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Financial Planning > Behavioral Finance

For Poor, Advisors Can Unlock Financial Mainstream

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A new study of low-income households by the Federal Reserve Bank of Dallas shows that seeking professional financial advice is positively correlated with beneficial financial outcomes, but few avail themselves of this important stepping stone to financial security.

The Dallas Fed surveyed residents of Fair Park, an economically lagging South Dallas neighborhood where nearly half the residents have incomes below $10,000 (compared with 7% nationally). The project’s purpose was to empirically determine practices that relate positively to beneficial financial outcomes.

For example, financial training and education are often viewed as a pathway to saving and asset building, but Wenhua Di, Tammy Leonard and Emily Ryder, who conducted the research project, report that such programs offer no panacea for low-income communities.  “Evaluations of these programs are scarce, and the existing few have shown limited and often ambiguous effectiveness in increasing financial stability,” the authors write.

A more reliable “gateway” to the financial mainstream is ownership of basic transaction products and services such as a checking account. South Dallas residents with a checking account are “4.6 times as likely to have a savings account and 2.3 times as likely to have a mortgage or cash their paychecks through direct deposit or at a bank,” the survey found.

Beyond these elementary gateway measures are higher-level “stepping stones” that lead to beneficial financial outcomes (measured by whether families save for financial emergencies and have a consistent savings plan). These stepping stones are higher level practices that promote asset building such as seeking the advice of a professional financial advisor, having a savings account or mortgage, and cashing paychecks through direct deposit or at a bank.

Most South Dallas survey participants, 69%, owned a checking account; 54% owned savings accounts; and 55% cashed paychecks through mainstream institutions. But just 17% seek professional financial advice and 17% have mortgages. As for outcomes, 38% save for emergencies. And while 76% of households save more generally, only 24% save with a set plan.

Savings patterns of poor residents of South Dallas are markedly different from the broader population. Nearly 60% are saving for the next few months, which is more than three times the level of short-horizon savers found in the public at large. Consumer finance surveys show that most savers have a long-term savings horizon—five to 10 years or longer. “This discrepancy may indicate a sense of urgency in the South Dallas community for fulfilling immediate needs that overrides long-term financial planning,” the authors write.

The Dallas Fed report found that stepping stone measures are associated with positive outcomes. The authors write that “individuals who report that they would seek professional financial advice are more likely to save with a plan and also more likely to advise friends to invest in a financial institution.”

Amid a marked increase in the poverty rate—15.1% in 2010, compared with 12.5% in 2007—the Dallas Fed study urges policymakers to “examine the pathways for American families to build sufficient savings to mitigate financial shocks” through financial mainstream products and services.


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