement ceremony someone calculated the number of envelopes [and boxes and cases] saved through the years. It was a phenomenally large number.
He’s still around, and he still manages to make an appearance at class reunions for classes which were there during his years at that school.
Prof S. Wrote: “3 years ago, they would have said to refinance your house to pay down credit cards. Not such great advice looking back, is it?”
Actually, it IS good advice which can not only save you a bundle in interest costs, since congress eliminated the tax deduction on credit card and other consumer interest [but kept the tax deduction on mortgages and HELOCs] it can save you a lot on your tax bill.
The problem many people had was they ignored the REST OF THE ADVICE to not charge anything on your credit card you can’t afford to pay off.
Well, this post sure seems to have been a springboard to a lot of the frustrations what people have with the current “situation”. But I think that financial education is important and that many of the people here who oppose it for a wide variety of reasons may be missing Shiller’s point. Or maybe I am suggesting something a little different, but finacial education is badly needed. This is particularly true for less educated and minority groups. It should be:
1.Basic - Keeping a checkbook, credit, needs v. wants, etc.
2.Disinterested - Not provided by mortgage brokers, real estate agents, even financial advisors with products to offer
I could see what Shiller is proposing meeting these two criteria, although it would represent scaling back from his proposal to pay $75 an hour for “advice”. What is needed is simple education, which I think could have accomplished some of what Shiller suggests.
