Canadians get passing grade on financial knowledge, but confidence in concepts lacking

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As an advisor, this is no doubt a common theme you hear from clients. Add that to the uncertainty of the COVID-19 pandemic – many aren’t sure what to do with their money.

That’s why for Financial Literacy month, Canada Life set out to test Canadians’ knowledge of general financial topics like saving, debt and insurance. Before taking the 10-question quiz, each respondent rated their confidence in their financial knowledge. While Canadians got a passing grade on the quiz, with the average scoring seven out of 10 correct, many underestimated what they actually knew.

“The bottom line is, too many Canadians lack confidence when it comes to their personal finances. But they don’t have to do it alone,” said Hugh Moncrieff, Canada Life’s Executive Vice-President of Advisory Network and Industry Affairs. “That’s where advisors come in. Being aware of this lack of confidence means that with each interaction, a skilled advisor can help their clients build their confidence and educate them to make the best choices for their individual needs.”

One clear example of the knowledge gap was illustrated by the fact that most respondents could not identify the recommended amount of life insurance coverage – seven to 10 times one’s annual salary. Only a small minority of Canadians (27 per cent) knew the answer to this simple financial knowledge question.

“Having life insurance is essential if you have loved ones who depend on you financially. But it’s not just a matter of having ‘some’ coverage. Your clients need to have the right type and proper amount of life insurance to be prepared. All to often, this isn’t the case,” explained Moncrieff.

Moncrieff says bridging this knowledge gap is key for Canadians to both protect and accumulate wealth.

According to Stats Canada, the seasonally adjusted household savings rate rose to 14.2 per cent in Q2 2021 from 13 per cent in Q1 2021 and has remained at double-digit levels since the second quarter of 2020.¹ Meaning, Canadians are sitting on their hard-earned cash.

“Today’s market demands different ways of investing, but it doesn’t change the fact that each customer has unique needs and risk levels,” said Moncrieff. “The COVID-19 pandemic has caused an increase in loss-aversion, so it’s natural for investors to want a sense of predictability, confidence and control over their investments,” said Moncrieff, noting these things together adds up to many are missing out on opportunities to accumulate wealth. “This is where an advisor’s guidance is invaluable. At a time when it’s more important than ever to understand their investments, Canadians needs to turn to a trusted ally – an advisor – to support them in improving their financial future.”

Moncrieff noted one of the most surprising results from the quiz was that more than half of Canadians didn’t know the different between a Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA).

“TFSAs and RRSPs are savings vehicles that every Canadian should take advantage of. In times of volatility, we need to rely on our understanding of basic financial topics, and the advice of experts, to ensure we’re not making impulsive decisions that can impact our financial plans in a big way. As an advisor, your coaching can help Canadians make sound decisions and set them on the right financial path.”

Starting earlier is better

The great news from the survey results was that while younger Canadians aren’t as financially knowledgeable, they’re most interested in expanding their knowledge.

According to the 2021 Investor Economics Household Balance Sheet, millennial wealth will increase by 480 per cent over the next decade.

“The Canada Life financial knowledge quiz found that young people just beginning to plot their financial future scored lowest, but want to learn more. That’s encouraging,” said Moncrieff. “With the great wealth transfer on the horizon, there’s a whole generation of clients that will need advice. Helping young people chart their course early is a sound strategy to set your practice up for success.”

Hugh Moncrieff Canada Life’s EVP of Advisory Network and Industry Affairs

The Canada Life Financial Knowledge survey was conducted by Canada Life from October 6 – 13, 2021, with an online sample of n=1,507 Canadian adults who are members of the Angus Reid Forum. The margin of error for a probability sample size of 1,507 is ± 2.5% 19 times out of 20.

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¹ Source: Stats Canada, National balance sheet and financial flow accounts, second quarter 2021