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Good Intentions Gone Bad

One thought leader who seems to be on the same page as ourselves is Jim McCool, EVP for institutional services at Schwab. In his September PSCA keynote talk titled “Best Intentions,” he offered a postmortem of sorts for investor education. He notes that the industry has spent an average of $9 to $10 per head on education, some of it beautiful and award-winning work, but that there’s virtually no evidence it has produced results.

Experience Teaches

What does educate is advice. That may seem a bit counter-intuitive: after all, most of us didn’t learn long division by tapping on a calculator. You have to know how to carry the two to the tens place and all that. But for more complex and nuanced decision-making, experiential learning, or learning-by-doing, turns out to be most effective for most people.

That’s exactly what happens with a live financial advisor. A professional helps you define your investment needs, then walks you through the potential risks and benefits involved in trying to meet them. A well-designed online advice process does essentially the same thing. Rather than just giving an answer, it provides a learning experience in the considerations and trade-offs of real-world investing – ideally one tailored to the amount of learning each individual prefers to absorb.

Education That Never Learns

Unfortunately, not everyone agrees with this view. People who specialize in benefits communication have an understandable bias toward education. The last couple of decades have been good to them, as the financial industry has struggled to reach tens of millions of people through pie charts, bar graphs, and blocks of text. And some of their work has been very good indeed. The problem is, this is historical baggage left over from the days when advice was prohibited. Since personalized advice has become more widespread and effective, it’s time to move on.

Now that much of the retirement conversation has come around to the income side you might think the education camp would throw in the towel. After all, maximizing income involves even more complexity and uncertainty than accumulating assets. But in a white paper reported in this recent article, Steve Vernon of the Institutional Retirement Income Council makes the case for doubling down on education.

I’ll Have What She’s Having

He’s absolutely right about the magnitude of the need, and in lamenting the industry’s longtime focus on the accumulation side of the retirement lifecycle. But his solution is a “retirement income menu” analogous to an investment fund lineup. This would include perhaps a half-dozen items such as fixed and variable annuities, guaranteed-minimum annuities, managed payout funds, and hybrid products – all combined with “robust education.”

In our opinion, the majority of plan participants would find this even more daunting than the list of fund choices they confront today. Not only are the products and even the underlying concepts unfamiliar, but apples-to-apples comparisons, like third-party ratings and those cute little risk-meter icons, would be categorically impossible. As we’ve argued for a long time, with abundant evidence, a cryptic and too-long menu leads many people either to guess, or to follow what everyone else is doing. It’s better just to ask the waiter.

Special of the Day

Vernon does cite some compelling facts. In one survey, 91% of respondents said they’d appreciate a statement of how much retirement income their accounts could generate. As it happens, that’s been roughly the response to our new Retirement Readiness solution, which does exactly that. But after the reality check, the next question is inevitably “what can I do about it?”

Our answer is not a menu of choices, or an attempt at education. It’s a handoff to personalized, professional advice through GuidedSpending. Not only is advice what real plan participants actually ask for, but it allows plenty of scope for variation among individuals. The minority of hands-on investors can use it as an educational and modeling tool. The rest can simply get the help they need and get on with their lives.

Some investors really do want to read the brochure and choose from the menu. Financial professionals tend to overestimate their numbers and enthusiasm because we usually fit that profile ourselves. But for most people, investing is an unknown country. It’s best to have a local order for you, or you may not like what appears on your plate.

Is investor education just throwing good money after bad? As always, your comments are welcome.