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FINANCIAL LITERACY

inancial decisions made early inlife play a significant role in deter-mining future financial success.Yet, there are few resources avail-able to teach young adults intro-ductory personal financial skills.The Canadian education system

teaches little to nothing when it comes to practical,personal financial management. “Go to school andget a job!” seems to be the prevailing wisdom. Okay,but then what?While our schools may teach us howto earn money, they don’t really teach us anythingabout how to manage it.We’re constantly faced with real-life decisions

requiring at least some degree of financial know-how.

Sadly, the majority of Canadians lack the skills neces-sary to make informed decisions when it comes totheir finances.

New RealitiesMany experts agree that the lack of financial literacyamong Canadians is contributing to broader econom-ic issues, such as the current household debt crisis inCanada.Historically, Canadians have demonstrated a fairly

prudent approach to personal finance. Our house-hold debt levels have always been significantly lowerthan those of our American neighbours. But not any-more. By the third quarter of 2010, average household

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On February 9, 2011, the Task Force on FinancialLiteracy delivered its proposed strategy to FinanceMinister Jim Flaherty for improving Canadians’financial IQ. Michael Callahan outlines severalkey recommendations that tie into the role thatprofessional financial advice plays in helpingclients make sound financial decisions

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debt in Canada had reached a staggering 148 per cent of annualincome. Stated another way, for every $1 we make, we spend $1.48.As a result, Canadian household debt has now exceeded that ofthe United States.While skyrocketing household debt is perhaps the most obvi-

ous example of imprudent financial decision making, it’s just oneindicator of a larger problem: Financial illiteracy threatens thelong-term health and well-being of our economy as a whole.Without an understanding of general financial concepts, we tendto make poor financial decisions with potentially disastrous con-sequences.

Basic SkillsWe’re all familiar with the basics of good physical health — regu-lar exercise, eating a healthy, balanced diet, etc; yet, we seem tohave forgotten the basics of good financial health, such as savingfor a rainy day and living within your means. Of course, we’re notsuggesting that everyone should understand the complex natureof hedge funds or the intricacies of fundamental and technicalanalysis. Rather, a basis for making sound financial decisions stemsfrom an understanding of a few key essential concepts:

• Borrowing — good debt, bad debt. From high-limit creditcards to “don’t pay a cent event” type marketing, it seems that tak-ing on debt has become an acceptable and increasingly easy solu-tion for funding today’s needs and wants. The focus has shiftedaway from whether or not a purchase makes sense and towardsqualifying for maximum financing. Granted, there are times whenborrowing makes sense, such as to fund an education, or buy ahouse or car. What’s truly important is that Canadians are able toevaluate terms of borrowing in any situation and distinguishbetween good and bad debt.

• Budgeting — personal finance. Unfortunately, most peopleequate budgeting with “doing less.” And yet, living within a budg-et doesn’t necessarily mean having less fun; it simply means mak-ing the most of what you have. A well-defined budget can allowfor meeting future goals, day-to-day lifestyle expenses, saving andinvesting, and the repayment of outstanding debt.

• Retirement — planning your own future. Today, many com-panies have abandoned defined benefit (DB) pension plans infavour of deferred profit sharing plans (DPSP), or simply offer nosavings or pension plan at all. The responsibility of constructingan income in retirement has been passed from employer to employ-ee. The message is clear: We must take charge of our own retire-ment. We can no longer rely on government, union, or employersto provide for us when our working days are done.

• Investing — risk vs. reward.Most real-life financial decisionsrequire an understanding of the relationship between risk and return.However, many Canadians have only a vague idea, or perhaps noidea at all, of the types of risk present within various financial instru-ments. From establishing a fixed- or variable-term mortgage to build-ing a portfolio for retirement income, it’s important that investorsunderstand the trade-offs that exist between risk and return.While by no means exhaustive, the above points help identify

the core problem — namely, that Canadians do not possess theskills necessary to make informed financial decisions.So where do we turn for a solution?

