Financial Literacy Impacts Financial Decision Making Essay

Financial Literacy Impacts Financial Decision Making Essay

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Introduction
Ethical standards in the financial services industry were severely tested in light of news of outright fraud, Ponzi schemes, lack of regulatory oversight, and the likes in recent times. These gross violations, although shocking, are not a novelty especially when it comes to the money management business. But the sheer size, frequency and egregiousness of these recent scams and scandals highlight the lack of basic ethical standards in the industry with total disregard of their customer’s interests. A study by the National Bureau of Economic Research found that many investment managers facilitate and support harmful behavior because it’s in their best interest to do so. With commissions being their sole motivation, the “advisors” or brokers to be more precise, encourage bad investing behavior like frequent trading and choosing more expensive funds that provide kickbacks to the investment manager. And then you have this entire army of insurance agents masquerading as investment advisors, routinely promoting and selling financial products to unsuspecting consumers that harm not only the people they are selling the products to but the integrity of the entire financial services sector, with severe long-term implications of capital accessibility for the entire economy. A Registered Investment Advisor (RIA), on the other hand, is required to act as a fiduciary under the Securities Act of the 1940. The fiduciary standard requires an RIA to put the interest of the clients he or she serves above their own and to declare any conflicts of interests that may arise. Brokers and other money managers can hide behind a very loosy-goosy suitability standard and are required to only recommend investments that are “suitable” to their clie...


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...equally strong enforcement of them are required. People managing money should be required to be a fiduciary, regardless of whether they are mutual fund managers or insurance agents or brokers, just like what RIAs are required to do. This simple move where investment managers are personally held liable for any obvious violations will minimize the frequency of ethical lapses.
And finally, education and training is the key, both for the consumers of financial products and the people serving them. Financial literacy impacts financial decision-making. Consumers, at the minimum, should educate themselves about basic financial concepts to enable them to differentiate between what is right and wrong. Asking the right questions about fiduciary responsibilities, fees charged and products recommended would go a long way in minimizing the potential of being taken advantage of.

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