The disparate economic outcomes of the coronavirus pandemic have brought into greater focus the importance of financial inclusion.
If a person is not connected to the U.S. traditional financial system, like having a bank account, their ability to participate meaningfully in society is adversely impacted. Further, without a base level of financial literacy to make informed decisions about credit, savings and investing, they incur higher costs and receive lower benefits.
Economists have recognized that these added costs and fewer benefits result in dramatically worse outcomes, both in the short-term and even more so over a lifetime.
These are not new observations. But with the ever-increasing pace of global economic activity, it is clear that, if these escalating issues are not addressed now, the gap between those who benefit from the financial system and those who do not will widen. This is a bad outcome for all.
The key factors driving this problem also are well known: lack of financial education in secondary schools; limited opportunities for exposure to personal financial analysis and decision making; and a fear, in part well-founded, of being taken advantage of by those with more resources and knowledge.
So, we know the problem and the causes. But the question remains what to do about it. The answer: connect people early and combine education with financial access.
Here’s a proposed theory on connecting people early in life. What if a $500 bank account was established for every child at birth that grows with interest, could be added to, but the initial funds could not be withdraw or otherwise touched for 21 years? The child would have a tangible interest in personal finance and could, of course, make deposits or withdrawals above that $500-plus interest threshold. This undoubtedly would help them connect earlier and more easily with the U.S. economy.
With approximately 4 million births per year, the annual funding cost would be a modest $2 billion, based on our estimates. But the positive impact on the economy would be magnitudes higher, including providing an effective, personal focal point for financial education in schools.
More immediately, brokers and investment advisers should embed investor education and qualification in their core business, and more prominently in their service offerings. The Operation HOPE “Investor Bill of Rights” provides a pragmatic framework for implementing this policy.
Some of these protections are included in the U.S. Securities and Exchange Commission’s recently adopted a “best interest” standard on client relationships with broker-dealers. But, importantly, Operation HOPE’s Bill of Rights goes farther, particularly in the areas of education and qualification. This levels the playing field even more for consumers, and increases confidence in the fairness of the U.S. financial system.
The costs of these additional steps are modest, and there is no need to wait for regulatory or legislative action. With the array of off-the-shelf public and private sector investor education programing already available, providing investors online access to materials tailored to their circumstances should not be a heavy lift.
In addition, requiring completion of certain educational modules before investors are given access to more complex and riskier products and strategies — such as buying stock on margin and investing in equity options — would greatly benefit those who do not fully appreciate the risks and costs. And it would be of little cost or inconvenience to those who do.
We are heartened by the recent increase in retail investor participation in the markets, especially when considering the magic of compounding — investing 30 years before one’s retirement date — is four times better than starting at just fifteen years out.
The more educated younger investors are, the better. However, we are concerned about retail investor involvement in the recent high volatility “meme stock” situations, particularly because the size and breadth of the retail volume suggests inexperience.
These are technical trading events where there are a few winners and many losers when the dust settles, unlike long-term investing based on fundamentals where the winners are many and losers are rare.
Better investor education and qualification requirements as a prerequisite for leveraged, short-term trading surely would limit unfortunate outcomes for retail investors, without impeding their access to our vibrant capital markets. We call for these measures because the nation’s dynamic economy thrives on the free flow of capital, innovation and choice, and also because individuals are more responsible than ever for funding their retirements and other needs.
The COVID-19 pandemic has revealed the benefits of advances in communications technology, medical research, production and logistics. However, it has also shown the need to address the accelerating economic and societal disparities among Americans.
These conditions demonstrate both the power of nimble capital allocation and innovation and the importance of broad investor participation and financial inclusion. All Americans need an earlier, faster and safer on-ramp to participate in our economy and to build financial security.