“Financial Literacy” Versus Farm Education

I believe there are a handful of big topics that are worth really digging into in the asset management world right now: the future of fixed income, the evolution of ESG, tokenization, the ethics and impact of indexing, and the shifts in our understanding around portfolio theory. Those are the big heady topics I’ll be wrestling with for a long while.

Underneath the hood, however, there are 20–30 key influencing issues that are worth understanding, because they’ll underpin the future of finance, and last time I looked, my business card said Financial Futurist.

Top of mind for me has been financial education.

Financial education in this country isn’t great, and the need for it has never been more pressing — indeed, it’s the whole issue behind the recent FINRA request for comments that spurred me to actually submit a comment letter and for the media to realize, “Hey, this might be a big deal.”

FINRA does real work on this topic, publishing an every-three-year National Financial Capability Study where they ask 25,000 Americans “How’s it goin’?” in various money-related matters. It’s where we get all the scary statistics like, “Only 46% of Americans have any rainy day funds at all,” and “35% of Americans only pay their credit card minimums.”

The subset of folks who self-classify as “investors” aren’t any better: Only one-third could score 50% or higher on a basic 10-question test. (Not to brag, but I got a 10 out of 10.)

However, FINRA isn’t the only researcher coming to this conclusion. A widely cited 2015 study by Standard and Poor’s on financial literacy suggests that roughly 57% of U.S. adults could be considered financially literate. Outside of the U.S., Nordic and European countries fare a bit better, while emerging markets fare much worse. But I’m not going to bore you with data; it’s well-established that as a country, we don’t know as much about how money works as we should.

From a public policy perspective, we have adopted a singular approach, which is to try to wedge financial education into the schools. I’m all for this, and indeed, there has been some progress in getting money education in the curriculum. We have dozens of non-profits trying to help educators figure this out, too. But according to the Council for Economic Education, which surveys state requirements, while the numbers aren’t getting a lot worse, they’re not getting a lot better either:

Source: FINRA

Most policy makers have focused on that hollow black line: the number of states requiring some economics or financial education course to be completed as a requirement of high school graduation. Currently, about half do. Furthermore, according to a March 2022 poll by the National Endowment for Financial Education, 80% of U.S. adults believe that students should have to complete at least one semester of financial education.

Change is coming, but it’s coming slowly, and it may not be enough to move the needle, as there’s scant evidence that this financial education is keeping up with how fast the economy and markets change.

It’s not that there aren’t resources available. It’s actually shocking how many resources are out there. There’s the National Endowment for Financial Education, a Denver non-profit that’s been building out resources and conducting research since the 1970s, originally as part of the College for Financial Planning. (Yes, the folks who made up the CFP designation.) Meanwhile, Next Gen Personal Finance approaches the problem more directly by educating educators and giving them the tools they need to include financial education in the classroom. They’ve got a full-year curriculum for high school, which covers everything from opening a checking account to behavioral economics. (Seriously, their lesson on Arrogance and Echo Chambers# should be required to leave the Trinity/Wall Street subway station.)

Of course, actually working with teachers to build curricula is hard, thankless work, which is why most asset management industry efforts tend to prioritize flash over substance. I love Fidelity, but color me skeptical about their attempt to bring financial education into the “Metaverse” by posting some text on the walls of a virtual office building that folks will presumably read on their way to the virtual dance floor at the top. (Because nothing makes me wanna get my VR-helmeted-dancing-in-my-office groove on like learning about ETFs.) (Yes, I know Decentraland doesn’t actually have a VR-compatible client, just a super-low-poly, 1995-era game client, but I did it in VR anyway, because I’m a pedant.)

Me, touring Fidelity’s “Stack” in Decentraland

Still, the industry does make an effort. They produce the content. Blackrock has an education center, Vanguard sponsors a classroom effort called My Classroom Economy with programs for K-12, and so on down the line. Almost every major financial institution offers, at minimum, a lip-service nod to educating future customers and, in many cases, genuinely thoughtful education.

Our failures to actually teach people about money are not rooted in content, but in compassion and context.

I believe the biggest issues we face in teaching people about money are linguistic and cultural. In the asset management world, we’re buried in jargon and lingo. The celebrities #FinTwit talks about rarely rise above the fold in non-financial newspapers, until they’re caught in scandal or become part of the Western billionaire-capitalist oligarchy and thus too powerful to ignore.

The very phrase “financial literacy” is one of the biggest problems, says Tyrone Ross, financial entrepreneur, Twitter phenom, and founder of LearnToMoney.org, which develops foundational video content targeting young people who were skipped over when it came time to learn about money as kids.

“I don’t say ‘financial literacy,’” he says. “Literacy — overall — was an issue in our household, and that bleeds into the stigma with ‘literacy.’”

