TIME Economy

The Real Way to Fix Finance Once and for All

Bull statue on Wall Street
Murat Taner—Getty Images

Changing the way financial institutions operate will require more than calculations and complex regulation

We live in an age of big data and hot and cold running metrics. Everywhere, at all times, we are counting things—our productivity, our friends and followers on social media, how many steps we take per day. But is it all getting us closer to truth and real understanding? I have been thinking about this a lot in the wake of a terrific conference I attended this week on “finance and society” co-sponsored by the Institute for New Economic Thinking.

There was plenty of new and creative thinking. On a panel I moderated in which Margaret Heffernan, a business consultant and author of the book Willful Blindness, made some really important points about why culture is just as important as numbers, particularly when it comes to issues like financial reform and corporate governance. As Heffernan sums it up quite aptly in her new book on the topic of corporate culture, Beyond Measure, “numbers are comforting…but when we’re confronted by spectacular success or failure, everyone from the CEO to the janitor points in the same direction: the culture.”

That’s at the core of a big debate in Washington and on Wall Street right now about how to change the financial system and ensure that it’s a help, rather than a hindrance, to the real economy. Everyone from Fed chair Janet Yellen to IMF head Christine Lagarde to Senator Elizabeth Warren—all of whom spoke at the INET conference; other big wigs like Fed vice chair Stanley Fischer and FDIC vice-chair Tom Hoenig were in the audience—agree more needs to be done to put banking back in service to society.

MORE: What Apple’s Gargantuan Cash Giveaway Really Means

But a lot of the discussion about how to do that hinges on complex and technocratic debates about incomprehensible (to most people anyway) things like “tier-1 capital” and “risk-weighted asset calculations.” Not only does that quickly narrow the discussion to one in which only “insiders,” many of whom are beholden to finance or political interests, can participate, but it also leaves regulators and policy makers trying to fight the last war. No matter how clever the metrics are that we apply to regulation, the only thing we know for sure is that the next financial crisis won’t look at all like the last one. And, it will probably come from some unexpected area of the industry, an increasing part of which falls into the unregulated “shadow banking” area.

That’s why changing the culture of finance and of business is general is so important. There’s a long way to go there: In one telling survey by the whistle blower’s law firm Labaton Sucharow, which interviewed 500 senior financial executives in the United States and the UK, 26% of respondents said they had observed or had firsthand knowledge of wrongdoing in the workplace, while 24% said they believed they might need to engage in unethical or illegal conduct to be successful. Sixteen percent of respondents said they would commit insider trading if they could get away with it, and 30% said their compensation plans created pressure to compromise ethical standards or violate the law.

How to change this? For starters, more collaboration–as Heffernan points out, economic research shows that successful organizations are almost always those that empower teams, rather than individuals. Yet in finance, as in much of corporate America, the mythology of the heroic individual lingers. Star traders or CEOs get huge salaries (and often take huge risks), while their success is inevitably a team effort. Indeed, the argument that individuals, rather than teams, should get all the glory or blame is often used perversely by the financial industry itself to get around rules and regulations. SEC Commissioner Kara Stein has been waging a one-woman war to try to prevent big banks that have already been found guilty of various kinds of malfeasance to get “waiver” exceptions from various filing rules by claiming that only a few individuals in the organization were responsible for bad behavior. Check out some of her very smart comments on that in our panel entitled “Other People’s Money.”

MORE: The Real (and Troubling) Reason Behind Lower Oil Prices

Getting more “outsiders” involved in the conversation will help change culture too. In fact, that’s one reason INET president Rob Johnson wanted to invite all women to the Finance and Society panel. “When society is set up around men’s power and control, women are cast as outsiders whether you like it or not,” he says. Research shows, of course, that outsiders are much more likely to call attention to problems within organizations, since not being invited to the power party means they aren’t as vulnerable to cognitive capture by powerful interests. (On that note, see a very powerful 3 minute video by Elizabeth Warren, who has always supported average consumers and not been cowed by the banking lobby, here.)

For more on the conference and the debate over how to reform banking, check out the latest episode of WNYC’s Money Talking, where I debated the issue on the fifth anniversary of the “Flash Crash,” with Charlie Herman and Mashable business editor, Heidi Moore.

MONEY Financial Planning

Kill The Clutter: When to Toss Financial Documents

wastebasket
Getty Images

A handy guide to what to keep and what to throw away.

