Morningstar Magazine - April/May 2018 - 34

Spotlight: Behavioral Finance

Stop Teaching, Start Coaching
The limitations of the advisor-aseducator role.

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

COACHIN G

Sarah Newcomb

"I have been impressed with the urgency of doing.
Knowing is not enough; we must apply.
Being willing is not enough; we must do."
Leonardo da Vinci

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 defend¹ and refute² 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.³ The meta-analysis led to two important
conclusions:
1 Whenever an effect was found for financial

education on behavior, it was very small. In many
studies, there was no effect whatsoever.
2 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

One might propose that the problem is in the
methods used to teach. However, the metaanalysis 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.
3 Other Factors Overpower the Effect of Knowledge

Knowing the right thing and doing the right thing
are two different things entirely. We can know
that saving is important, but if we are easily
tempted by what we can buy today, we may not
have the willpower to follow through on what
we know is the best course of action. This
explanation says, simply, that knowledge itself
isn't enough. We need to look at other influences
that might be stronger than knowledge when
determining financial behavior.
In our view, this third factor is of primary
importance. If factors other than knowledge are
overpowering decision-makers' ability to apply

1 See Lusardi, A. 2008. "Financial Literacy: An Essential Tool for Informed Consumer Choice?" National Bureau of Economic Research, Working Paper No. 14084.
2 See Mandell, L. & Klein, L.S. 2009. "The Impact of Financial Literacy Education on Subsequent Financial Behavior." Journal of Financial Counseling and Planning, Vol. 1, No. 20, pp. 15-24.
See also Newcomb, S. 2015. "Psychological Barriers to Sound Money Management: Advances in Theory of Human Decision With Practical Applications to Financial Education." ProQuest Gradworks,
Dissertation & Theses.
3 Fernandes, D., Lynch, J., & Netemeyer, R. 2014. "Financial Literacy, Financial Education, and Downstream Financial Behaviors." Management Science, Vol. 60, No. 8, pp. 1861-1883.

Morningstar April/May 2018

Table of Contents for the Digital Edition of Morningstar Magazine - April/May 2018