Empowering Professional Households with Financial Literacy
American households are in a precarious position. They know they must make financial decisions but they don’t know where to start or whom to trust. The government has let them down by failing to enact strong consumer protections and financial advisors increasingly seem like a source of risk rather than clarity.
An effective response is to improve financial literacy within American households, thereby reducing their reliance on unresponsive government and insincere advisors, and empowering them to make better decisions.
Traditional sources of financial literacy
For working professionals, traditional sources of financial literacy (outside the client-advisor relationship) include: books, blogs, TV (radio) shows, and peers or friends. Each of these can provide some useful knowledge, but all are flawed. Most books on the subject are written by financial advisors. Since they have clear commercial agendas the objectivity of their content is questionable. Many bloggers sell advertising space to financial advisors, brokers, or insurance agents. This too raises the potential for bias.
TV finance gurus flash toothy smiles and dispense advice with flair, but they have a very superficial understanding of a caller’s circumstances. This does the audience a disservice. It makes for good television—but bad financial planning. And for this same reason peers may not be able to give you good advice—because even if they are financial product experts (rarely the case) they most likely don’t fully understand your circumstances. Your peers and friends may have the best intentions, but their advice is often heavily influenced by negative personal experience which they may incorrectly generalize to you and your household. An insurance product that isn’t appropriate for your friend may be useful for you. An asset allocation that doesn’t work for a peer may be well suited to your needs.
A better solution
No one knows your family’s circumstances better than you and no one is motivated more than you to do the right thing—every time. Improving your financial decision-making skills allows you to reduce reliance on others. It may also lower the fees you pay. Even if you resent making these decisions and want to outsource them to a financial advisor you still need to understand enough of the basics to choose a good advisor.
My work focuses on improving financial decision-making by physicians. The findings can be generalized to other professions.
As a starting point, teaching a subject effectively requires at least three elements:
- Identify the relevant body of knowledge
- Deliver a comprehensive curriculum
- Use an unbiased, expert teacher
Body of knowledge
In our ongoing research at Johns Hopkins University we utilize a broad personal finance curriculum for medical professionals covering the following basics: investing, retirement planning, children’s college planning, managing risk, estate planning, asset protection, budgeting, debt management, negotiating employment contracts, selecting insurance, and dealing with financial advisors.
A comprehensive course
Financial planning decisions cannot be made in a vacuum. We can’t learn about insurance for an hour and finalize insurance decisions without also understanding our various other needs, which may include all the other topics listed above. Some people emerge from isolated educational events with firm convictions regarding next steps, only to develop doubts when reminded of all their other priorities. Such lingering doubts lead to procrastination—decision making’s greatest enemy. The best way to enable constructive decisions is by providing all relevant content in compact fashion.
Traditionally, hospitals have invited credentialed financial professionals such as advisors, brokers, and insurance agents to teach so-called financial literacy. Many other workplaces do the same. But such sessions are often thinly veiled marketing events. Education offered by finance professionals must always be viewed as suspect because it comes from presenters who have an agenda to sell financial products and services. It’s difficult to be decisive as a student when you’re unsure whether you’ve just learned an objective truth or been subtly led down a path to earn the “teacher” a commission or fee. Reliable learning can only take place when the source is sincere and unbiased.
I collaborated with several Johns Hopkins physicians in delivery of a comprehensive 8-hour curriculum to 18 graduate medical fellows. Twelve attendees completed the exit survey. Despite various other time commitments, respondents attended a mean of 70% of the class sessions. All “Strongly Agreed” with the statement: “It’s important for graduate medical education programs to offer such financial literacy courses to their students.” Overwhelmingly, respondents perceived that they learned the content and would recommend the course to other physicians.
We observed that a remarkable number of tangible financial decisions was made by attendees during and immediately following our educational sessions. 11 of the 12 respondents credited the course with helping them make a total of 21 distinct decisions in the areas of: retirement planning, investing, insurance, employment contracting, debt management, and home purchasing.
In summary, it’s possible to equip professionals with financial decision-making skills and the confidence to implement such decisions. The keys are to provide a comprehensive course delivered by a trusted, unbiased educator.
Empowering Physicians with Financial Literacy – Journal of Medical Practice Management
Click here for the article Empowering Physicians with Financial Literacy in the Journal of Medical Practice Management.
