I decided yesterday that “financial literacy” was a term of art that I did not fully understand, so I set out to find out what others think it means. The array is quite instructive. The lack of literacy is not for want of passing legislation and talking about it.
Wikipedia offers this and it is not far from the ideas of many others:
Financial literacy is the ability to understand how money works in the world: how someone manages to earn or make it, how that person manages it, how he/she invests it (turn it into more) and how that person donates it to help others. More specifically, it refers to the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.
Not a bad collection of ideas. I especially like the last sentence because it talks to the question, “What is financial literacy for?”
As I have discussed before, people have trouble learning anything unless they know what it is for. Sterile information is beyond useless. It cannot be used and it may confuse the person who is trying to learn something similar.
In Singapore the financial literacy program is aimed at this goal: “to empower educators to equip their students to be financially savvy so as to make informed decisions and exercise discipline in managing their personal finance.”
The addition of discipline to informed and effective decisions, how to earn money and invest it is useful.
There is an interesting question that falls out. “If a person was financially literate would they be less likely or more likely to use a financial adviser?”
I don’t know the answer to that but this is my instinct.
- The proponents of financial literacy as presently constructed will think “Less Likely”
- Many, if not most, of the people who are not presently financially literate will think “Less Likely”
- Of those who use an adviser now but don’t know what the adviser does. “Less Likely”
- Most financial reporters and commentators, “Less Likely”
Pretty much a consensus.
But, I think, perhaps foolishly, that when people become financially literate they will be “More Likely” to use a financial adviser. Here’s why.
- You can be competent financially knowing things like, where money comes from, what is it for, how to measure needs and resources, how to value time, how to invest and how to be disciplined. Those things are strategic. Knowing all that will not give you clue number one about how to actually do implement.
- Financially capable people recognize their own limits. That is part of discipline. One of the first limits they find and decide to avoid, is the tactical universe. Tactics are complex, ever-changing and nuanced. Most people will implement a particular one only a few times in their lives. They will gain little experience.
- Advisers will provide tactical choices with reasons for the ones they have presented. An aware client can make good decisions based on the choices presented. They will not do as well if they must sort through all the possibilities before deciding. For example, how many different life insurance products are available? I don’t know the answer but I know it is not fewer than 200. I also know that financially literate but unspecialized people will not recognize the differences.
- It is inefficient for a non-specialist to play in the tactical universe. By the time someone finishes searching all the choices, there will be new ones to consider and some of the ones they researched will have disappeared.
In my view the financially literate world will be occupied by two groups.
- The people who make self-interested strategic decisions, provide the resources to achieve them and have the discipline to carry them through. Clients
- The people who present and eventually attach specific tactical tools to the strategic decisions the others have made and then provide the logistic support to implement them. Advisers
In one way financial literacy is not different than English, French German, or Chinese literacy. It is about understanding meaning. Finance has ideas, presentations and techniques that have meaning. Knowing meaning leads to better outcomes.
Like language literacy, financial literacy is about enjoying the techniques, applying them, recognizing when each is appropriate and how they collectively tell the story.
It is not about writing, (probably poorly) and reading your own books.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.