Industry AdviceMany Canadians look to financial institutions, such as their localbank branches or credit unions, for financial advice. Although thisis often a good starting point, relying solely on financial institu-tions for advice isn’t always the best approach.“It’s important to keep in mind the potential conflicts of interest

that exist with respect to financial institutions acting as educators,”says Ellen Roseman, author and personal finance and consumer issuescolumnist with the The Toronto Star. “For example, a bank mayapprove a couple for a $350,000 mortgage, but in no way should thisbe taken as advice to actually go out and borrow that much money.”Of course, we can only expect financial institutions to do so

much. For instance, most products and services are sold with anaccompanying disclosure document, but as Roseman points out,there is a limit to how much disclosure actually helps people.“Financial literacy is of the utmost importance, make no mis-

take about that,” Roseman adds. “However, financial literacy can-not take over from regulation.”Outside of the financial services industry, many Canadians rely

on the government for education and guidance on financial mat-ters. In recognition of this, the federal government created a spe-cial task force to address this growing concern.

The Task Force on Financial LiteracyIn the 2009 federal budget, Minister of Finance Jim Flahertyannounced the establishment of a national task force dedicatedsolely to raising the country’s financial IQ. Comprising 13 mem-bers from both business and education sectors, the goal of the TaskForce on Financial Literacy was to provide advice and recommen-dations to the Minister on a national strategy to strengthen thefinancial literacy of Canadians.On February 9, 2011, the Task Force released its official report,

including a set of 30 recommendations, to the federal government.The full report is available on the Task Force’s website atwww.financialliteracy.com. Let’s focus on a few recommendations that are of particular

interest:

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Many experts agree that the lack of financial literacy

among Canadians is contributing to broader economic issues, such as

the current household debtcrisis in Canada.

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• The Task Force recommends that the federal, provincial andterritorial governments require all financial services providerswithin their respective jurisdictions to simplify their informa-tional materials and disclosure documents. Given the importanceof clear communications, governments should lead this effort byreviewing and improving their own public informational mate-rials to ensure they meet clear communications principles.• The Task Force recommends that financial services providers

put a strong emphasis on delivering educational informationand ensuring that it is fully understood by Canadians at “teach-able moments,” so that Canadians can make sound financial deci-sions.• The Task Force recommends that the Government of

Canada, in partnership with stakeholders, provide tools to helpCanadians become better informed about the role and benefitsof professional financial advice, as well as how to choose a finan-cial practitioner.• The Task Force recommends that the Government of Canada

create, maintain, continuously upgrade and promote a singlesource website for financial literacy in an effort to increase pub-lic awareness about, and ease of access to, information.• The Task Force recommends that all provincial and territo-

rial governments integrate financial literacy in the formal edu-cation system, including elementary, high school, post-second-ary education and formalized adult learning activities.In preparing its list of recommendations, the Task Force

embarked on a 12-week consultation process, travelling in smallteams to communities in every province and territory. The TaskForce met face-to-face with 175 individuals and organizationsto gather their views, values and experiences.

“Although advisors may not be directly compensated for helping their clients with [personal budgeting, cash flow andborrowing], it’s one more way to differentiate yourself from the pack while further strengthening client relationships.”— Ellen Roseman, personal finance columnist, The Toronto Star

Additional Resources for Financial LiteracyTurning your clients on to any of the following sitesfor financial education will show them how muchyou care about their financial future. Better yet, cut and paste articles of interest and email themdirectly to clients.

Advocis – Financial Advisors Association of Canadawww.advocis.ca

Canadian Centre for Financial Literacy (CCFL)www.theccfl.ca

Investment Funds Institute of Canada (IFIC)www.ific.ca

Financial Consumer Agency of Canada (FCAC)www.fcac-acfc.gc.ca

Task Force on Financial Literacywww.financialliteracyincanada.com

Practical Money Skills Canadawww.practicalmoneyskills.ca

“We’ve travelled across the country, from coast to coast, andone thing that really stood out was the incredible commitmentfrom everyone involved,” says Donald Stewart, CEO of Sun LifeFinancial Inc. and chair of the financial literacy Task Force. “Fromadvisors, various industry organizations, and from [provincial andfederal] governments, the level of commitment to increasingCanadians’ financial literacy is outstanding. We’re very pleasedthat the Honourable Jim Flaherty, Minister of Finance, has indi-cated his intention to move forward with our recommendations.”

