Investments 

Finding a framework for financial literacy

This article is part of
Winter Investment Monitor - December 2015

But it must, of course, be good financial advice. Bad advice merely reinforces a dearth of financial literacy or, worse still, takes advantage of it.

It may be worth pausing to note the difference between advice that is unquestionably bad and advice that eventually proves less than ideal. This distinction goes to the heart of one of the main impediments to effective financial advice: the threat posed by retrospective class actions over so-called ‘mis-selling’.

Although there are inevitably instances where such action is justified, often these cases are made only ex post after a range of risks has resolved against the interests of the consumer. Here it appears that it is lawyers and regulators who are in need of a lesson in financial literacy.

The inescapable fact is that we are living in an age characterised by ever-intensifying market complexity and growing policymaker enthusiasm for ‘libertarian paternalism’. Given what we now know about financial literacy, the coexistence of these trends is perhaps not altogether helpful.

They could, after all, combine to produce a perfect storm – one in which insufficiently sophisticated consumers are left to make what might turn out to be some of the biggest and costliest mistakes of their lives. This is why good financial advice arguably has a greater role to play now than ever before.

A regulatory framework that clearly encourages and respects best intentions will certainly be crucial to fostering the full realisation of this role. Maybe most important of all, though, will be the adviser community’s ability to recognise the genuine gravity of the situation and to treat financial literacy as an issue that demands amelioration rather than exploitation.

Dr John Gathergood is an associate professor of economics at the University of Nottingham’s School of Economics