If you haven’t already opted to go paperless, you might be swimming in a flood of receipts, bills, pay stubs, tax forms, and other financial documents. But it doesn’t have to be that way. Some of those papers need to be kept, but others can be shredded and tossed.

Here’s a guide on what to keep and for how long.

Receipts
Receipts for anything you might itemize on your tax return should be kept for three years with your tax records.

Home improvement records
Hold these for at least three years after the due date of the tax return that includes the income or loss on the home when it’s sold. If you plan to sell the house and you have made improvements to it, keep receipts for those improvements for seven years — you may need them to lower the taxable gain on the house when you sell it.

Medical bills
Keep receipts for medical expenses for one year, as your insurance company may request proof of a doctor visit or other verification of medical claims. If your medical expenses total more than 10% of your adjusted gross income, you can deduct them. If you plan to take that deduction, you’ll need to keep the medical records for three years for tax records.

Paycheck stubs
Keep until the end of the year and discard after comparing to your W-2 and annual Social Security statement.

Utility bills
Keep for one year and then discard — unless you’re claiming a home office tax deduction, in which case you must keep them for three years.

Credit card statements
Keep until you’ve confirmed the charges and have proof of payment. If you need them for tax deductions, keep for three years.

Investment and real estate records
Keep for three years, as you may need the documentation for the capital gains tax if you’re audited by the IRS. These records help track your cost basis and the taxes you owe when you sell stocks or properties. Once you receive the annual summaries, you can shred your monthly statements.

Bank statements
You’ll need bank statements for up to three years if you are audited by the IRS. If your bank provides online statements, you can switch to receiving your bank documents online and cut down on paper.

Tax returns
The IRS recommends that you “[k]eep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.” If you file a claim for a loss from worthless securities or bad debt deduction, keep your tax records for seven years.

Records of loans that have been paid off
Keep for seven years.

Active contracts, insurance documents, property records, or stock certificates
Keep all these items while they’re active. After contracts are completed or insurance policies expire, you can discard these documents.

Marriage license, birth certificates, wills, adoption papers, death certificates, or records of paid mortgages
Keep forever.

More from Daily Worth:

TIME

Why Bad Bank Service Means You Could Pay More

We want more attention, they want more money

In the wake of the financial crisis, the Feds put the kibosh on a whole slew of bank tactics pertaining to overdraft fees, interchange fees (which they charge merchants when you use a debit card and which stores say get passed along in the form of higher prices) and credit card interest rate hikes. To cope, banks closed branches, invested in technology so they could replace costly branches and tellers with computers, and started trying to coax their more affluent customers into shifting their borrowing and investing activities from other institutions.

At the time, these actions made sense. Banking industry trade publications and white papers were full of buzzword-y terms like the “360-degree customer view,” which encouraged banks to think of a checking account as the financial services equivalent of the $1.99 chicken breasts at the supermarket: A loss leader that could reel in customers who would then stick around and buy more profitable items (like, say, a home equity loan or brokerage account). And banks poured money into their online offerings, mobile apps and upgraded ATMs that — the thinking went — could deliver customer service at the fraction of the cost of a teller depositing money or checking a balance for a customer.

But it didn’t turn out like that, according to a new study from consulting firm Capgemini and banking trade association Efma. The World Retail Banking Report shows that positive customer experiences fell among North American bank customers. “Return on investments in the front- office and digital channels are struggling to keep up with evolving customer expectations,” the report says.

The advancements in technology just built up people’s expectations — especially for tech-savvy younger customers. “Across all regions, Gen Y customers registered lower customer experience levels than customers of other ages, reflecting the high expectations Gen Ys have of banks’ digital capabilities,” the report says. The fact that young adults are less satisfied than customers in other age brackets shows that banks aren’t keeping up with the technological times, and less than half of American Gen Y bank customers say they plan to stay with their current bank over the next six months.

And yet, customers’ embrace and expectation of digital banking didn’t put the kind of corresponding dent in branch usage banks were seeking. In fact, the number of people using bank branches in North America actually went up — hardly the kind of digital revolution banks were seeking. Seems we’d still rather deal with a human being for most kinds of banking activities because we don’t think the digital service is up to snuff. “Customers still perceived the branch to be offering better service than what could be found on the digital channels,” the report says.

