What Does Financial Literacy Mean?

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.

  1. The people who make self-interested strategic decisions, provide the resources to achieve them and have the discipline to carry them through.  Clients
  2. 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.

Don’t Take a Knife to A Gunfight

What, if any, is the duty of a financial adviser to educate their client as to macro and micro economics, taxation, psychology, longitudinal spending models, mortality and morbidity models, financial products and processes, financial planning in general, their plan in particular and how they are all connected?

Make no mistake, they are all connected.

What is the client’s duty to learn more?

If the client does not know enough, at some point the client ceases to be the planner and the adviser, by default, becomes the planner. That point will be different for every adviser and for every adviser/specific client relationship. It probably changes over time too.

It is when the client stops making the strategic decisions and the adviser adds strategic decision making to the tactical and logistical things they were doing before.

The ideal relationship is one where the client knows what they are trying to do, when they need it done, who is involved and with what resources it will be achieved. The adviser supplies methods of achieving the goals and implements the one or ones the client decides upon.

Problems happen when the client is incapable of deciding which tactics to implement because they have too little knowledge of the surrounding circumstances. This is when the adviser’s “closing techniques” become important. Advisers make little money if the client does not make a decision. So there is a problem. If the client cannot make the decision a skilled adviser ends up making it for them.

Most of the time that won’t matter because if the client knew enough about all the circumstances, they probably would have made the same decision. It becomes a problem under three conditions:

  1. The adviser did not know enough about the client and in fact the client’s decision would have been different.
  2. The adviser is acting in their own best interest
  3. The circumstances change later and the client accepts no responsibility for the failed decision

The world is a big and conflicted space. A well-armed adviser cannot take a poorly armed client into that space and believe that they can be the protector under all circumstances. That would be like the adviser going to a gunfight with the client. Adviser with a machine gun and body armor. Client with a t-shirt and a Swiss army knife. The adviser would have to be right every time for the client to have a hope of survival and the client could not contribute anything to make the adviser’s job easier.

Clients must participate. Client needs to understand both the purpose and the general idea of the techniques employed. They need to understand their resources and how their needs change over time. They need to be able to understand how they fit into the world and how their techniques might change if the world changes. They do not have to be experts but they need to know the general idea. Aware is good enough.

In the army the smallest fighting force is a mutually supporting pair. A well-trained pair is dramatically more powerful than two individuals. Individual soldiers do not do well in combat.

If you are smart as an adviser, you will train your client/partner. Your survival may depend on it.

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.

November is Financial Literacy Month

MONEY.CA ~ FPSC Hit the Streets and Talked to Canadians about Money

Poverty Sucks
Canadian Financial Literacy
TORONTO, Oct. 17, 2011 /CNW/ – October 17-23 is Canada’s third annual

Financial Planning Week and as part of its campaign to get more Canadians engaged in their financial wellbeing, Financial Planning Standards Council (FPSC® hit the streets to hear what Canadians are saying about money.

The resulting video is just a slice of the many comments heard from Canadians of varying ages. And because it’s never too early to start talking to your kids about money, FPSC also spoke with some very young people about their views too.

“Every day is financial planning day at Financial Planning Standards Council and for the 18,000+ Certified Financial Planner® professionals in Canada. But, while many Canadians may have great intentions, they fall into the procrastination trap,” says Tamara Smith, V.P. Marketing & Consumer Affairs, FPSC. “We are putting a call out to every Canadian: this Financial Planning Week, it’s time to take action — even if in small steps — to do more towards your financial wellbeing.”


Even small steps can build momentum and make a difference.


1. Reflect on your life goals (Own a home? Travel the world? Or simply get by?). Think in terms of shorter and longer-term goals. As well, consider your needs and wants. Financial planning supports your life and it involves much more than just planning for tomorrow. It’s about the continuum of your life, which includes today!


2. Talk to your life partner. Money often comes last on the list of relationship conversations but it should be a priority and is an essential part of family life planning. Plan now to prevent money from becoming a stressor on your relationship!

3. Talk to your kids. It’s never too early to teach your kids the value of money and the importance of good financial habits.

4. Talk to a financial planning professional who can help you make sense of it all. CFP® professionals are uniquely trained to help you translate your life goals into meaningful financial strategies and in seeing how all these strategies are connected. Before engaging anyone, learn what to look for and what to ask a prospective planner. See 10 Questions to Ask for starters.


5. