Fiduciary Commentary | Spring 2018

By: Brant Griffin – May 23, 2018

Effective Financial Education: Why Financial Wellness Matters

A decade after the great recession and the financial crisis still lingers on for countless Americans. Many households are unable to get from under the heavy burden of consumer debt. Research from the New York Federal Reserve Bank shows that the household debt surpassed $13 trillion at the end of 2017, exceeding the $12.7 trillion level of toxic mortgage-related debt level experienced in 2008. Unlike ten years ago, today’s debt is broader and arguably affects a larger spectrum of consumers through the debt from student loans, auto financing and credit cards.

This heavy consumer debt obligation causes financial stress that can permeate its way into the workforce and cause employee productivity loss.  To alleviate financial ills, employers have traditionally provided financial education to inspire savings and investment and to encourage prudent financial decisions. At its face, this appears to be a reasonable response to combating economic anxiety and helping employees budget their wages, build confidence and save for the future. However, studies have shown that the years of plying away at providing traditional investment education has been ineffective. A growing percentage of American workers have saved shockingly little for retirement. Some estimates show 50% of the American workforce live paycheck-to-paycheck and 42% of the workers have not set aside any retirement savings at all. In fact, 19% of individuals have no savings to even cover emergency expenses. Many individuals still remain unaware about basic economic concepts and have yet to embark on saving for retirement

Financial education is traditional a one-size-fits-all approach designed to alter spending habits and encourage saving and investment. This broad-based method cannot be fully effective to address the spectrum of savers with unique characteristics and needs. The efficacy of this approach, typically provided as a classroom-like lecture with written materials, is often based on ideology­­ rather than proof or fact.

Information and education alone is unlikely to have a lasting effect on employee behavior and truly altering engrained behavior patterns. Although financial literacy has good intentions, it is not always the solution to yield the best results due to the challenge of incorporating what is learned into practice. Richard Thaler, a prominent behavioral economist, has said that true financial literacy is nearly impossible especially when making a crucial financial decision. It is extremely confusing to know the right road to take, even for an economist such as himself.

Behavioral Economics and its effect on an individual’s decision-making

Traditional economics adopts the theory that people are rational when making decisions to achieve their own self-interest. Conversely, the study of behavioral economics has demonstrated how a multitude of factors influence our behaviors and how individuals do not always act in a manner that supports their own wellbeing. Behavioral economics view that decision making is largely connected with sociology, psychology and other areas of science. This field of study has demonstrated how cognitive and social factors have an intense influence on our decisions on money and financial activities.

Its undeniable that behavior is difficult to change. Various studies have been conducted in search of successful methods to alter consumer behavior. A notable study involving those with low to moderate incomes has shown that their primary desire is for financial security. The participants were able to identify several key actions needed to advance towards the objective, yet nearly none of them had initiated any of the recognized actions needed. Social scientists have classified this scenario as the Intention/Action gap (the difference between what people plan to do, and what they actually do).

Behavioral economics explains that people are influenced by cognitive biases which are deeply entrenched in our psyche. These biases cause impulsive consumer decisions controlled by cognitive limitations and the urgency to choose.  Some of the more common cognitive biases include:

  • Discounting the future: Choosing immediate gratification above longer-term objectives. The present is tangible, immediate and satisfies our current needs. The here and now will often weigh more heavily than future needs. Discounting the future results in overspending by discounting the future costs associated with such activity.
  • Overconfidence: Underestimating the possibilities of future misfortune while remaining overly optimistic concerning present circumstances. An example would be those that believe that an accident is unlikely to happen and therefore do not buy insurance.
  • Anchoring is when one tends to use an initial piece of information as a reference point to make a subsequent decision, no matter how illogical it may be. This can result in overspending due to how pricing is presented to us.
  • Confirmatory bias: The tendency to cherry-pick information and weigh more heavily the information to justify one’s own belief, while downplaying information that contradicts one’s opinion. This tendency lends to irrational and stubborn behaviors.
  • Loss aversion: The phenomena describes the tendency of a consumer to fear losses over the equivalent gains. It explains that fear and anxiety is more powerful than positive emotions.

These powerful predispositions are difficult to overcome as they are rooted in our most primal instincts. These tendencies help explain the challenge of traditional education efforts and why alternatives have been sought to overcome our instinctually-rooted patterns that result in poor financial decision making.

Financial Wellness

The field of financial wellness utilizes various tools to combat lingering cognitive biases and change consumer behavior. Financial wellness utilizes various strategies to strike a balance of the psychological and tangible facets of our views towards finances. In other words, financial wellness aims to provide a comprehension of your current situation, develop a plan to achieve personal and financial goals and manage the adversities that will inevitably arise along the way.

