The lost key to financial literacy: better industry disclosure
The problem with teaching people to be smarter about money is that they learn to ask questions for which there are no ready answers.
That's why it's disappointing to see banks, advice firms, investment dealers and mutual fund companies treated solely like part of the solution to the lack of financial literacy in Canada, and not part of the problem as well.
Better disclosure from the financial industry of fees, rates, terms and conditions is an important way to make Canadians savvier about money. And yet, the recommendations that the federal task force on financial literacy made public on Wednesday largely ignored this issue.
Over all, the task force report has come up with some good suggestions that will help boost our financial IQ in Canada. That fact that it didn't go further relates to the influence the banking and investment industry has in this country over all matters financial.
Look no further than the top people on the task force. The chairman is Donald Stewart, CEO of insurance giant Sun Life Financial, and its vice-chair is Jacques Ménard, chairman of investment dealer BMO Nesbitt Burns. The federal government could have gone with a variety of experts to lead the task force, but it chose the heads of companies that make their money selling financial products.
Deferring to the financial industry is the Canadian way. No large industrialized country has come out of the financial crisis in better overall shape than Canada, and no country is more comfortable with the financial status quo. In Britain, Australia and, to some extent, the United States, regulators have progressed in making the financial advice industry both more transparent and more accountable to clients. Here on Planet Canada, no such initiatives exist.
You could argue that the financial literacy task force, organized in the dark days of the crisis by the federal government, is a way of making things better for consumers of financial products. Over the long-term it has the potential to do that through recommendations that provinces and territories integrate financial literacy into the curriculum of all levels of school, and that Ottawa promote literacy through programs such as the Canada Pension Plan and universal child care benefit.
The suggestion to teach money management through the Canada Student Loans Program is also useful, although the problem with student debt is almost entirely about high and rising tuition costs as opposed to slack borrowing habits.
There's no downside to teaching the young about how to manage money, and to reaching out to adults as well. Financial products are too pervasive and dangerous in our society for people to have to learn, like they did in the old days, from their mistakes. If people are ever going to become smarter consumers of financial products, two things they need to do are: mind the interest they pay when they borrow and be aware of the fees they pay to invest. And that's where the financial literacy task force falls short.
Searching for such basic information, the credit card holders and mutual fund investors of the nation will venture forth for answers. They'll pick up their card and investment statements and find a gaping hole in the quality and amount of information provided. How much card interest have they been paying? How much did they pay in fees to their mutual fund company? Financially literate people will want to know this stuff. It's not enough to teach them in school that debt is bad and investing is good.
The obligations of the financial industry have not been totally ignored by the task force. In calling for Canadians to be better informed about the benefits of professional financial advice, it said it believes the advisory business should meet tough standards on the transparency of compensation and professional qualifications.
But that's as close as the task force comes to advocating for more disclosure. One of the few other references to the financial industry's own responsibilities is a recommendation that it use "teachable moments" to deliver educational information that can help people make effective financial decisions.
"Teachable moments" come every time a financial company charges us for a service and doesn't put it in context. The legitimacy of the charge is not the issue here. Profitable banks, fund companies and investment dealers make for a strong economy.
It's just that if we're going to have a financially literate society, we need to understand that making people smarter means they're going to ask more questions. When they do, they'll be up against a financial industry that is as much a part of the financial literacy problem in Canada as the solution.
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STUFF WE NEED TO KNOW
We'd all be better informed about our finances if our banks and investment firms showed us:
How much interest we're paying on our credit cards - since the card was issued, and each year.
How much we're paying for mutual funds - not just in percentage terms but dollar amounts.
How much we're paying investment advisers for the services they provide - again, in dollars.
How well our investments have performed annually and since the inception of the account.