2015 Report on U.S. Women Physicians’ Financial Preparedness
AMA Insurance recently released its 2015 report on U.S. women physicians’ financial preparedness. See the report here.
Some of the highlights include:
- 47% of women physicians consider themselves to be ‘behind where they’d like it to be’ when describing the overall status of their retirement ﬁnancial plans.
- The majority of women physicians (76%) believe they are only ‘somewhat’ or ‘not very knowledgeable’ about personal ﬁnancial planning.
- Nearly two-thirds (62%) of women physicians feel the time they spend on their personal ﬁnances is not adequate.
- Of those women physicians who have not engaged a ﬁnancial advisor, 45% say it is because they ‘haven’t found someone I trust.’
- Seventy-one percent (71%) of women physicians are the breadwinners in their family, earning about 75% or more of their family’s household income.
- Half of women physicians say they are primarily responsible for personal ﬁnancial planning decisions for their family.
It should come as no surprise that many of the areas of concern described by survey participants could be addressed through more effective financial literacy education.
How far in advance should I plan my private practice launch?
This is a common question for those contemplating the launch of their first private practice. Those of you who are already on your second or higher launch have likely learned the answer the hard way.
The rule of thumb is to allow at least one year. More complicated launches, including those requiring a purpose-built structure, typically require an additional 6 to 12 months, for a total of up to 2 years.
Here is a rough timeline to follow (see figure below). Your specific circumstances will determine the precise order and duration of each phase. The AA Team in Step 1 refers to a team comprised of an Accountant and Attorney, both with specializations in your area (i.e., dental or medical). These specialists should know all the specific challenges you can expect to face, and will have access to other relevant service providers.
Here’s a question that came up recently:
Does the 401(k) annual contribution limit include or exclude the employer match?
The answer is that your employer’s matching contributions don’t count toward your maximum allowed limits. These limits are $18,000 in 2015, plus an additional $6,000 if you are over 50.
So to be clear, you can contribute up to $18,000 yourself (if under 50) and your employer can contribute funds in addition to that. There is a combined annual defined contribution limit (employee and employer together) of $53,000 for 2015.
Some examples of identity theft (falsified tax filings) aimed at physicians and dentists:
If you’ve been targeted this tax season, contact the IRS Identity Protection Specialized Unit at 800-908-4490, extension 245.
More information is available at IRS.gov:
The article “Understanding Uncertainty and common Risk Management Challenges” recently appeared in Investments & Wealth Monitor, a publication of the Investment Management Consultants Association, March/April 2015. It aims to generate greater understanding of, and appreciation for, the nuances of risk and risk management. Read the article here.
In this post I highlight two ways in which the Mutual Fund industry may influence prospective investors, especially those who are not fully aware of what happens behind the scenes. These misleading acts are related to performance. That is, how these companies advertise their performance. To fully understand the issues we first need to understand the industry. Mutual Fund companies generally don’t offer just one fund, they typically offer dozens of funds to investors. Those funds usually span the asset class spectrum (from large cap to small cap, diverse geographic regions and diverse industry sectors). So in a given period (quarter, year, five years, etc.) some of these funds inevitably perform well (because the overall economy, or their region, or their industry has done well). What do the Mutual Fund companies do? They pick out their best performing funds and advertise those heavily. This makes them look like geniuses, and catches the eye of the average investor. That investor signs up for an account but doesn’t realize that her investments will likely be going into some of the funds that have not performed as well (and may not perform as well in future). The next time you see advertising, look at the name of the fund(s): it may be bizarrely non-mainstream. For example, you may find that the “Latin American Space Exploration Medium Term Convertible Bond Fund” returned 23% over the last three years. Such marketing draws your attention away from the fact that the firm’s American large cap and mid cap funds performed below average. The latter are funds you will likely end up holding in a typical portfolio. (By the way, I shamelessly made up that fund name – any resemblance to existing funds is purely coincidental).
Here’s the second example. We established above that inevitably, since Mutual Fund companies manage dozens of funds, some will do well while other do poorly. We know those that do well will become the “poster children” in marketing campaigns. What about those that do poorly? The simple answer is that under-performing funds are either shut down, or merged into other, better performing ones. This removes the “offending” example of poor performance from the scene. After all, if a fund is closed, the Mutual Fund company no longer has to report its results or be embarrassed by them. Have you ever received a brief notice from your Mutual Fund company, stating that one of your funds will be closed as of some date, and that your holdings in that fund will be transferred to another? To make this as smooth and unremarkable (the last thing they want is for you to remark on this and dig deeper) you may be told that for your convenience you don’t have to take any action: the transfer will take place automatically. If you’re like most investors, you view this as routine, put the message in the recycling bin, and never wonder why your fund is being closed.
