Expand your clients’ financial literacy

A September survey by Desjardins Financial Security of Lévis, Que., found that many Canadians lack the knowledge and skills to manage their finances. For example, about half the survey’s respondents were unaware that credit card interest charges are calculated as of the date on which the item or service was purchased, and 60% of respondents were unable to compare total interest paid on two loans that had the same terms but different amounts at different interest rates.

And things don’t seem to be improving when it comes to the next generation. Another September survey, this one by the Investor Education Fund (IEF) – a non-profit founded by the Ontario Securities Commission that promotes financial education for consumers – found that young Canadians may not have the money-management skills they need. Only four in 10 highschool students surveyed thought they were “somewhat prepared” or “very prepared” to manage their finances after high school, and only about one-quarter said their schools provided them with most or all the financial information they need.

Barry Desrosiers, a financial planner with Bank of Montreal in Calgary, says he rates no more than 5% of new clients with having a “better than fair” knowledge of financial matters: “Financial literacy is disturbingly low.”

Triffon says levels of financial literacy vary widely. “You often see this after a spouse has died,” she says, “and the surviving spouse has no idea about the investments they acquired jointly.”

That’s where her work begins. “I point out that this isn’t rocket science,” she says, “and the clients can become financially literate. I tell them that it’s in their interest to learn, because their money is involved.”

Greg Pollock, president and CEO of Advocis and a member of the federal Task Force on Financial Literacy, notes that one of the 30 recommendations tabled by the task force in December 2010 was for financial services providers to deliver educational information at teachable moments.

“Teachable moments for financial advisors,” Pollock says, “are opportunities when clients will be particularly receptive to information. A client who is buying a home will be open to learning the difference between fixed- and variable-rate mortgages.”

Key life events – such as marriage, the birth of a child, divorce – are opportunities for advisors to present meaningful financial concepts to clients, says Gaétan Ruest, Winnipeg-based Investors Group Inc.’s assistant vice president, product and corporate research: “These also are [the] times when advisors can guide clients in making good decisions. The wrong one can have negative consequences, such as a significant tax hit.”

Present clearly and simply expressed financial information at these teachable moments, says Tom Hamza, president of the IEF: “And refer clients to places they can go to deepen their knowledge, such as our website – www.getsmarteraboutmoney.ca.”

Fostering financial literacy in clients is well worthwhile, Desrosiers says: “Clients with a lower level of financial knowledge provide a singular opportunity to differentiate ourselves as financial planners. After our first meeting, a significant number of my new clients say, ‘I’ve never had the opportunity to learn so much about money as I’ve just had in the past hour.’ It’s not that I’m so fantastic; it’s that the knowledge level is so low.”

Ruest says that from the outset, advisors need to make their clients aware that they may have to change their financial behavior to achieve their long-term financial goals. “Start with a financial plan,” says Ruest, “that shows the client how saving 10% of his salary vs 5% over 30 years will impact the date at which he can retire.”

The more your client knows about finance and investing, the safer his or her assets will be. “The most dangerous client,” Triffon says, “is the one who is financially illiterate and has no interest in becoming financially literate. That kind of person has no idea how much investment risk he can assume.”

Adds Desrosiers: “Lack of knowledge attracts predatory practices.”

A knowledgeable client will also pose less risk of liability for you. “Liability is an increasingly huge issue for advisors,” Desrosiers says.

“I assume that the fewer people who know about what we are doing, the more dangerous it is for them and for us. If you don’t describe the product you are selling in great detail, the gap in the client’s understanding can lead to litigation. I always tell clients what bad [things] could happen with the product I am selling: ‘I’m selling you a balanced mutual fund. It’s average return should be around 5% or 6%, but there will be years when you’ll have negative returns. That I can guarantee. I also guarantee that when you call me in those years, I will tell you that there is nothing we need to do – unless something in your life has changed that warrants a serious revisiting of your portfolio’.”

Ruest maintains that a financially literate client should understand value as well as cost. “For example,” he says, “it costs more to buy a mutual fund than an ETF, but the financial advisor’s advice is bundled into that cost, so the mutual fund may ultimately be more valuable to the client. It’s in advisors’ own interest to bring their clients to this level of knowledge.”

The push toward financial literacy should extend to teenagers. “Talk to a client’s child about saving for short-term goals,” Ruest says. “Explain that saving some of the money he’s earning at a parttime job will allow him to put a down payment on a car in a few years. An advisor can be another voice of reason.”

© 2012 Investment Executive. All rights reserved.