Do you ever wonder how, when there are financial products and information thrown at us on a daily basis, we can still feel totally lost in terms of financial literacy? Well, the CFPB did. To find out why, they performed a study with The Boston Consulting Group that highlights the amount of spending on financial marketing compared to the amount spent on financial literacy. This is just another step that the CFPB is taking to pave a path to more educated and empowered consumers.
Read on to learn results of the study along with tips to help you navigate through the muck of financial marketing overload to obtain real knowledge.
What is the CFPB
The CFPB, more formally known as the Consumer Financial Protection Bureau, was developed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The CFPB was created in answer to the need for regulation of consumer financial products and services. But after the financial crash just a few years prior, consumers needed more than regulation. Consumers needed information.
To assist the CFPB in providing this information, the Office of Financial Education was created. The sole purpose of this office is to make available information that will give consumers the capability to make sound financial decisions. That’s where the study comes in. As mentioned in the study,
“The Office of Financial Education works to promote effective and high-quality financial education for American consumers. To do this, it is helpful to understand the size and scope of today’s financial information marketplace in order to calibrate financial education efforts in the context of the broad array of financial information consumers receive.”
Discovering the scope of the financial information marketplace they did – and the results may or may not surprise you.
The CFPB’s Study and Results
In order to perform a study of financial marketing spending versus financial education spending, the CFPB first needed to define the true difference between these two fields. Here are the CFPB’s definitions:
Financial Education: “a process of lifelong knowledge and skills development required to achieve financial literacy, learn to mitigate financial risks, protect assets and ensure on-going effective management of one’s savings, credit, debt, housing and other resources to maximize financial well-being of individuals and society.”
Financial Marketing: refers to the financial services industry marketing products and services to consumers and includes, “spending by channel (for example television, radio, and newspapers) and product type (for example, credit cards).”
The short version of the findings on dollars spent on financial education versus marketing is as follows:
“As a nation, we spend about two dollars per person per year on financial education… in comparison, the $17 billion spent on financial services marketing translates to about $54 per person per year.”
The result is an obvious imbalance in money spent on financial education ($670 million per year) versus money spent on financial marketing ($17 billion per year). So what creates this imbalance? First off, the CFPB looked at who’s spending this money:
Financial education receives, per year, approximately $230 million from the federal government, $67 million from state governments, $46 million from municipalities and school districts, $160 million from financial institutions, $40 million from private philanthropies, and $550 million from non-profit organizations.
In short, the study found that, of the $670 million spent on financial education, “approximately three-quarters of the total spending comes from private sources, and the remaining one-quarter comes from all public sources combined.”
Financial institutions spend, per year, approximately $5.5 billion on “awareness advertising” (promotional materials not meant to convert to direct sales) and $12 billion on “direct marketing” (marketing meant to convert to a sale or lead).
In conclusion, “more than 25 times as much is spent on marketing financial products and services to consumers each year than on providing them with financial education.”
How You Can Find Knowledge Through the Muck
With this disparity, you may be wondering how to cut through the muck of financial marketing to obtain financial education. In fact, it gets even murkier when you realize that nearly three quarters of the financial education consumers receive comes from the same financial institutions which spend so heavily on financial marketing.
This could lead to more confusion than ever for consumers trying to determine the difference legitimate financial education and financial marketing. Here are a few steps you can take to ensure the information (or offer) you receive is in your best interest:
Gut check. Deep down we all have a pretty good idea if something sounds too good to be true or if maybe something is a good idea but red flags keep popping up. No matter what it is – or who it is – you’re dealing with, don’t make a decision to move forward unless your gut feels okay with it. If it doesn’t, then you’ll want to…
Conduct independent research. If you’re trying to decide if a financial service will help or hurt you, start independently researching the institution and the service. Perhaps the service is valid, but there’s another financial institution that’s more trustworthy – or vice versa. Read reviews on the institution and product (a simple google search will bring up more than you might realize). You could even call other representatives of the same and competing institutions for more balanced information. And if this is an offer you’re considering, don’t sign on the dotted line the same day. Gather your research, write out the pros and cons, and sleep on it. Time will provide more clarity every time.
Read, read, and read some more. Stay up to date on your daily financial news with financial websites and newspapers. This will keep you in the know on scams to watch out for, trends that could help or hurt your finances, and new developments within the financial industry.
Remember, education is power – that’s why the CFPB is so concerned with making sure consumers receive the right education. The more you know, the better decisions you’re going to make.
Image Credit: Ian Muttoo