How Australia’s finance sector could do more to boost financial literacy

It’s all very well to do something in theory, but often it’s not until we practise something in the real world that we feel truly comfortable with it.

Imagine if as well as teaching our kids about the basics of money, we also gave primary school classes real money, say $20,000, to inve invest in stocks and bonds.

That’s what U.S. investment manager Ariel Investments is doing on a small scale at a public school in its home town of Chicago, and we think Australia can learn a thing or two from their approach.

Financial literacy is back on the policy agenda here with the Australian Securities and Investments Commission (ASIC) reviewing its national strategy to tackle the issue, making it a prime time to consider new approaches.

Despite ASIC’s attempts to boost financial literacy in recent years, largely through its MoneySmart website, ASIC’s own research shows 42% of Australians still don’t feel confident managing their money day-to-day and 36% find dealing with money stressful and overwhelming.

Without the confidence and ability to manage their finances, many people are facing insecure futures. According to recent research funded by NAB, 70% of Australian adults are facing some level of financial stress or vulnerability. Furthermore 2.6 million people have no savings at all, and the situation is deteriorating.

The problems starts in childhood. Around a fifth of 15-year-olds in Australia don’t have even the most basic level of financial literacy, according to the OECD, with the proportion of financially literate teenagers slipping in recent years. Those with low socio-economic backgrounds on average perform much lower in financial literacy assessments than children from more well-off families, highlighting the need for better programs aimed at disadvantaged students.

Start early, make it real

A key focus of Ariel’s approach is to start teaching financial literacy to kids at an early age, and to use real-time and real-world experiences to make sure school is a place where financial literacy is practised and not just preached.

For 20 years, the firm has supported a financial literacy program at the Ariel Community Academy (ACA), a public elementary (primary) school on Chicago’s South Side, where 98% of students are African-American and more than three quarters qualify for subsidised lunches, reflecting their families’ low incomes.

A core driver of the program is to use financial literacy as a tool to fight inequality. A study conducted by George Washington University (Washington DC) revealed that “those with the least financial knowledge are also the most vulnerable groups in economic terms. As a result, the lack of financial literacy exacerbates economic inequality.”

ACA students learn not just about personal finance, which is typically the extent of most financial literacy programs, but also basic to advanced investment concepts—kids start learning about stocks from first grade and begin trading stocks in sixth grade.

Ariel sponsors a three-pronged financial literacy program for the school that includes:

1. 1. A financial literacy curriculum developed in consultation with educators and leading economists that comprises four key strands: Economics, Personal Finance, Entrepreneurship and Investing.

1. 1. The Ariel-Nuveen investment program. Through a partnership with Nuveen, the investment arm of TIAA, Ariel awards each class a US$20,000 grant to invest in the U.S. stock market over the coming eight years until they graduate. In the early years, the money is invested and managed professionally on behalf of the students. However, as the students advance through the school’s unique investment curriculum, they become actively involved in making the investment decisions, with a Junior Board of Directors (made up of sixth, seventh and eighth grade students) assuming ultimate responsibility for deciding how the $20,000 is invested.

1. Engagement between Ariel as an organisation and students to drive home the importance of what the kids are learning. Students visit the Ariel office to observe board meetings and stock presentations, and high-profile guest speakers visit investment classes, providing students the opportunity to dialogue with leaders of industry, finance and philanthropy.

Ariel and Honner recently made a joint submission to ASIC calling on the regulator to create a platform whereby local banks, investment managers and other financial companies can support financial literacy programs in Australian primary schools, similar to the way Ariel supports ACA.

At a minimum, we recommend that ASIC work with educators and the private sector to develop a financial literacy program to target the 5% of government primary schools that are the most disadvantaged in socio-economic terms.

We don’t believe it’s sufficient to wait until university, or even until high school, to begin teaching young people about investing.

If a national framework was established to target younger children in need, we believe many generous people across Australia’s substantial financial sector would be willing to give time and money to support the program. And we know, from Ariel’s inspiring pilot in Chicago, that change is possible.

We encourage you to read our submission and welcome your feedback.