Nobody ever refers to retail investors as the “smart money.” And that’s why this group needs more uncompromising investor protection.

The Canadian Securities Administrators’ (CSA) latest research confirms that the average Canadian needs more instruction when it comes to managing money. About 40% of Canadians who were surveyed couldn’t pass a short test on basic financial concepts.

The rate is even worse among younger Canadians: 56% of those in the 18 to 34 age group also failed that test. Given that this group probably has been in school most recently, it’s obvious the education system isn’t doing enough to teach fundamental financial skills. This is the group facing some of the most significant financial decisions of their lives – buying a home, starting a family and, hopefully, adopting the habit of saving and investing. Yet, less than one-quarter of them have a financial plan.

And despite not understanding basic financial concepts, not planning and having unrealistic expectations regarding returns, more than half of Canadians profess confidence in their ability to make financial decisions.

A lack of knowledge and overconfidence is a terrible combination.

And faced with fundamental innumeracy, and either consumer apprehension or indifference when it comes to sound financial management, regulators’ efforts are like spitting into a hurricane.

However, many Canadians are seeking professional advice: 49% now say they have a financial advisor, up from 42% in the CSA’s initial survey in 2006.

But, given their lack of basic knowledge, they are not in a position to evaluate that advice. Most don’t bother to check out their advisor at all. And more than half of those with advisors don’t know how much they pay for their services. In other words, they are exceedingly vulnerable.

Regardless of their savvy, people need to save and plan. Disclosure has to be made simple and upfront. More drastic measures may be necessary – whether it’s the introduction of a fiduciary duty to ensure that advisors must protect investor interests or more direct regulatory intervention to eliminate inherent conflicts. It’s an economic and social necessity.

© 2012 Investment Executive. All rights reserved.