Friday, December 19, 2008

Financial Advice for the Public

In previous posts, I have argued in favor of professional financial advice. Do not get me wrong, I am not saying that using a financial advisor is the only rational choice. Rather, I want to argue that there need to be alternatives for people who have little financial knowledge and who may currently choose to “do nothing” or to rely on the advice of people who may know as little as they do. But choosing a financial advisor can be a difficult task, so we need to find alternative sources that can provide advice and guidance.

In other fields, such sources exist or have emerged. If you go to the National Cancer Institute’s web site, for example, you get basic information about what cancer is, available treatments, and a link to information about smoking that offers “free help to quit.” I like the smiles of the patients on that web page and the stern yet reassuring looks of the doctors. The U.S. Department of Agriculture has established the “food pyramid” to give guidelines about healthy eating. These are very general guidelines; nevertheless it is good to know that we should eat vegetables—lots of them. Moreover, some books have become “the bible” on certain topics. I am thinking of What to Expect When You’re Expecting, which almost every first-time mother I know read during her pregnancy.

Now, where do people go when they need financial advice? Which web site should they consider? Which book should they read when they want to start saving or investing or managing their debt? Believe me, there is a lot of information out there. The problem is that there is too much, and—in my view—a lot of confusion about what source to use. What is worse is that many people would like to dispense financial advice, irrespective of their qualifications.

There is an institution that is well-equipped to provide financial education and improve financial literacy. This institution meets three important requirements: (1) It possesses high qualifications, meaning a knowledge of economics and finance; (2) It is independent of the financial industry and any lobbies; (3) It cares about the well-being of consumers. As you may have guessed already, this institution is the central bank. Central banks in all countries, and the U.S. Federal Reserve in particular, have armies of bright Ph.D. economists who spend much of their time monitoring the state of financial markets. Central banks in most countries are independent institutions whose primary objective is to fight one of the big enemies of saving: inflation. Moreover, they are interested in the smooth functioning of financial markets and have incentives to care about citizens.

The U.S. Federal Reserve is already working on financial education (check their web site:, but my recommendation is that they do more. First, they should take up that role officially and with more fanfare so that people know where to go for financial information. Second, they should provide a lot more resources on line. Their web site should be a “bank” of information. Third, they should offer some recommendations. As broccoli is good for you, so is risk diversification. Finally, on that web page we need a stern-looking Ben Bernanke, a few smiling, happy investors, and a link to a free guide on how to save.

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