All three comments to my last blog on “Financial Literacy” are good and revolve around the same theme, captured by commenter “PPotts” with an old quote from famed retailer Sy Syms: “A knowledgeable consumer is the best consumer.” Yes, indeed. As the Faber College statue in the classic movie “Animal House” read: “Knowledge is good.” Hard to argue with that.
Yet in this Information Overload Age, knowledge of a few facts simply isn’t enough (if it ever was). The Internet with its access to billions of bits of data seems to have created the illusion that we can simply log on to WebMD, Wikipedia or LegalZoom.com and diagnose our own illness, write our own business contracts or research, well, just about anything, depending upon whatever might be our crises of the moment. Over the holidays, my brother-in-law the doctor was lamenting that he spends about half his face-time with patients explaining the flaws in the diagnoses and/or treatments they’ve come up with through their Web research.
The late philosopher Mortimer Adler of the University of Chicago addressed this problem a generation ago, by creating what has become known as the DIKW Hierarchy to describe the steps in the progression of human insight:
The idea here is that bits of data and knowledge of a few facts provide rather scanty insight; while the understanding, and hopefully, wisdom, gained by years of research, study and experience provide us with rather more insight into whatever problem or discipline we’re interested in.
What does this have to do with financial literacy? Everything. Will financial consumers who make an effort to learn something about finances and the markets be better consumers? Maybe, if they’re lucky. But chances are their efforts won’t take them past the data/knowledge stages—when they come up against professionals who have attained the understanding/wisdom levels who intend to deceive them, they don’t stand a chance. And I’d cite the sorry history of personal finance to back me up on this.
“Steve” posted a comment that provides a perfect example: “One great piece of financial literacy that investors shouldn’t have to rely on advisors for is: never transfer funds or securities directly to your advisor.” Excellent advice, as far as it goes. But what will the bad guys do, once most financial consumers grasp this bit of knowledge? My guess is they’ll set up wholly owned “arms length” firms, and get their clients to transfer their funds to them. As my father used to say: “For every offense, there’s a defense; and visa versa.”
Without an understanding of how financial services really works, and at least a bit of wisdom into human nature, financial consumers will always be at the mercy of “financial advisors.” That’s why, in my view, the onus has to be on professional advisors do to the right thing, rather than shifting the burden to consumers to protect themselves. And we have to stop contributing to the illusion of information. As nineteenth century American writer Artemus Ward told us 150 years ago:
"It ain't so much the things we don't know that get us into trouble. It's the things we do know that just ain't so." (I’ll bet you thought it was Will Rogers—but as I said, a little knowledge…)