Who’s afraid of financial literacy?

Today, the federal government unveiled the new task force on financial literacy, promised in the January budget. I thought the choice of members said a lot.

The chair, Don Stewart, heads a life insurance company. The vice-chair is with BMO Nesbitt Burns, an investment dealer. Only two of the 11 others named to the task force can be called consumer advocates, Pat Foran of CTV and Laurie Campbell of Credit Canada.

Makes me wonder what will come out of this exercise. There’s a consensus that Canada needs to teach children about money management when they’re in school. That’s helpful, but not enough.

Financial literacy is being watered down and becoming a motherhood issue, one that all the big institutions can support. It’s about when to introduce courses in schools and how to teach compound interest to children when they’re old enough to understand it.

After thinking about what this idea really means and debating it with trusted colleagues, I have a few points to make.

— People only learn when they’re ready to learn, when they find a topic interesting or they have to make imminent decisions. That teachable moment often comes later in life than high school.

— There’s been a huge shift in risk from governments and employers to citizens. Decent pensions are becoming obsolete (except for civil servants). Medicare covers only the basics and any extras have to be paid for by private insurance. You have to cover the costs if you or a family member become ill and unable to work. You have to cover the cost of children’s post-secondary education.

— Governments have pulled back the safety net and created this “risk shift” to individuals, while not providing the educational supports that people need to make informed decisions.

To me, financial literacy is not just about distributing plain-language educational materials. It’s also about adopting new attitudes.

–One, you can’t delegate your money decisions to anyone else (an adviser, a friend, a spouse). You have to look after your own finances or face adverse consequences.

–Two, you can’t trust someone paid to sell products to have your best interests at heart. And in Canada, most financial advisers don’t have a fiduciary duty (a requirement to put the client’s interests first).

— Three, you can’t be an optimist where your money is concerned. Always ask about the worst case scenario when presented with a set of financial projections.

— Four, life has a habit of being unpredictable and often hurtful. So plan accordingly. Save as much as you can in case you lose your job. Buy insurance in case you’re sick or you die, leaving your family without income. But make sure you get the right advice and don’t enrich the pushers of high-priced and inadequate savings and insurance products.

–Five, don’t count on anyone to bail you out of a financial jam. The government or your employer may not give you a decent standard of living when you retire. Your parents may not leave you money in their will. Your house may not be worth more than you paid for it. Assume the worst and be prepared for bad stuff, even if it never happens.

–Six, don’t be too starry-eyed about your finances when love is involved. There’s a good chance your marriage or common-law partnership won’t last, so protect yourself. And remember that having children is a huge expense and shouldn’t be undertaken lightly. People with fewer kids often do better in life.

I hope that Canada’s financial literacy strategy is broad enough to encompass such points. I’m willing to give this task force a chance to prove itself. But the fact that the final report won’t come out until the fall of 2010 causes concern. How long will we have to wait to see any results?

Author: Ellen Roseman

Consumer advocate and personal finance author and instructor.

12 thoughts on “Who’s afraid of financial literacy?”

  1. Interesting, the Task Force’s emphasis seems to be on debt, credit, life insurance, budgeting — and little on investing and personal pension planning.

    Some people I would have liked to see on it – Stephen Jarislowsky, Moshe Milevsky. The investment/pension stuff is far more complex than advice on how to stay out of debt.

    How are they going to get this stuff into the school curriculum? There’s no provincial education representation. In Scotland, financial literacy is in the schools from primary on up.

  2. Ellen, I agree with each of your six points. And I would add:

    7)- Investment costs matter a lot.

    8)- Individual investors have no hope of beating the market.

    So: (i)avoid actively managed mutual funds. The costs will kill you and the results compared to benchmark indexes will not make up for those costs.

    (ii) what are Bay-Street insiders, the principal proponents of actively managed funds, doing leading this task force?

    Marc Ryan

  3. 100% in agreement with Marc. Just like pretty much everything in life, investing has costs. Since there are so many market forces that we can’t foresee or control and so very few things that we can actually control when it comes to investing, deciding on a low-cost strategy from the beginning makes sense.

    Day trading is an inefficient and purely speculative strategy. The odds of success are no better than a long-shot at the race track.

    Investing in actively managed mutual funds means settling for mediocre returns at the expense of service fees, front loads, DSCs and trailers.

  4. > what are Bay-street insiders, the principal proponents
    > of actively managed funds, doing leading this task force?

    What they’ve always done. Protect their interests. (And no, Virginia, that doesn’t include you.)

  5. Agree with most of your conclusions, but why are you so hateful of financial advisors (all the bashing)?

    Do you really think that real estate agents have your interest at heart? (I can give you many stories.)

    And what about the girl/guy in the department store telling you you look great in those pants?

    Sure, put us all on the same team, it’s fashionable to beat up on FAs. Once your at it, why not put everybody else in the same category?

    I am sure that we all can add experiences where we put our personal interest first!!!

  6. Very good points, Ellen. There are too many folks who see investor education as a fad. The investment business will play nice, but they also will ensure their interests come first.

    My wish would be twofold:

    1- Education starting in high school for both debt and investment basics.

    2- Capital Accumulation Plans should have mandated training for all pension plan participants, at the companies’ expense. I also believe you cannot have the same company selling the investments and doing the training!!!!

    If you were to grant me a third wish, it would be that regulatory bodies had a real stick to enforce decisions and a strong desire to make a change from the status quo.

  7. @JF

    > why are you so hateful of financial advisors (all the bashing)?

    We’re not. We’re bashing the many conflicts-of-interest built into the mutual fund and investment advisory industries.

    > real estate agents … the girl/guy in the department store

    Do either have a fiduciary duty to put the client’s interests ahead of theirs?

    Do you?

  8. Bylo: Canadian Securities Course says that financial advisors do have fiduciary duty to their clients. I have completed CSC. Two commission based brokers/ financial advisors that I have talked to claim that they have fiduciary duty to their clients.

    I personally believe that financial advisors who work on commission do not have fiduciary duty and have so called suitability duty. There is no way that a salesperson is required by law to have fiduciary duty. However, financial advisors who are fee based or fee only have fiduciary duty enforced through the courts.

    I want to write a paper on fiduciary duty of financial advisors in Canada. It would be great if you guys can give me some pointers on where I can find the best information.

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