Education InitiativesThe Task Force’s recommendation to introduce financial educa-tion into our schools is no doubt a breath of fresh air for thosewho believe the financial literacy of Canadians is the responsibil-ity of our education system.“It is absolutely critical that we integrate financial management

skills into the curriculum at all levels of the public education sys-tem,” says Greg Pollock, CFP, president and CEO of Advocis andmember of the Task Force. “It’s important that we introduce finan-cial literacy at an early point in our education system. By doingso, we can better equip Canadians to make the real-life financialdecisions we all face.”It appears that many feel educating young Canadians should

be the responsibility of parents and schools. In fact, a recent nation-al survey conducted for the Canadian Institute of CharteredAccountants (CICA) found a whopping 98 percent of respondentsbelieve that parents should play a role in the financial educationof children. The survey, conducted by Harris Decima, also indi-cated that 85 percent of Canadians believe financial managementskills should be taught in schools.“I am aware of the challenges our educators face with intro-

ducing new material into the curriculum,” adds Pollock. “However,I know they can rise to meet this challenge and help make finan-cial literacy a core component of our education system.”Exactly when or how the new material will find its way into the

classroom is yet to be determined. In Canada, education is aprovincial responsibility and therefore, Pollock says, the Task Forcedecided it’s best left up to each province and territory to deter-mine the most effective way to integrate financial education intotheir curriculum.

Role for Financial AdvisorsSo what does this all mean for advisors?“As financial products become more and more complex, advi-

sors will no doubt play an increasingly important role in provid-ing clarity around various industry products and services for theirclients,” explains Pollock. “For example, prospectus documentsfor investment products are often difficult for consumers to under-stand. Too often, Canadians don’t have the help of a financial advi-sor to clarify and distil this complex information.”“In addition to investment advice, we’re finding out that clients

also need guidance on matters such as personal budgeting, cashflow and borrowing,” adds Ellen Roseman. “Although advisorsmay not be directly compensated for helping their clients with

some of those initiatives, it’s one more way to differentiate your-self from the pack while further strengthening client relationships.”Since advisors work in many different capacities with their

clients, a needs assessment is one more reason to determine anappropriate advisor-client fit. For example, while some clients maywant help with personal budgeting challenges, and others mayrequire help planning for retirement, others may be looking forpurely transactional stock trading advice.Of course, advisors cannot be all things to all people. But as

Roseman suggests, “Advisors can maintain client relationshipswhile referring to other professionals or other resources for mat-ters outside their service offering.” That is, an advisor doesn’t nec-essarily need to possess a massive amount of educational materi-als to help educate their clients on financial matters. Rather, anadvisor can refer clients to other resources (see sidebar “AdditionalResources for Financial Literacy”) or pass along information fromthird-party sources.One potential future resource may very well come from the

Task Force. Says Donald Stewart: “One of our recommendations,[which is] the idea of a single source website for financial litera-cy, should prove a great resource — not only for the general pub-lic, but also for financial advisors.”

Bottom LineWe face financial decisions every day of our lives. Everything fromchoosing the right credit card, to buying a house or car, to simplyevaluating a cell phone plan requires at least a basic level of finan-cial knowledge. Financial literacy must be viewed an essentialskill — a “need to have” as opposed to a “nice to have.”Indeed, when it comes to financial know-how, ignorance is not

bliss. As Greg Pollock puts it, “At the end of the day, we have a respon-sibility to educate Canadians and provide them with the toolsnecessary to make informed decisions on financial matters.”

MICHAEL CALLAHAN can be reached at callahan_michael@yahoo.com.

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“One of our recommendations,[which is] the idea of

a single source website forfinancial literacy, should prove a great resource — not only

for the general public, but alsofor financial advisors.”

— Donald Stewart, CEO, Sun Life Financial Inc.