Although financial wellness is still a relatively new area of practice, its effectiveness in promoting productive behavior has already been recognized. Some of the key principles for successful financial education that will help employees make sound financial decisions for their future include:

  • Know your audience. Acknowledge that situations vary, and information should be personalized to match one’s specific status, challenges and goals.
  • Deliver actionable, relevant and timely information. Develop a suitable plan related to a specific goal to combat our cognitive tendency to bias the present.
  • Advance broad skill sets. Teach how to find relevant information and how to process that information to make an informed decision from what is learned.
  • Build motivation. Supporting individuals to identify their own values, to maintain persistence in the inevitable challenges they will face and to stay enthusiastic about their future.
  • Create habits that support good decisions. Help individuals form new healthy habits that will reinforce positive outcomes.

It is frequently agreed that wellness is a important part of effective employee education. Furthermore, employers can play a vital role in an employee’s financial well-being by assisting savers in managing their employees’ overall financial health. Financial wellness programs are growing rapidly as companies continue to realize the importance in addressing the financial challenges of its workforce and the resulting benefits to the employer.

In financial wellness sessions, a practitioner collaborates with the employee to work towards financial objectives through one-on-one interaction either by phone, video conference or in-person. The programs encourage savers to take control of their own finances with the support they need to be successful. Assisting employees identify financial priorities, setting goals with a realistic timeline and applying the principles of financial education are critical aspects of a effective program.

Successful programs offer a tailored assessment of an employee’s income in retirement based on their individual wages. They also frequently provide information regarding other employee benefits beyond the company retirement plan and attempt to provide a comprehensive picture of the employer’s benefits package. Wellness plans that cover various financial planning topics can further illuminate the importance of being prepared into perspective for employees.


It is undeniable that behavior is difficult to change especially when financial matters are involved. There is no one perfect way to help employees save for retirement as the unique needs of a workforce will respond differently to various communication strategies. Clearly, it is critical to any education effort to identify and address the destructive human predispositions regarding spending and preparing for retirement. There are a wide range of approaches to effective education that a financial wellness concepts are imperative to address to successfully help savers bridging the gap between their financial intentions and actions and to achieve what many believe to be an elusive dream—financial security.

Market & Economic Commentary| Spring 2018

By: Jim Scheinberg – May 8, 2018

Going nowhere fast.

The first quarter marked a changing of the guard from the low (or practically no) volatility days of 2017 to a period of erratic swings within a trade-range bound market. The unprecedented steady advance of the U.S. stock market that began the morning after the election of Donald Trump came to an abrupt halt in early February, when the S&P 500 quickly corrected 10%. Though that drop was due predominately to an unwinding of volatility index derivatives (and not market fundamentals) the result was a new phase of hyper sensitivity to the news cycle, and dramatic daily swings in the indexes. The largest contributor to the mania has been President Trump’s rhetoric and actions relating to massive trade tariffs, especially those with China. Each announcement stoked fears and speculation of trade wars, which could derail an otherwise rosy outlook on U.S. and global economic conditions. Rising interest rates and the specter of inflation also contributed to worries. However, strong earning and a steady stream of positive economic data countermanded trade and interest rate fears and kept the markets moving in a sideways range.

How the Markets Fared

Broader U.S. stock indexes were virtually unchanged during the first quarter of 2018. Growth indexes, (fueled by advances in technology stocks) outpaced value indexes again, as they did throughout 2017. Growth indexes saw gains of 2-3% during the quarter, while value stocks experienced similar declines. International developed market equities also saw fractional losses during the quarter, however, with little distinction between growth and value sectors. The one shining area of global equities was emerging markets, specifically those in Latin America. With strong global economic conditions and largely unmentioned in the trade war rhetoric, South American markets surged with the Latin EM index up over 8% for the quarter.

The Fed raised its short-term lending rate again in March, its sixth rate hike in a little over two years. This increase was largely expected and was seemingly well digested by the market. However, what was not as universally embraced was the increase in the yield of the bellwether 10-Year Treasury, which rose from 2.40% to nearly 2.75% at quarter’s close. At times, during the quarter, the 10-Year challenged the 3% mark, a level last seen in 2013. Increases in yields at the long end of the curve caused moderate losses in intermediate fixed income portfolios, and even more dramatic declines in long paper. Declines in the U.S. Dollar led to small gains in international fixed income indexes both in the developed and emerging markets. Commodities declined slightly during the quarter as well. Generally, there were few places in the global capital markets to achieve positive returns.

PIERing Ahead

Like nuclear war, there are seldom winners in a true all out trade war. After all, most historians agree that the trade wars of the early 1930s deepened and extended the great depression. However, unlike nuclear war, which wreaks its damage in moments, trade wars often take years to play out, and the effects are not always instantly negative. In fact, the initial trade tariffs enacted in the 1920s had positive economic implications initially.  To speculate on whether all-out war will break out (economically) is likely shooting in the dark. What is clear and present is that global economic conditions continue to be highly favorable. With S&P 500 companies expected to grow earning double digits again this year, it is far more likely that investors will regain their focus on what is true and measurable instead of what is unknown and sensationalized. The question is, how long will the drums of war drown out the steady march of economic advancement? To us, that is the most PIERvailing question at hand.