Friday, January 27, 2012

The Next Wave of Civil Rights?

Economic empowerment.

That's According to Operation Hope's John Hope Bryant who is quoted in this Businessweek article about minority entrepreneurs.  The article contains some interesting facts and is worth a read for passages like this: 
When the U.S. Census Bureau last surveyed the landscape in 2007, African Americans owned 1.9 million businesses, about 7 percent of the total. While that was a 60 percent increase from five years earlier, the average revenue at those businesses had decreased 3 percent since 2002, to $72,000 a year, vs. an average of $490,000 at those owned by whites. And that was before the recession wreaked havoc on the black middle class. Median wealth in black households fell 53 percent between 2004 and 2009, to $5,677, according to the Pew Research Center. That’s one reason black entrepreneurs accounted for 9 percent of new ventures in 2010, according to the Kauffman Foundation, which promotes startups. Latino entrepreneurs represented 23 percent of the total. “
If you don’t have the resources, it’s much tougher to make it.” says Daryl Williams, Kauffman’s director of research and policy.

Wednesday, January 18, 2012

Serving - and Surviving - the Middle Market

Much of CFS's work is focused on helping to make sure middle-class families can acquire the knowledge and tools necessary to achieve financial security. This includes increasing financial literacy and helping to make sure public policies work to connect working Americans with tools like life insurance, IRAs and other products that are an essential part of the American Dream.

The New York Times ran a piece this week about the challenges of making sure the middle market is properly served. It is a challenge this Blog touched on during the DOL fiduciary debate, when everyone from the Consumer Federation of America to members of Congress worried that the rule would dry up incentives the industry had to serve small savers.

What exactly is the challenge?  The headline sums it up: "Financial Advice for Those with Small Nest Eggs."   The Times, noting Merrill Lynch's decision to tell brokers they would no longer be compensated for working on accounts with less than $250K, wrote:

Nobody has figured out a way to consistently give large numbers of people reasonably priced financial advice across all areas of their life and to do so in an ethical manner.
Knowing the DOL debate is coming back, the whole piece is worth a read for a discussion of the challenge. It is clear the market is moving away from the small and medium saver. What if regulations hasten the move? What can be done to turn it around?

Thursday, January 12, 2012

Kudos to the Ohio Insurance Department

Ohio Lt. Governor Mary Taylor (also the Department of Insurance Director) has penned a guest column that shows that she understands the role financial experts play in helping their neighbors achieve financial security.

Key point:

Representing a significant portion of Ohio’s economy, these small business owners treat their clients like friends and neighbors because they are friends and neighbors. They are local, they know their communities, and most importantly, they know their client’s needs. Agents and brokers use their knowledge of insurance to help determine what coverage is best, and work on the client’s behalf to ensure they have a policy that protects them, their family and their interests. And after the sale of a policy, agents and brokers continue to assist their clients by providing a helping hand when and if claims arise.

Part of the CFS mission is to advocate for public policies that will help connect working-class Americans with financial professionals. Research shows "middle-market" communities are underserved and under-represented by agents and brokers who can link consumers to products that grow financial security such as life insurance and IRAs. That same research shows Americans are looking for help.

It is good to see leaders like Lt. Governor Taylor taking the obligation to ensure consumers have choices seriously.

Monday, January 9, 2012

Getting a License to Sell Insurance in Texas

Given the CFS mission to help ensure that working-class Americans have access to financial tools and advice – including agents who represent a vital link to products like IRAs and life insurance, CFS has done a fair amount of work on how financial professionals are licensed and get into the business. That work has uncovered instances where the evidence suggests that state licensing requirements, particularly licensing exams, may be serving as an unfair and unnecessary barrier to entry into the profession - - to the detriment of consumers. After all while licensing is important and meant to protect consumers, consumers are not protected if the pool of professionals on which they can rely is artificially limited.

The state of Texas recently released a report detailing outcomes related to its life insurance licensing exam. The results are puzzling.

Overall, the report shows candidates for a life insurance license in Texas doing significantly worse on the exam than their counterparts in neighboring states like New Mexico, Kansas and Arkansas. Why? The subject tested is supposed to be essentially the same – entry-level insurance knowledge. Are candidates in Arkansas where the exam pass rate is 76 percent smarter than candidates in Texas where the pass rate is 55 percent? Unlikely. Though the profession is the same and the laws similar, the test is obviously different in Texas. Why?

In addition to an overall low level of success, the Texas report also showed the exam has a disparate impact that is consistent across education levels.

Some might suggest the Texas results can be attributed to some candidates better preparing for the exam or socio-economic variables. Certainly those two things have an impact. They do not, however, fully explain why Texas candidates do worse than their neighbors on an exam for the same job. Also, the Texas report shows that those who take courses to study the exam do only marginally better than those who do not (58 percent to 44 percent). So how important is preparation?

The Texas report is particularly puzzling in light of the fact that an alternative exam and method of exam administration exists that has less disparate impact and is presumably equally protective of consumers. That exam is used by Illinois, which has a history of dealing with issues in licensing exams.

Compare the Texas education/ethnicity chart above to this one below showing pass rates by ethnicity from 1985-2010 in Illinois:

Why don't Texans deserve the same?

At its launch, CFS released a survey with the League of United Latin American Citizens (LULAC) that highlighted some of the sources of financial insecurity among middle-class and minority communities. The poll revealed a very serious knowledge gap among Americans who had the finances to save and but did not. For example, 89 percent of those CFS surveyed who did not have life insurance or an IRA did not know anyone who sells the product. Eighty percent of this group had never been contacted about it.

CFS’s own research is mirrored by the consumer research of LIMRA and others, which consistently show middle-class Americans in search of professional financial advice. For example, LIMRA’s 2010 survey of the life market found that “almost eight in 10 U.S. households currently do not have a personal life insurance agent or broker to turn to and most of them say they never did.”

With life insurance usage so low, and Americans searching for individuals to talk to, will public policy makers listen?

Obviously, the answer is not to make the Texas and other exams easier or loosen consumer protections. The answer is to make sure the process is fair. As long as candidates for a license in states like Illinois and others have a much smoother pathway into the profession than candidates in states like Texas, questions of fairness will continue to linger - - and consumers will continue to suffer the consequences.

One Word You Don't Hear Mentioned A Lot

Pundits and polls have identified a lot of reasons for the lack of financial security in America. The University of Michigan has added another - patience.

A new line of research done by the school finds that "impatience and financial illiteracy are strong predictors of wealth and investment in health."

So while great strides have been made in getting financial literacy into the classroom, maybe we should be looking at teaching patience too.

The researchers note that this can be done with proper "framing" of financial choices.

Interesting stuff.