Investors don't know what they don't know

Here’s a reality check about financial literacy. American Century conducted a short 10-question survey of 680 Americans between the ages of 18 and 41 and found that less than half understood the fundamentals of a well-diversified portfolio. I found this shocking result the Chicago Tribune on Sunday May 27 (as well as some other publications): Less than 20% could recognize the definition of asset allocation.

The survey posed the following question: "Which of the following is true about asset allocation?"

• Asset allocation is a strategy where investments are divided among different asset classes such as stocks, bonds and cash.
• According to academic studies, a portfolio's investment returns over time are based mostly on its asset allocation.
• Asset allocation lowers a portfolio's risk because losses in one type of investment are offset by gains in others.
• All of the above.
• Don't know.
  

Only 14% of Younger Adults (age 18 to 26) picked the correct answer -- "all of the above." Generation Xers (age 27 to 41) faired only slightly better as 18% responded correctly. To their credit, 60% of the Younger Adults and 49% of Generation Xers chose "don't know," suggesting they are more inclined to admit ignorance (but also to learn) than to try to guess.

What this tells me is that financial literacy is not where it ought to be. Financial advisors tend to assume concepts like asset allocation and diversification are common knowledge. And, as an industry, we tend to focus on more sophisticated matters like Modern Portfolio Theory and products like hedge funds. But after years of financial education, the market needs are much more basic.

Retirement & Healthcare: Convergence or Disturbance for Financial Advisors

In today’s Wall Street Journal, (5/14) a short article on page C6 entitled Advisers To See Their Roles Shift crystallized a point that has been bothering me for some time. Whose job is it to take care of our future? Should we embrace our independence and become financial and healthcare experts, equally comfortable with Wealth Accumulation and Asset Allocation as well as Managed Care, Wellness and Disease Management?

As someone who has championed financial literacy for two decades, it becomes increasingly apparent that most people will not do it for themselves and will need “professional help”. In the retirement business, we have learned to use people’s inertia against them by introducing auto-enrollment and auto-deferral increase programs. Once enrolled in these plans many people will not make the effort to opt out and ultimately, that behavior may help create some retirement benefits down the road. Must we do the same for healthcare?

And, where will the champions of this effort come from? Will there be a new hybrid financial/healthcare advisor who will take a holistic approach to an individual’s needs? Who will be the first to step up to the plate and redefine the industry? Surely the answers begin with those far-sighted individuals and organizations like the Investment Company Institute who have a platform to begin the discussion. Plaudits to the ICI – now who else wants a turn at bat?

Money Smart Week

Here at Praxiomatic, we're all about the financial literacy. As more and more financial responsibility for retirement and healthcare shifts from employers to employees, the importance of financial literacy for every American in every walk of life cannot be stressed highly enough.

That's why we're glad to see that next week is Money Smart Week in Chicago, hosted by the Federal Reserve Bank of Chicago and its partners.

This weeklong fair of financial education is being presented at financial institutions, not-for-profits, schools and libraries throughout the metro area — over 300 classes, seminars and activities in all (click the link above for a calendar).

Here are a couple of samples to whet your appetite:

Investing 101
Sponsored by Ariel Mutual Funds

Beat the Financial Squeeze: Caring for Both Children and Parents
Sponsored by Ameriprise Financial

Financial Planning for College
Sponsored by Primerica Financial

Getting Financially Organized
Sponsored by Financial Planning Association

Small Business Financial Workshop
Sponsored by Bank of America

Money Smart Week is a great way for financial institutions to reach into communities and help prove their commitment to the financial literacy of the customers they serve.

And on May 1, there will also be a Financial Literacy and Education Summit, a free two-hour webcast that features policymakers and financial education leaders.