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Can We Use The Power of Communities to Break the Model of Self-Reliance When it Comes to Financial Literacy for Saving and Investing?

Insights on how Financial Literacy issues span age and socioeconomic groups and the shift from defined benefit to defined contribution plans

Photo of Trevor z Hallstein
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This is a write-up of our breakout group discussion from the OpenIdeo Meetup at Pier 28 last night.

In our breakout group we shared stories around the challenges individuals face in trying to understand the appropriate amounts to save and to invest to achieve the milestones they would like in their lives. Two of our break-out participants were recent college grads and they opined on the difficulties of understanding IRA’s & 401k plans, when to start saving, how much to start saving, and how this would map to their future goals to one day own a house, have children, send kids to college, retire, donate to philanthropy, and so on. For several of them, one of their main resources was to reach out to friends and family to get input from loved ones and people close to them. For my part, I pointed to a series of  discussions held over the prior six months in which I had helped my father understand his retirement needs and current savings and investment options. We also considered the plight of many professional athletes: upwards of 50% of the pros are bankrupt within 5 years of leaving their respective leagues (78% for NFL, 60% for NBA: http://www.munknee.com/78-of-nfl-players-go-bankrupt-within-5-years/). So, while I/We had initially considered that the financial empowerment challenge would primarily include low income populations at or below the poverty line, it became clear that if you take a broader view of ‘most in need’ then financial empowerment is something that touches on large swaths of people across a wide range of age groups and socio-economic levels.

One leg of our mini-discussion centered on financial literacy as it relates to financial empowerment and the prevailing notion that people need to be self-reliant and able to make decisions around their individually directed savings plans. The shift in the United States from Defined Benefit plans to Individually Directed Plans (IRAs, 401k, 401b, etc) may represent a fundamentally flawed shift of responsibility. If a group of professional money managers are unable to successfully run a defined benefit plan on behalf of their beneficiaries, who thought it would be a good idea to take a distributed approach and shift that responsibility from professionals to plan constituents? Here’s some info on that shift form the *.gov => http://www.ssa.gov/policy/docs/ssb/v69n3/v69n3p1.html. In response to this thought, we asked, are there mechanisms to address the shift towards self-reliance around mastering adequate financial literacy for savings, investments, and retirement and move it in the direction of community support and group solutions? We asked, would it be possible for groups of like-minded people with similar milestones and earnings power be able to collectively outsource the complex decisions around financial management to professionals? Could the multiplier effect achieved allow larger groups to collectively access better advisors and managers? If one million people living at the poverty line each paid in a dollar to a platform, how could that $1 million be used to seek out legal, accounting, and planning advice? Another group that presented earlier pointed out that it is nearly impossible for people without means to access high quality legal, accounting and planning advice.

A common topic which came up in our breakout group and also within other breakout groups was how to address financial literacy. Our group's thoughts on this were around what would be the impact of providing people with personalized data visualizations for their finances and goals. We discussed how a visual map of a person’s earnings, projected earnings, expenses, and projected expenses would not require a ton of financial literacy; it could be easy to understand without needing in depth knowledge of the power of compounding & the time value of money (1$ at 10% doubles every 7 years and the take-way principle there is .. start saving early), interest rates, mutual funds, ETFs, equity markets, credit markets, and so on. A couple of other points which came up were:

<>How to make the knowledge transfer low friction under the concern that people don’t want to spend time on it

<>How to make the outreach catch on

<>Could  data visualizations create awareness of different trajectories that positively changed behaviors

<>Could peer group accountability be used to bring people together

<>What would lead to changes in behavior around spending and saving

I feel compelled to comment on the fact that the needs of people at or below the poverty line may be dramatically different than the rest of the population, and that the research and ideas above may not be super-helpful to those communities except by hopefully helping to keep people who are on a suboptimal trajectory from losing what they have and becoming a part of those low income communities (e.g. 78% of NFL and 60% of NBA athletes playing their last season who within 5 years will slip into that group).

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Photo of Jason Rissman

Wow -- You've offered some really fascinating insights about the need for more financial literacy for all sorts of groups. I had no idea about the financial difficulties of pro athletes. I've tended to think that those most in need of financial education are those without resources, but clearly there are all sorts of at risk groups that need it as well.

Meanwhile, I'm super intrigued about your provocations around shifting from a model of self-reliance to community support and group solutions. We've seen the success of micro-finance lending circles and other peer support groups in low-income countries. Why shouldn't it exist for other groups as well? Actually pooling the resources of a group to access financial services seems like it could have a ton of potential. It makes me wonder...

- Is this happening anywhere yet?
- What legal restrictions might need to be considered?
- In addition to having similar levels of income and similar milestones, what other characteristics would need to be taken into account for financial advice to be accurate across a large group?

Meanwhile, given your background in the financial services sector, are there others you'd like to invite to this conversation?

Photo of Trevor z Hallstein

There are a few, but they are not on OpenIDEO. I've suggested they join the challenge! Is there a better way to pull those people into the conversation? One person involved with Lending Club and another one of the early micro-finance folks.

This reporter puts the views on the shift from Defined Benefit to Defined Contribution more bluntly, "The Dumbest Retirement Policy in the World", http://billmoyers.com/2013/09/25/how-401ks-rewarded-the-rich-and-turned-the-rest-of-us-into-big-losers/

On the self-reliance front, I'm just not sure it's realistic or reasonable to think that financial literacy in its present form is the solution. It's sort of like saying, "Well, if we just teach all these people who don't have access to healthcare how to read an X-Ray and splint legs they'll be just fine!".

This post from a former Goldman Sachs bond trader (and childhood friend) has some good points on what might comprise reasonable elements of a financial literacy program: https://openideo.com/challenge/financial-empowerment-challenge/research/principles-of-financial-literacy-from-a-former-wall-street-insider

I am not sure however, that it is abstracted enough for most people, and the idea of personalized data visualization combined with the multiplier effect to retain professional advice could be worth continuing to explore (i.e. the shift from self-reliance to community/group based solutions).

I really liked the Library Hub research as a way to create a community network. I wanted to chat with the person who set up the South San Francisco Public Library Financial Well-Being (FWB) program, Saundra Davis. I dropped her / her company a note through their website ( http://sagefinancialsolutions.org/about/saundra-davis/ ), but I give that a 50/50 chance of connecting us. Any chance you have contacts there which could get some time with her to get her perspective and provide some insights to this current challenge?

To your specific questions:
- Is this happening anywhere yet? TH: I don't know.
- What legal restrictions might need to be considered? TH: Good question, also don't know.
- In addition to having similar levels of income and similar milestones, what other characteristics would need to be taken into account for financial advice to be accurate across a large group? TH: Another good question. Finances are such a personal and private issue, one of the challenges in assembling cohorts to interact in person will be to overcome this stigma. Key elements are: income, savings, risk tolerance, milestones, saftey net (related to risk tolerance), time-frame.

~Trevor z

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