Banks’ cost-cutting moves in the service arena did some serious damage to customer satisfaction, dampening customers’ inclination to deepen their relationship with their banks or recommend the institutions to others, another key component of banks’ post-reform moneymaking strategy. “Alarmingly for the banks, there was a significant increase in the percentage of customers who were unlikely to buy additional products or refer someone to their banks,” the report says. In North America, that figure jumped by more than 20 percentage points in just a year.

The report blames this on growing competition to banks from other products and services like Apple Pay, LendingTree and Starbucks’ prepaid payment platform.

What could this mean for customers? If you said, “more fees,” you just might be on the right track. According to research company Moebs $ervices, financial institutions have collectively lost roughly $5 billion a year in overdraft fee revenue alone (although, if this sounds like a lot, keep in mind that they still made roughly $32 billion off these fees in the year that ended September 30, 2014, compared to around $37 billion just before the new laws kicked in.)

Moebs also says bank and credit union net operating income as a percentage of assets fell by nearly 7% last year from the year prior, driven by a drop in revenue from fees. “Financial institutions need to assess why fee revenue is falling and develop additional sources of fee revenue to get net operating Income back on track,” Moebs economist and CEO Michael Moebs wrote earlier this month.

And that technology we’ve grown to depend on might be the way to accomplish this. One recent study finds that a quarter of bank customers say they’d pay $3 a month just to use their bank’s mobile app, a figure that goes up to about a third for customers under the age of 35.

“Customers are willing to pay for services such as credit monitoring, person-to-person transactions, personal couponing, identity theft protection, and related other services,” a recent banking trade publication article notes, saying that if banks get on the ball, they could more than make up their losses from that declining overdraft revenue — probably not what all those already-frustrated customers wanted to hear.

MONEY Banking

Homeless Man Discovers Long-Lost Bank Account

John Helinski, a victim of identity theft, was homeless and living on the streets of Tampa when a police officer helped him recover his ID—and a long-lost Bank of America account. He's not homeless anymore.

MONEY Kids and Money

The Best Way to Bank Your Kid’s Savings

150403_FF_KidBankAcct
YinYang—Getty Images

After the piggy bank fills up, here's how to launch your child on the path of saving and investing.

When I told my 7-year-old that her wallet was getting full and it was time to open a bank account, her eyes widened. She wanted to know if she would be allowed to carry her own ATM card.

Um, no.

When transitioning from a piggy bank to handling a debit card linked to an active account, financial experts say it is best to start with a trip to a bank, but which one and when? Here are some steps to get started:

1. Bank of Mom and Dad

Don’t be in a rush to move away from the bookshelf bank, says financial literacy expert Susan Beacham. There are lessons to be learned from physical contact with money.

Sticking with a piggy can be especially effective if you teach your kids to divide their money into categories. Beacham’s Money Savvy Pig has four slots: save, spend, donate, invest.

When you cannot stuff one more dime into the slots, it is time to crack it open and seek your next teachable moment.

2. Neighborhood Convenience

Many adults bank online, but kids still benefit from visiting a branch, says Elizabeth Odders-White, an associate dean at the Wisconsin School of Business in Madison.

Do not worry about the interest, Beacham says. “A young child who gets a penny more than they put in thinks it’s magical. You’re not trying to grow their money as much as grow their habits.”

Your second consideration should be fees. Your best bet may be where you bank, where fees would be determined by your overall balance and you could link accounts.

Another option is a community bank, particularly a credit union, which are among the last bastions of free checking accounts.

“The difference between credit unions and banks is that credit unions are not-for-profit and owned by depositors,” says Mike Schenk, a vice president of the Credit Union National Association.

At either type of institution, you could open a joint account, which would be best for older kids because it allows them to have access to funds through an ATM or online, says Nessa Feddis, a senior vice president at the American Bankers Association.

Or you could open a custodial account, for which you would typically need to supply a birth certificate and the child’s Social Security number. Taxes on interest earned would be the child’s responsibility, but likely would not add up to much on a small account. A minor account must be transferred by age 18 to the child’s full control.

3. Big Money

If your child earns taxable income, the money should go into a Roth individual retirement account, experts say. There is usually no minimum age and many brokerage firms have low or no minimums to start an account. You can pick a mix of low-cost ETFs, and let it ride.

Putting away $1,000 at age 15 would turn into nearly $30,000 by age 65, at a moderate growth rate, according to Bankrate.com’s retirement calculator.

Not all kids can bear to part with their earnings, but there are workarounds. One tactic: a parent or grandparent supplies all or part of the funds that go into the Roth, akin to a corporate matching program.