I’ll admit my own failure of insight — the phrase “financial literacy” has always made me feel uncomfortable, but I’m not sure I could have articulated why until Ross said the phrase out loud. The word “literacy” itself is only commonly used in its negative context. It’s like the word “remedial” in that it carries weight and judgement whether intended or not. Someone who legitimately needs financial education and is aware that they need financial education is probably the most likely to be turned off by the idea that they’re “financially illiterate.”

While I fear we’re stuck with the phrase “financial literacy,” what we can do is mold the conversation and better define what we mean by it — and what we don’t.

Dr. Preston Cherry, who heads the Financial Planning Program at University of Wisconsin-Green Bay. and who is also the founder and president of his own financial advisory practice, thinks that the most important piece is something he deems “financial compassion.”

Financial compassion is about asking questions, real questions, emotional questions, without judgment or preconception, says Cherry: “How do you feel about your money situation? Your money thoughts? Share with me about your life and your money, your knowledge, your culture, your experiences. Let’s get better informed about where you are and how you feel about it.” This applies even if the person on the other side of the table is a 13-year-old and not a prospective financial planning client. The important questions, the emotional ones, are the same at 13 as they are at 73.

But that’s rarely how financial education is structured. All the great curricula on financial education is facts and figures — exercises designed to instill knowledge in bog-standard, American academic pedagogy. Present some facts, complete an exercise, take a test. From my own narrow experiences of raising kids, helping out in schools, and observing in classrooms, there’s little room for real compassion and connection in the modern classroom, despite the best efforts of great teachers. There’s rarely time to have the one-on-one conversations and establish the emotional connections necessary to learn about money effectively.

To improve financial literacy in this country, we don’t need more textbooks. It’ll take cash and labor. Maybe an Americorps for Financial Education. But until then, it’s mostly going to take creativity.

My most refreshing find of the pandemic era has been the TikTok channel? of Kyla Scanlon. Now 24, Scanlon deeply understands the business, having worked at Capital Group prior to the pandemic, and she’s rapidly become one of the most important voices in financial education precisely because, well, she’s smart, 24, and on TikTok.

Also, she’s hilarious. Scanlon can explain a rough inflation print in 45 seconds, while cracking a joke about how “avoidant personalities” are our hope against inflation. She uses the language of her peers to tap into the actual zeitgeist the finance world is overlooking: a nihilistic world where young people distrust, even hate, money.

“I have two groups of friends,” she explains. “I have my ‘finance friends,’ and my other ‘regular people’ friends. And they hate money. Anytime they bring it up, they’re just like, ‘You suck, shut up.’”

It’s not just that “traditional” finance isn’t cool enough for Zoomers (which explains some of the allure of crypto of course — NFTs are nothing if not both cool and hilarious). There’s a foundational, widespread lack of faith in institutions and systems among Millennials and Gen Z that surpasses even Gen X at their most disaffected and cynical.

“I think there’s a lot of nihilism,” Scanlon said when asked why the gallows humor of her TikTok channel lands so well with her audience. “2008 led to a lot of ‘life sucks’ thinking, and the pandemic compounded all of that, and now there’s a war going on. We’re seeing the crumbling of our systems in real time, no offense to the government. It’s not great for anybody,” she continued. Laughter is one way to deal with it, but neither despondent nihilism nor dark jokes make for sound investment strategies. Instead, it gives birth to the oft-touted investment anti-philosophy of “YOLO” (meaning, “you only live once”).

YOLO investing is an expression of nihilism to the core and is also behind the rise of one of the greatest success (ish) stories of the pandemic: Robinhood.

That brings us full circle, back to why FINRA became so nervous about the state of financial education in the first place: meme-stock trading by Robinhood users.

Why now? It’s not just because of Wall Street bets. It’s about the numbers:

Source: https://www.businessofapps.com/data/robinhood-statistics/

Since the pandemic, an incremental 12.5 million folks started using Robinhood, meaning roughly 10% of American adults. Schwab’s still bigger, with over 30 million users, but it’s a shocking user base increase for a platform that didn’t functionally exist a few years ago, and which breaks the mold of a staid, trad-fi trading platform. (The problems with Robinhood’s gamification of trading have been well covered elsewhere. My hot take is that it successfully gamified the exact behavior any financial educator worth their salt would’ve tried to discourage: frequent trades that take big bets and try to time the market. It’s like Robinhood made smoking cool again.)

But while FINRA’s attention may be on Robinhood because it’s big and flashy and public, the entire fintech space is crammed with app-based finance tools. Indeed, adding “money” to apps, no matter what their original intention, has become such a prominent practice that it has spawned a new terminology: ‘embedded finance’, or the idea that literally everything is fintech.

On the one hand, I have a knee-jerk negative reaction to embedded finance. After all, I spent a few thousand words last year on one particular application of this maxim: “play-to-earn” gaming. At the time, I referred to it as a “capitalist hellscape,” so I’m not exactly on the fence about this issue.