The upshot: carefully examine any funds that are recommended to you. Be very skeptical of performance claims. It’s advisable to use resources at your disposal, e.g., Internet search, to read about any suggested investments.
This is meant to be a quick post citing two articles on the subject of college education: highlighting tuition costs and saving for college, as well as an alternative perspective on the future of college education.
CNN Money’s article “Americans have a record $248 billion in 529 college savings accounts,” tells us that 529 College Plans have grown to unprecedented levels. This may be viewed as a positive development, reflecting proactivity by responsible parents seeking to save enough to cover ever-increasing tuition costs. But it is also a reminder that the vast sum of $248 billion barely takes a bite out of the over $1 trillion of school debt already on the books (which will likely grow into a much higher number in the near future).
In a potentially controversial new book, Kevin Carey’s “The End of College: Creating the Future of Learning and the University of Everywhere,” addresses the increasingly unaffordable aspect of higher education along with several other observations regarding the replication of privilege and problems with current college admissions processes. He provides a vision of the future of college education for the majority of students who are not privileged enough to gain access to and to be able to afford a traditional liberal arts college. Did I mention his hypothesis is that this future will include free tuition? Difficult to ignore the appeal of that … imagine what you could do if you didn’t have to spend $200,000 per child for college?
Food for thought.
The Labor Department is contemplating overhauling the standard of care owed by brokers to their clients. Under the new plan, brokers would owe their clients a “fiduciary duty” which means they would be required at all times to give advice that is in the best interest of each client. Under the current “suitability” requirement, brokers can meet their legal obligation by giving advice that is merely consistent with a client’s risk tolerance and current circumstances, but that advice need not be in the best interest of the client. An immediate implication is that brokers can (and often do) direct clients to investments that are appropriate from a risk perspective, but may carry higher than necessary fees. (As an aside: Financial advisors employed by registered investment advisory (RIA) firms already owe a fiduciary duty to clients.)
What are the implications for consumers? Forcing the higher level of duty on those who provide financial services should be a positive move. Many consumers have been harmed by the current system, partly due to ignorance – a lot of people aren’t even aware that brokers don’t have to give them the best advice. Ideally, the proposed changes will do away with such confusion. Consumers will have greater certainty regarding the obligations of all retail financial advice providers.
It is expected that the brokerage industry will continue to fiercely contest any upcoming changes. The main thrust of their counterargument is that a higher level of duty will lead to higher fees (to compensate for the additional regulatory burden). This is the typical argument made by such firms whenever regulations are debated. The bottom line is that today people are paying too much for not very good advice. Paying too much for better advice is at least a step in the right direction. I would also argue that brokers are paid too much, so there is room in the system for better advice and lower fees.
Do you have a question about financial advisors and/or brokers and their standards of care?
Your family’s financial well being is primarily determined by how much money you earn over a lifetime. Your ability to earn is determined by your skill set. Physicians and dentists (and some other professions) have significant skills sets and potentially high earning capacity. Their skill sets are gained over many years of intense study and training (as well as blood, sweat, and tears). If your earning capacity is suddenly cut short due to disability, all subsequent earnings will fail to materialize. This could leave you and/or your family in a bad financial situation.
Disability Insurance (DI) helps by insuring some of your future income stream. You can choose to insure just a few years of future income or several decades. The decision to get DI is entirely up to you and depends on your circumstances. If you have sufficiently high net worth, DI may not be needed at all. If you have significant debt and must remain healthy to ensure your family survives financially, then insuring that income is arguably a necessary move.
Ask yourself two questions:
(1) are you wavering on DI purchase because the person pitching you a DI product seems unsavory and you don’t trust him/her? The answer to this question is often ‘yes’. It is natural to become defensive about a product that is pitched by someone who appears unscrupulous. But that might just mean that the person is unscrupulous, not the product itself.
(2) are you wavering on DI purchase because you don’t understand the product? The answer to this question is also often ‘yes’. DI is a potentially complicated product (not because it is ‘rocket science’ but more due to the fact that there are many customization options that add confusion).
