Should Uncle Sam pay for financial advisors for everyone?
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Add one more federal bailout program to the list: subsidized financial advice for the masses.
That’s the proposal of Yale University economics professor Robert Shiller, perhaps better known for his research chronicling the housing market’s collapse.
Writing in the New York Times over the weekend, Shiller asserted that the mortgage mess might not have mushroomed to its current proportions if millions of Americans had had the help of an objective third-party counselor on financial issues.
‘Many errors in personal finance can be prevented,’ Shiller wrote. ‘But first, people need to understand what they ought to do. The government’s various bailout plans need to take this into account -- by starting a major program to subsidize personal financial advice for everyone.
‘Giving the general public access to trained advisors would be a boon for the nation in this time of doubt and distrust,’ he wrote.
Shiller cited recent research showing how abysmally low many Americans score on financial literacy tests:
A paper by Kris Gerardi of the Federal Reserve Bank of Atlanta, Lorenz Goette of the University of Geneva and Stephan Meier of Columbia University asked a battery of simple financial literacy questions of recent homebuyers. Many of the respondents could not correctly answer even simple questions, like this one: What will a $300 item cost after it goes on a ’50 percent off’ sale? (The answer is $150.)
One problem, as Shiller noted, is that people who do seek advice often turn to ‘sales representatives of one sort or another: real estate agents, mortgage brokers, sellers of financial products. Some of these providers could use their sophistication to exploit people’s tendency to behave irrationally, and to manipulate the judgment errors that consumers typically make.’
Shiller has raised this idea before, and I think he’s right, in principle: Many average Americans would benefit from objective advice on financial issues, including basic asset allocation and debt management. You can tell people to read about this stuff, but there’s no substitute for a face-to-face discussion.
I’m just not sure where you’re going to find enough qualified advisors to sit down with tens of millions of people.
The Bush administration’s idea: Open the doors to brokerages and mutual fund firms to advise 401(k) plan participants. The administration approved a rule change late last week to allow those firms to provide financial counseling.
But some House Democrats say they’ll try to block the measure, fearing that financial-company reps will give biased advice promoting their own firms’ plan investments.
-- Tom Petruno