Study: Canadian advisors can do better

Canadians claim great confidence and optimism in their ability to make responsible investment decisions, yet they seldom seem to, according to a recent survey by the Canadian Securities Administrators (CSA).

The vast majority (85%) of survey respondents said that it is important to build personal savings and investments. At the same time, 35% said they do not have any savings or investments.

While 64% said that it is important to have a formal written financial plan, only 25% had one. Most Canadians (80%) agreed that it is their own responsibility to acquire their own investing skills, yet only 32% said they have actually taken steps to do so.

“This research clearly shows that Canadians are not doing all they can to make informed investment decisions,” says Jean St-Gelais, chair of the CSA. “The CSA continues to provide Canadians with unbiased information and tools to help investors make these important decisions.”

Whether Canadians have any great investing acumen may be beside the point. A larger problem may be a lack of understanding about the fundamentals of money management. A concept as simple as spending less than one earns appears lost on many, regardless of income level.

In fact, anecdotal evidence suggests that those who appear quite wealthy may be among the worst at managing their cash flow. A family living off of $40,000 a year will need to keep a much closer eye on its spending,spending and it likely won’t qualify for enough credit to get into too much trouble.

High-income Canadians, on the other hand, may be more easily tempted by the big-ticket accoutrements of success.

“The problem is, when you don’t take care of the money you have, you’ll never do better with the next dollar you get,” says Stephanie Holmes-Winton, a Halifax-based financial advisor known as The Money Finder. “I think it all comes down to financial literacy. Because we don’t teach people what is reasonable, they see images in the media and they stop worrying about their spending.”

Holmes-Winton specializes in getting client spending under control and does not sell any product if the client chooses a fee-for-advice arrangement. Too often she meets new clients who should be high net worth, but the liability side of their personal balance sheet destroys the asset side.

“A lot of people tell me that the big clients don’t need this kind of help. Oh right! I have lots of high-income clients and lots of high-asset clients, but I wouldn’t call them high net worth, because they came to me because they had spending issues.”

One client she took on was a doctor earning in excess of $1 million annually. He was concerned that he would not be able to retire as early as he had hoped and contacted his primary advisor.

In essence, he was told, “Y “ou’re a big boy. Y, ou make plenty of money. I’m sure you can figure it out,” Holmes-Winton says. “We have to become a culture of advice, not just product advice.”

Part of the problem, it turns out, was that he was being encouraged to live up to a certain image of a successful doctor — an image that had little in common with his actual goals. He owned a boat, for example, which he had never really wanted, but every successful doctor needs a boat.

“If I showed anyone half of his balance sheet — the portfolios, the income, the insurance products — they would look at that client and say, ‘That ‘that is an HNW client; he does not need that sort of advice.’ That client has been handicapped for years, because that is exactly the way he’s been treated.”

Some of her clients even work in the financial services industry, and while they may understand financial products, they don’t know how to manage cash flow properly to attain their goals.

Holmes-Winton has lectured to university finance students — and their professors — and found that they are not being taught anything practical.

“They might understand how a strip bond is built, but they can’t understand not borrowing more than they can afford. They don’t know how to figure that out.”

Whose job is it?

According to the CSA survey, 78% of parents agree that teaching children financial skills is among the most important roles of a parent, but only 46% said they have taught their children about finances and investing.

The problem may be that these parents do not have any real skill in managing money themselves. But those with poor financial skills may be doing their children a favour by not passing along their own bad habits.

While that large majority feel it is important for a parent to educate their children on money matters, only 20% of parents are most responsible for financial and investment education; 51% said a financial advisor should be most responsible.

“There’s a difference between what our industry thinks is financially literate and what our clients actually need as a functional financial literacy standard,” says Holmes-Winton. “Unfortunately, most of the advisors I know don’t concentrate on both sides of the balance sheet. You can’t lecture kids at university about cash flow and spending behaviour if you don’t talk to your clients about it.”

But advisors cannot be expected to carry the weight alone, she says. They need to lean hard on their dealers and managing general agencies to provide better client education materials.

In an effort to shore up financial literacy, the Financial Consumer Agency of Canada has rolled out a program called The City, aimed at educating secondary school students about rudimentary money management skills, such as budgeting and saving.

Not surprisingly, young Canadians (aged 18 to 34) are among the least confident in making investment decisions, but still largely think they can handle the job: 48% said they are “very confident” or “somewhat confident.” At the same time, though, 67% said they did not know where to go for information about investing.

Providing financial education shouldn’t be a stretch for secondary schools, Holmes-Winton points out, because the tools for managing money are already being taught. Financial literacy could be bundled into math classes, providing students with an understanding of why they need to learn algebra.

Avoiding Fraud

“We don’t teach anything about money as part of the core curriculum in our school system,” she says. “Because we aren’t talking about money in school, and we don’t talk about money at home, clients don’t have an understanding of what to expect as a reasonable return from an investment.”

This leaves the financially illiterate vulnerable to fraudulent “investment” schemes or even simply being placed in legitimate, yet unsuitable, investments by honest advisors.

“The majority of people are busy and exhausted, and they aren’t paying attention. It’s very easy for some of these schemers to manipulate their emotions and say, ‘Did ‘did you know what you’re getting? This is garbage.’ If they didn’t know that the Ponzi scheme is a Ponzi scheme, they don’t know what garbage is either.”

The reluctance to dictate a “reasonable” expectation could be fuelled by liability fears, she suggests, as the undereducated investor may mistake the figure as a guarantee.

The inaugural CSA study, conducted in 2006, was designed partly to understand Canadians’ experience with fraud attempts. One of the hallmarks of a fraud dressed up as an investment is the promise of outsized returns.

According to this year’s survey, 38% of Canadians have been approached with a fraudulent investment, and 4% of Canadians admitted that they invested money in what turned out to be an investment fraud.

While the easy advice is that “if it sounds too good to be true, it probably is,” Holmes-Winton points out that many targets of fraudsters may not have any frame of reference to determine whether the offer is too good to be true.

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(10/14/09)

Steven Lamb