The other is to work with your child to understand long-term and short-term cash needs. That is what certified financial planner Marguerita Cheng of Blue Ocean Global Wealth in Potomac, Maryland, did with her daughter, who is now in her first year of college.

While mom and dad pay for basic things like tuition, the teen decided to pool several thousand dollars from her summer lifeguard earnings, money from her on-campus job and gifts from her grandparents to fund several educational trips.

“She would make money investing, but it’s only appropriate if you have a longer time horizon,” says Cheng. “It’s not even about the money, it’s the pride she gets from paying for it herself.”

MONEY Banking

Google Wants You to Use Gmail to Pay Your Bills

Google is working on a service, code-named Pony Express, that would let you receive and pay bills from your inbox.

MONEY Banks

The Government Will Publish Your Banking Nightmare Story

The Consumer Financial Protection Bureau will start including the tales behind your banking complaints on its website.

MONEY Banking

The Hidden Risks of Paying Your Bills Automatically

open wallet
Alamy

It's convenient to put your regular bills on autopilot. Just don't ignore them entirely or you might find yourself short on cash.

Autopaying bills is a no-brainer. You are never late with a payment, and you do not have to spend all that time going through stacks of bills, filling out checks, and then stuffing and stamping envelopes.

But Brent Cumberford learned the hard way that automatic bill paying is not as simple as setting it up and walking away.

Last year, his natural gas was turned off because expected automated payments were not made, a canceled subscription kept getting paid and another canceled service automatically renewed itself.

Cumberford, 32, who runs the personal finance site Vosa.com and splits his time between San Diego and Calgary, resolved the natural gas situation without figuring out what exactly went wrong (the bank and the utility blamed each other) and got the automatic renewal credited back. But he is still dealing with the subscription.

“The lesson I learned was that it’s important to still track automated payments,” Cumberford says.

About 61% of Americans have set at least one bill to pay automatically, says Eric Leiserson, a senior research analyst for financial technology services company Fiserv.

The main reason consumers use autopay is to make sure bills are paid on time. That is vital to their credit scores when it comes to debts like car loans, credit card balances, and mortgages, but most other on-time payments are not recorded.

A recent study by credit reporting firm Experian, however, suggests that including positive utility payment histories, which is not commonly done, could help elevate the credit scores of millions of Americans. The report also says people with thin credit histories would benefit from having a richer record of payments made.

As much as automation can be a positive, there are plenty of catches to be watch out for:

1. Changing accounts

If you decide to pay from a different account, be sure all the changes are in place. Marketing consultant Peter Brooks, 56, of Vallejo, Calif., says it was a big hassle to re-enter all the payment information after he changed checking accounts.

2. Being short of funds when bills are paid

Not having enough money in the bank is a main reason not to automate bill paying. If you have a bill set up to pay automatically and you lack money to pay it, this could affect your credit history as much as forgetting to mail in the check. Being on time 99% of the time does not help you much, but missing one payment could hurt your credit score for years.

3. Continued withdrawals even if you stop using the service

Monthly recurring charges for services can keep occurring even if you asked for them to stop. A gym membership or subscription set to be paid automatically every month could lag a request to cancel. So it is vital to keep an eye out to see if withdrawals persist after you have canceled a service, experts say.

4. Inadvertently disengaging the automated payments by making one manually

Bob Girolamo, 41, of Chicago, who runs the startup data and statistics organizer Sorc’d, learned that the hard way. He says he made a manual payment for his health insurance that disengaged the autopay. He did not notice the missed payments until he received the cancellation notice.

5. Errant payments

Monitoring transactions is key to fixing errors. Greg McBride, chief financial analyst for Bankrate.com, says putting payment dates in an online calendar is one way to stay on top of what payments should be going out. “With 24-7 online and mobile account access, keeping tabs on your account is easier than ever,” he says. “Taking a matter of seconds each day is all it takes.”

MONEY investing strategy

Most Americans Fail This Simple 3-Question Financial Quiz. Can You Pass It?

piggy bank with question marks on it
Peter Dazeley—Getty Images

These questions stump most Americans with college degrees.

Following are three questions. If you’ve been around the financial block a few times, you’ll probably find all of them easy to answer. Most Americans didn’t get them right, though, reflecting poor financial literacy. That’s a shame — because, unsurprisingly, the more you know about financial matters and money management, the better you can do at saving and investing, and the more comfortable your retirement will probably be.

Here are the questions — see if you know the answers.

