Canadians remain woefully uneducated about finance, the results of a new survey reveal. Worse still, they seem to be unaware of their own ignorance, which highlights the huge challenge that looms in equipping people to take responsibility for their own money.
In mid-October, the Canadian Securities Administrators (CSA) released the third edition of its survey on investor knowledge, attitudes and behaviour. The latest survey, striking many of the same themes as the CSA’s previous reports – the first was published in 2006, before the financial crisis hit; the second, in 2009, early in the aftermath of the crisis – found that Canadians have a relatively weak understanding of fundamental financial concepts yet remain blithely confident in their financial decision-making ability.
Although the content of these surveys has changed a bit, they consistently have found that: there are major gaps in investor knowledge; the knowledge investors do have often isn’t being applied; and, given the low level of financial sophistication among a large portion of the population, investment fraud is a persistent threat.
This year’s survey had aimed to assess investment knowledge with seven questions about basic investment concepts, including compound interest, diversification and risk/reward trade-offs. About 40% of respondents flunked the survey by failing to answer four of the seven questions correctly. Younger respondents (those aged 18 to 34) scored particularly poorly on the test, with 56% failing.
The survey also found that many investors have unreasonably high expectations regarding returns. The mean annual return expected on an “average” portfolio is almost 8%. This compares with actual average annual returns of slightly more than 4% for Canadian stocks and 6.4% for bonds over the past five years. In fact, just 12% of survey respondents currently harbour realistic return expectations.
And yet, despite Canadians’ relatively low levels of financial sophistication, their confidence in their own ability to make investment decisions is on the rise. The CSA reports that 57% of survey respondents say they are “somewhat” or “very” confident when it comes to making investment decisions – up from 51% in 2006.
This confidence is barely diminished among the least sophisticated investors. Among those who failed the investor knowledge test, 46% say that they are confident in making investment decisions. These investors also profess to have a good handle on portfolio risk, with 26% boasting they “strongly agree” that they understand how risky their investments are (compared with 31% for the survey overall). As well, the survey found that a mere 6% of these uneducated investors have reasonable return expectations.
The latest survey confirms the conclusions of previous editions: fundamental knowledge of financial matters remains depressingly low, yet overconfidence is dispiritingly high for a large number of Canadians. This suggests that many Canadians simply aren’t aware that they have a problem with financial literacy.
This lack of self-awareness is one of the basic challenges confronting efforts to improve personal financial competence. Says Tom Hamza, president of the Toronto-based Investor Education Fund (IEF): “People do seem to take a very hands-off approach to their finances. And, as a result, they feel they can make decisions without knowing very much about what they’re doing.”
Indeed, many people simply outsource the chore of financial management to an advisor. But the survey also found that when it comes to the use of advisors, investors aren’t taking even basic steps to protect their own interests.
For example, the survey found that 60% of those with a financial advisor haven’t done anything to check out their advisor’s background or credentials. Furthermore, almost one-quarter admit that they don’t know how their advisor is compensated for their services. And 56% say they are unaware of how much they actually had paid their advisor over the past year. Moreover, less than a third of survey respondents said that they have a financial plan (which is up from 25% in 2009, but down from 38% in 2006).
The consequences of this shortage of sound planning – and the lack of personal financial accountability – is evident in the buildup of household debt in recent years, which Hamza characterizes as a “crisis,” noting that it has potentially serious ramifications for the country’s economy overall.
The lack of financial literacy hasn’t gone unnoticed by governments, and there have been efforts to tackle it, including the federal Task Force on Financial Literacy, which published its final recommendations in February 2011.
For Hamza, solving the problem has to start in the schools, with the teaching of both basic numeracy skills and what he terms “the civics of financial self responsibility” – in other words, the duty to take charge of your own finances. (See story on page 6.)
“Schools are the starting point, but it needs to go well beyond that,” Hamza says. “And we need to start taking the next steps with the Task Force on Financial Literacy.”
Indeed, organizations such as the IEF, which is a non-profit established by the Ontario Securities Commission and funded from its enforcement penalties, are taking on the challenge. Hamza says that one of the IEF’s primary targets is Canadians aged 35 and under, the group the CSA survey indicates needs the most help.
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