September 2010

Canadians: flunking finance?

We might be world-beaters when it comes to Olympic gold medals, but when you start talking money, we don’t have much to brag about. In fact, many observers are uneasy about the gaps in Canadians’ financial knowledge.

To the great surprise of the whole world, the Canadian financial system has outperformed all others by far in withstanding the financial crisis that has disrupted the global economy for the past two years. Nonetheless, it turns out that this success isn’t because Canadians are smarter than everyone else in economic matters. Just look at how average Canadians answer some very basic questions:

This data was collected by a task force that will file its final recommendations with the federal government by the end of this year:  the Task Force on Financial Literacy. What is “literacy”? It is the body of knowledge that enables a person to function within society… And if we need a task force on it, it’s because too many Canadians are, quite frankly, illiterate when it comes to money.

Are we worried yet?

Comparatively speaking...

The reassuring thing – at least on a comparative basis – is that Canada isn’t the worst in this area. A survey by the British research firm TSN early this year placed Canadians 9th out of 13 in terms of ability to assess the risk associated with their financial situation. In particular, the survey asked respondents to evaluate the risk/return ratio of two investment funds, as well as the risk of investing in the shares of a single company as opposed to a basket of equities. Only 13% of Canadians passed the test. Mexicans (7%), Portuguese (6%) and Argentinians (5%) did even worse, while the Dutch were at the head of the class with a pass rate of 21%.

The situation is no better in the United States. In 2008, faced with the flagrant financial illiteracy of the majority of citizens, the Bush administration set up a committee known as the Advisory Group on Financial Literacy to recommend measures that would improve the financial aptitude of Americans.

Citizens at risk

Being more educated about financial matters would not have protected U.S. citizens from the huge crisis concocted by a few Wall Street geniuses. But a significant number of them might well have found their own situations less precarious if they had had the means to better assess their savings and debt levels, and the related risk.

These are exactly the risks that experts associate with financial “illiteracy”:

  • individuals lack points of reference for the financial solutions offered to them, and are at a loss when faced with unfamiliar phenomena, such as a stock market correction;
  • they become distrustful, and even cynical, about the work of financial advisors;
  • and, in seeking reassurance, they become vulnerable to the siren calls of purported advisors who are running scams.

The solution:  education

Like the citizens of other countries, Canadians have a hard row to hoe, but there are glimmerings of what direction we need to move in. A 2009 study by researchers at the University of Florida has shown that university students from States with mandatory financial education at the secondary level are quite different in attitude from other students:  they are more inclined to make a budget and to save, less likely to max out their credit cards, and generally pay their credit balances off in full. It’s a start!

It shows that financial security can very well begin in childhood. The financial services industry, the education system, and parents will have to shoulder a heavy responsibility if they want to help future generations to become more financially aware, and break the vicious circle of financial illiteracy.