  1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After five years, how much do you think you would have in the account if you left the money to grow? (A) More than $102. (B) Exactly $102. (C) Less than $102.
  2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, how much would you be able to buy with the money in this account? (A) More than today. (B) Exactly the same. (C) Less than today.
  3. Please tell me whether this statement is true or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.

Did you get them all right? In case you’re not sure, the answers are, respectively, A, C, and False.

Surprising numbers

The questions originated about a decade ago, with Wharton business school professor and executive director of the Pension Research Council Olivia Mitchell, and George Washington School of Business professor and academic director of the Global Financial Literacy Excellence Center Annamaria Lusardi. In a quest to learn more about wealth inequality, they’ve been asking Americans and others these questions for years, while studying how the results correlate with factors such as retirement savings. The questions are designed to shed light on whether various populations “have the fundamental knowledge of finance needed to function as effective economic decision makers.”

They first surveyed Americans aged 50 and older and found that only half of them answered the first two questions correctly. Only a third got all three right. As they asked the same questions of the broader American population and people outside the U.S., too, the results were generally similar: “[W]e found widespread financial illiteracy even in relatively rich countries with well-developed financial markets such as Germany, the Netherlands, Switzerland, Sweden, Japan, Italy, France, Australia and New Zealand. Performance was markedly worse in Russia and Romania.”

If you think that better-educated folks would do well on the quiz, you’d be wrong. They do better, but even among Americans with college degrees, the majority (55.7%) didn’t get all three questions right (versus 81% for those with high school degrees). What Mitchell and Lusardi found was that those most likely to do well on the quiz were those who are affluent. They attribute a full third of America’s wealth inequality to “the financial-knowledge gap separating the well-to-do and the less so.”

This is consistent with other research, such as that of University of Massachusetts graduate student Joosuk Sebastian Chae, whose research has found that those with higher-than-average wealth accumulation exhibit advanced financial literacy levels.

The importance of financial literacy

This is all important stuff, because those who don’t understand basic financial concepts, such as how money grows, how inflation affects us, and how diversification can reduce risk, are likely to make suboptimal financial decisions throughout their lives, ending up with poorer results as they approach and enter retirement. Consider the inflation issue, for example: If you don’t appreciate how inflation shrinks the value of money over time, you might be thinking that your expected income stream in retirement, from Social Security and/or a pension, will be enough to live on. Factoring in inflation, though, you might understand that your expected $30,000 per year could have the purchasing power of only $14,000 in 25 years.

Mitchell and Lusardi note that financial knowledge is correlated with better results: “Our analysis of financial knowledge and investor performance showed that more knowledgeable individuals invest in more sophisticated assets, suggesting that they can expect to earn higher returns on their retirement savings accounts.” Thus, better financial literacy can help people avoid credit card debt, take advantage of refinancing opportunities, optimize Social Security benefits, avoid predatory lenders, avoid financial scams and those pushing poor investments, and plan and save for retirement.

Even if you got all three questions correct, you can probably improve your financial condition and ultimate performance by continuing to learn. Many of the most successful investors are known to be voracious readers, eager to keep learning even more.

MONEY Banking

The Easiest Way to Reduce the Bank Fees You Pay

Where to find free checking
James Worrell—Getty Images

Shift your money over from a big bank to a credit union

Looking to avoid those annoying—and expensive—monthly fees on your checking account? You might want to take your funds to a credit union.

A survey released Thursday by Bankrate.com found that 72% of America’s largest credit unions still offer standalone free checking accounts. And another 26% waive fees if customers meet certain requirements, like accepting e-statements or opting for direct deposit.

Credit unions look ever more attractive compared to the nations biggest retail banks—only 38% of which now offer free checking, down from 65% five years ago.

Even when credit unions do levy checking fees, those charges are typically between $2 and $3, about half of what traditional banks will deduct.

Prone to overdrawing your checking account? You’d do better at a credit union on that count, too. The average overdraft fee at unions is $26.78; the average for banks: $32.74.

In spite of the potential savings, however, a credit union isn’t right for everyone. Find out if you could benefit from becoming a member by checking our guide. And find a credit union that offers free checking with this list compiled by Bankrate.com.

More from Money.com

Money’s Bank Matchmaker

Why the Right Bank for You Might Not Be a Bank

The Proven Way to Retire Richer

The Insulting Names That Businesses Call You Behind Your Back

Your browser is out of date. Please update your browser at http://update.microsoft.com