The remedy to ‘yes’ answers in both cases is – education! With greater understanding of the product (what is DI and what can and can’t it do for me?) you can avoid the unscrupulous salespeople and you can make an empowered decision regarding whether you need the product or not. In either case, you will be able to proceed from a position of strength (empowered by knowledge). The alternative is to put off the decision and live with the anxiety of not being insured and constantly wondering whether you should be.
As alluded to above, the main challenge for a young doctor who is not financially literate is that DI happens to be among the more complicated and nuanced financial products. This forces you up a very steep learning curve, exactly when you have little time to invest in improving your knowledge of such insurance (Most likely you’re already busy finishing a residency or fellowship, getting your first real job, buying a home, moving the family to another city or state, etc.).
Nevertheless, I would argue that investing your time in learning more about DI (and other insurance offerings) is time well spent. In fact, I argue that medical schools and training programs (residencies and fellowships) should formally offer financial literacy education. But that is a whole other topic …
One of the big issues affecting financial literacy is that there are many urban myths or fallacies propagated by superficial advisors and misinformed consumers. The media is sometimes also complicit. Much of the problem is rooted in blanket statements that tend to be invoked reflexively but don’t apply to every situation.
One such fallacy is that investors should always prefer “no-load, no-fee” funds.
No-load (mutual) fund share classes are those that don’t impose commission or sales charges at the time of purchase or sale. Similarly No-fee share classes don’t charge other fees.
The catch is that no-load no-fee share classes of mutual funds can have higher management expense ratios.
The most recent example I ran into was one in which the no-fee no-load share class of a fund charged a management expense ratio of 0.93% annually. The same fund was offered under another share class, in which commissions of $24 were charged per transaction, with a management expense ratio of 0.63% annually.
If you plan to trade a lot, you likely want to avoid the fee-paying share class (i.e., you don’t want to have to pay $24 every time you buy or sell). But most investors are passive, which means purchases and sales are somewhat rare. For passive investors, paying $24 dollars on rare occasions may be much better than paying an extra 0.30% (= 0.93 – 0.63) every year on that fund.
In this example the math suggests that if you have a position that is greater than $8,000 in the fund, paying the transaction fee once a year is better than paying the higher management expense ratio: 0.003 * $8,000 = $24. If you hold $100,000 in the no-load no-fee share class, you’d be paying 0.003 * $100,000 = $300 in higher management expense fees. You could buy or sell every month and still be better off avoiding the no-load no-fee share class.
Of course, you could invest in exchange traded funds (ETFs) instead and avoid the unfathomably (and unconscionably) confusing world of mutual fund share classes.
If you have any comments and especially questions about the contents of this post, please reply and I will clarify. That’s the best way to learn!
Welcome to my Pillars of Wealth Financial Literacy Blog!
This educational initiative echoes Benjamin Franklin’s statement that “an investment in knowledge always pays the best interest.”
This blog will focus on financial literacy for medical professionals and their families. I will strive to discuss topics that specifically capture the interest of physicians, dentists, and other medical professionals. Please feel free to send me questions and I will respond to them in blog articles. I can be reached at yuval (at) pillarsofwealth (dot) com (please use the ‘@’ and “.” when sending email. The reason the address is written in this slightly cryptic format is to avoid web robots adding the actual email address to spam generators).
The mission of this blog (and more broadly the Pillars of Wealth initiative) is to provide meaningful OBJECTIVE education. I will be enforcing a very strict rule that no financial products or services will be pitched to our readers. Anyone attempting to do so will be excluded. This is intended to be the one place you can turn to when you want the facts – backed by science. (Yes, the field of economics/finance is often referred to disparagingly as the “dismal science” – nevertheless, it has come a long way as a science, and I expect this audience will want to know the scientific underpinnings (if any) of various statements/conclusions/guidelines/recommendations).
For more detail regarding the Pillars of Wealth initiative please visit other pages on this website.
Yuval Bar-Or, PhD
Dr. Bar-Or is a professor at Johns Hopkins University’s Carey Business School. He is a risk management and financial literacy expert and the author of seven books including the Pillars of Wealth series. He has been widely quoted in the media, including The Wall Street Journal, Bloomberg BusinessWeek, The Baltimore Sun, TheStreet.com, American Public Media, Bankrate.com, Washingtonian, Consumers Digest, and US News & World Report. He received his Ph.D. from the Wharton School of the University of Pennsylvania.