But financial education may in fact be one of the places where I’m actually excited about the concept of “embedded finance.”

Mike Gleason is the CEO of Learn and Earn, a non-profit financial education firm that’s, yes, an app-based fintech company. But instead of Learn and Earn being just another way to squeeze folks for money with a UX-prodded dopamine hit, the app leverages the power of these new technologies in another way.

How? It started with some foundational work by Dr. William Elliot at the University of Michigan, who found, over a decade of research, that saving for college — that is, saving literally anything for college, no matter how little — skyrocketed a student’s chances of graduation. Specifically, having as little as $500 in a savings account for a lower or middle-income child increases the likelihood they will graduate college by a factor of five.

500%. That’s a lot.

Of course, neither the research, nor I, would suggest that this is causality. It’s not the money that’s magic. More likely, it’s everything else that surrounds that act of savings.

“It wasn’t really dependent upon the amount of money,” explains Gleason, whose team worked with Dr. Elliot and key partner Junior Achievement to build a program from the core insight. “There was something about the mindset of having something for the future.”

Thus Learn and Earn was born. The idea was actually pretty simple: If having anything saved for college matters, then we should help as many kids as possible to save something. 

So the team at Learn & Earn started beating the bushes for donations, which they’ve received in spades, not just from Junior Achievement and its donor network, but also Tiger Woods, the Winklevoss twins, and the Milken Institute. They built a simple app loaded with Duolingo-style quizzes and activities on financial basics: e.g., What’s an entrepreneur? How does a credit card work? By completing questions, kids actually get real money in a real investment account (albeit one that has parental locks and other limitations in place).

It’s… good. Really good. This style of learning — quiz show with retests — genuinely works on an app format. (I’ve witnessed my wife’s journey to the top of the Duolingo leaderboards first hand.) It’s gamification done well. But more importantly, its gamification done right. From the kid’s perspective, they do what they do best — absorb new information — and in so doing get money that can be supplemented by their own earnings and parents’ contributions and so on. Then they get to see what happens with their money in their account.

In Learn and Earn’s case, that investment account is through Ant Money Advisors, an RIA, and the investments themselves are limited to a selected list of ETFs and individual stocks. As we learned through Robinhood’s rise, news-cycle relevance and brand connection with individual stocks really helps drive engagement.

“[Kids] become much more engaged when they start picking stocks,” says Gleason. “They start reading literature and wanting to know ‘why did Amazon go down today?’ That’s interesting.”

Interesting but not surprising. I was the same way when I bought my first share of stock in 1984. (As I recall, it was Deere.)

That’s the core of real education. I’m a wonky New England son-of-a-professor, so I have a pretty positive view towards formal education. But I have an infinitely positive view on “farm education.” Farm education is when you go down to the chicken coop that you ignored all summer and clean out all the grime. After that, you clean it every week. Farm education is learning about engines by trying to make new piston rings out of fence wire because the field needs haying and the Deere dealership doesn’t have parts. You get in there and get your hands dirty, and the world teaches you whether you got it right.

Approaches like Learn and Earn are farm education for finance. Hands dirty, making mistakes, with real money — but no stigma associated if and when failure happens. It’s financial compassion, as expressed in a fintech app.

In talking with Scanlon, I was struck by her explanation for why she does what she does: “My big theory is that people don’t understand what it means to be an economic entity. So I try to make content helping people understand what the economy means and this broader structure that they exist in.”
Any American under the age of 60 most likely was brought into the world as an economic entity. For the most part, our entire lives have been surrounded by the influence, presence, absence, and score-keeping of this one thing — money — that almost all global societies have decided projects power and societal value above all else. That’s just the real world. It makes no sense to be for it or against it, any more than it makes sense to be for or against air.

Those of us who have some claim towards adulthood have an obligation to the next generations to compassionately communicate that simple message: This is it. This is how we keep track, and this is where you fit.

While it feels profane to invoke David Foster Wallace’s This is Water in an article about money, I have had the close of it stuck in my head ever since I started down this rabbit hole:

It is about the real value of a real education, which has almost nothing to do with knowledge, and everything to do with simple awareness; awareness of what is so real and essential, so hidden in plain sight all around us, all the time, that we have to keep reminding ourselves over and over:

“This is water.”

Wallace is making a much grander point about keeping perspective on the unknowns, and indeed, expressing a pathway from awareness to enlightenment in the moment. But he’s also talking about recognizing the soup you’re sitting in.

Like it or not, money is the water in which we, as a society, raise our children. They are born into it, and they’ll likely die in it, surrounded by it their entire lives. We’ve got an obligation to teach kids how to swim. We have to do it compassionately, in a way that they’ll understand and internalize, if for no other reason that otherwise they’ll drown.

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