ICT Views

Good news for fraudsters…Financial illiteracy is widespread

by: (Associate Director, Research and Development) on

Well that’s what this article from the Wall St Journal says.

It’s hyperlinked if you want to have a look at it in full, but here is the highlight:

Good news for those intent on committing fraud. Bad news for most everyone else. American investors apparently don’t know much about anything financial.

According to a review released Thursday of years of surveys of individual investors, they are presumably ripe for the picking by fraudsters because they don’t have much knowledge to counteract any outlandish offerings.

Here’s the key and rather astonishing quote: “These studies have consistently found that American investors do not understand the most basic financial concepts, such as the time value of money, compound interest and inflation. Investors also lack essential knowledge about more sophisticated concepts, such as the meaning of stocks and bonds; the role of interest rates in the pricing of securities; the function of the stock market; and the value of portfolio diversification…”

Which means ?

To me, it means that in broad terms, the general public have little experience and/or confidence in their own ability to identify a genuinely good deal.

Or, more importantly, avoid a genuinely bad one. This is where the fraudsters and schemers ultimately benefit.

Step forward Mr Madoff, Mr Stanford et al, but perhaps more crucially, all those individuals who are undertaking activities like this at a more localised level, dealing with individuals, rather than institutional investors. The SEC covers a whole range.

NB – if it looks too good to be true, it probably is. A widely applicable rule of thumb it seems

Financial Education

The remedy which has been identified is, not surprisingly, better financial education. In fact, pretty much ANY financial education would be a start.

The US is certainly not alone in the issues of fraudsters and scammers.  so, in my opinion, formalised education around financial services would be really beneficial here too.

The UK

How would the UK fair in survey like this? Although I’m not aware whilst writing this of any particular studies (but I’ll admit I’ve not really looked into it), I imagine that a similar finding would arise. 

That said, there does seem to have been a recent groundswell towards promoting financial education, particularly in schools, which suggests that there are enough finance savvy people to recognise that this is an issue.

In June 2012, the Financial Literacy (Curriculum) Bill was presented to Parliament. You can track its progress through the Parliament website.

It will be interesting to see what happens with that.

It’s certainly not for me to criticise the education system, but I feel strongly that there is an argument for learning financial matters in school. Not the finer points of the futures markets perhaps, but enough to provide a foundation understanding and feel able to ask some of the right questions at the right times.

So this issue being put under the spotlight seems like a winner to me.

But until it comes to pass, watch out for the fraudsters.

ICT delivers ICA Awareness Certificate and Diploma level courses in Financial Crime Prevention. For more information, please click here or call +44(0)121 362 7534

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