At the 2018 Academic research Colloquium for Financial Planning and Related Disciplines put on by the CFP Board’s Center for Financial Planning, Dr. John Lynch of the Leeds School at the University of Colorado discussed some new research co-authored with Adrian Ward at the McCombs School of Business at the University of Texas at Austin. Their paper, “On a Need-to-Know Basis: How the Distribution of Responsibility Between Couples Shapes Financial Literacy and Outcomes” showed that the division of labor often had little to do with the respective financial literacy of the participants.
The study looked at how couples split the financial responsibilities (50/50, all her, all him, etc.) and the length of service in the household CFO role (HCFO). If the split is not 50/50, the literacy of the non-HCFO spouse declines over time while the literacy of the HCFO increases significantly. In 50/50 splits, the HCFO’s literacy only increases slightly.
The literacy measurements of the parties in each couple were nearly identical at the start when the divisions were determined. Even inside of 5 years from the initial division, the differences were not significant. It takes time for the literacy gap to develop. The more successful the division of labor and the longer the marriage lasts, the bigger the difference and the bigger the potential problem.
So how do couples decide who does what? The decision to divvy up responsibility is made intuitively. Interestingly, early in the relationship, who gets what role is largely determined based on competence in other “domains.” In fact, many HCFOs become such because they are bad at other stuff.
One spouse might say something like, “You aren’t very good at taking care of the dog, so I’ll do that, and you take on the finances.” And with that, the HCFO is appointed.
Why do so many of the newly widowed know so little about money? Why don’t they learn? In many cases, it is because when one in the couple has the finances covered, the other lets it go, creating a gap in financial literacy and competence.
This can cause problems prior to the incapacity of the HCFO. The study shows that when confronted with an issue, non-CFOs tend to avoid searching for information when the HCFO is not available. This results in a tendency to make poorer decisions because they don’t know as much and are less likely to bone up on the topic.
The good news is the gap is not insurmountable. Research by Joanne Hsu, a Federal Reserve economist, indicates the gap can be closed and often is when signs of cognitive decline arise in the HCFO. The non-HCFO engages and increases the literacy level.
Hsu also finds that many non-HCFO women seek greater literacy even in the absence of cognitive decline in their HCFO husband as he approaches an age at which she foresees her widowhood. Nonetheless, for many the decline or the recognition of the HCFO’s mortality comes too quickly, leaving a stressed and vulnerable survivor.
As mentioned earlier, these findings suggest that there can be value in helping new couples become aware of these gaps and manage them throughout their relationships. However, most of my clients are retired or are about to be and have been married a long time. The gap between their respective literacy levels is often significant.