Dr. Greg Filbeck, CFA, FRM, CAIA, CIPM, PRM
Investors are increasingly looking toward the private markets as an output for their investment dollars to increase risk-adjusted performance. Historically, such direct investment required an investor to qualify as an accredited investor. Recently, guidelines to qualify as an accredited investor have broadened to include a subset of financial professionals who otherwise may not have met minimum wealth or annual income guidelines, but these guidelines do not go so far as to include individual investors more generally. The logic for such regulation is sound–to protect unsophisticated (i.e., less wealthy, lower income) investors from private markets, markets in which downside risk is often greater and can be highly illiquid in nature. With many others encouraging even broader access, alternative investment professionals, and regulators, should increasingly be concerned with increasing financial literacy.
Prior research recommends public policies to embolden financial education during early stages of life (e.g., Alhenawi and Elkhal[i] (2013)). Gudmunson and Danes[ii] (2011) point out that high school is the best time to achieve impact with financial literacy due to the patterns that are developed during this time period. Danes[iii] (1994) notes that family environment influences student approach to receiving personal finance curricula in the classrooms. Since the American Savings Educational Council (2001) finds that parents leave their children’s financial education to the education system, high school is often students’ first exposure to formal personal finance curricula. This exposure is shaped by individual meanings and realities based on exposure (Berger and Luckmann[iv], 2011).
Nearly one third of all fees and charges related to borrowing result from a lack of financial knowledge. As a result, a lack of specifically debt literacy, leads to poor borrowing decisions and potentially overwhelming debt consequences. Although understanding financial concepts is vital to financial behavior, possessing high financial self-esteem and confidence is an essential key to successful financial decisions. Using data collected on 12,686 individuals by the U.S. Bureau of Labor Statistics tracked over a 30-year period, Tang and Baker (2016)[v] create four main variables: financial behavior, self-esteem, objective and subjective financial knowledge, and covariates. Their results indicate a direct and indirect relationship between self-esteem on multiple financial behaviors. As a result, the effect of self-esteem is proven to be statistically significant, thus self-esteem must be considered as a factor of financial behavior. Self-esteem is enhanced through training and knowledge acquisition, a primary purpose of our outreach efforts.
In the United States, 45.3 percent or 39.6 million households do not hold any assets in a retirement account. Rhee and Boive (2015)[viii] find that 66.2 percent of households in the United States have an insufficient retirement wealth. As such, potential services provided should be aimed towards students as well as adults. Helpful services could include the following:
- In-class instruction to area high school and college students on financial knowledge and financial behavior;
- Training seminars for secondary educators;
- Workshops for adults on financial and retirement planning; and
- Expanded capacity for analytical assessment of financial literacy programs.
As a portion of the Financial Industry Regulatory Authority’s (FINRA) Financial Capability in the United States 2016 publication, financial literacy among Americans was examined (Lin, Bumcrot, Ulicny, Lusardi, Mottola, Kieffer, and Walsh 2016)[ix]. Of all adults surveyed, only 37 percent were able to answer at least four out of five financial literacy questions correctly. In a country that unfortunately yields results as such, the problem is shown to be not only on a global scale but more specifically, on a national scale. Due to this issue being on the home front, the need for adult workshops focusing on financial and retirement planning is essential to progress. A large proportion of Americans either have no retirement plan or are not even currently financially able to consider retirement. A critical step to decreasing this number of adults is precisely the service offered, workshops for the adults.
What does this mean for broader access to private markets? It means that we need to train individuals on the basics of financial literacy before we can even think about helping them gain access to different investment strategies. Financial education is essential if we are to help the unsophisticated become sophisticated.
[i] Alhenawi, Yasser, and Khaled Elkhal. 2013. “Financial Literacy of U.S. Households: Knowledge vs. Long-term Financial Planning.” Financial Services Review 22(3) 211-244.
[ii] Gudmunson, Clinton G. and Sharon M. Danes. 2011. “Family Financial Socialization: Theory and Critical Review.” Journal of Family and Economic Issues, 32(4), 644-667.
[iii] Danes, Sharon M. 1994. “Parental Perceptions of Children’s Financial Socialization.” Financial Counseling and Planning, 5, 127-146.
[iv] Berger, Peter L. and Thomas Luckmann. 2011. The Social Construction of Reality. New York, NY: Open Road Integrated Media.
[v] Tang, N., & Baker, A., 2016. “Self-esteem, financial knowledge and financial behavior.” Journal of Economic Psychology 54, 164–176.
[vi] Greg Filbeck and Xin Zhao, 2018, “Financial Literacy: The Effectiveness of High School Outreach.” Journal of Business and Economic Perspectives 65(1), 87-117.
[vii] Greg Filbeck, Jason Pettner, and Xin Zhao, 2020, “Financial Literacy: Profiling a Successful High School Outreach Program”. Financial Services Review, forthcoming.
[viii] Rhee, N., and Boivie, I. 2015. “The Continuing Retirement Savings Crisis.”
Greg Filbeck, CFA, FRM, CAIA, CIPM, PRM holds the Samuel P. Black III Professor of Finance and Risk Management at Penn State Behrend and serves as Director of the Black School of Business. Before joining the faculty at Penn State Erie in 2006, he served as Senior Vice President of Kaplan Schweser from 1999 to 2006, where he was in charge of all content and curriculum. He also held academic appointments at Miami University (Ohio) and the University of Toledo, where he also served as the Associate Director of the Center for Family Business. He is the co-editor of the Financial Markets and Investments Series (Oxford University Press). Professor Filbeck has authored or edited 14 books and published more than 105 refereed academic journal articles appearing in the Financial Analysts Journal, Financial Review, and Journal of Business, Finance, and Accounting, among others. He serves on the editorial board of the Journal of Business and Economic Perspective. Since 2017, he has served as Editor for the Society of Financial Service Professionals Financial and Retirement Planning quarterly newsletter. He conducts consulting and training worldwide for candidates for the Chartered Financial Analyst (CFA), Financial Risk Manager (FRM™), and Chartered Alternative Investment Analyst (CAIA®) designations. He received a BS (engineering physics) from Murray State University; an MS (applied statistics) from Penn State University, and a DBA (finance) from the University of Kentucky. He holds leadership roles in numerous community organizations including serving as Past President of the CFA Society Pittsburgh and the Southern Finance Association.
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