I was recently reintroduced to Mission Asset Fund’s hierarchy of financial needs published several years ago.
On the one hand, a financial pyramid is a powerful concept to convey how financial products layer on top of one another. Taken together, it is true that living a full financial life and achieving financial self-actualization means having access to and using an ecosystem of financial products to achieve foundational and then aspirational financial goals.
However, on the other hand, I take issue with its product-focused view. Instead, it should be needs-driven. As I learned in my years at the Consumer Financial Protection Bureau (CFPB) and building its complaint service, people think in goals and emotions, not financial products.
Here’s a sampling of examples:
I want protection and security vs. I want homeowners insurance.
I want to buy a home for my family vs. I want a mortgage.
I want to attend university to get a better job vs. I want a student loan.
“People think in goals and emotions, not financial products.”
A financial needs pyramid
Based on the customer research I’ve done over the years, here’s my take on a revised financial hierarchy of needs:
Where product suitability and systemic problems comes in
Looking at the pyramid, it’s clear that where people can get in trouble is the mismatch that occurs when a financial product is repurposed to solve a different need. There are two causes of this - product unsuitability caused by an individual using one product for another need; and systemic problems that hurt people's access or ability to use a suite of products.
Product suitability
Using a credit card to make up for lack of income; draining a 401k prematurely to smooth consumption and pay for a big purchase; or, a reliance on overdraft to manage an adverse shock (and many others). These are all expensive ways of solving for these financial needs, though understandably may be the only option for some. There’s definitely a debate to be had on the lack of access to the right suite of products at the right time in a person’s financial journey.
Systemic problems
Larger institutional issues, particularly around access, also exist that prevent people from fulfilling their financial needs and goals at each level.
A short list of examples include: checking account access (many are blacklisted by the likes of no-name firms like ChexSystems) leaves many unbanked, lack of access to workplace retirement places prevents temp- and self-employeed works from accumulating wealth, and the federal student loan program has left millions overly indebted with the inability to grow and establish their own financial life.
Financial products represent tools for people to use
Suffice to say, a financial product is a tool - they are a means to an end and not an end in itself. Instead, we should focus on product suitability as the key test and continue to discuss systemic issues as a community. After all, a product is only as good as the need it solves and outcome it produces.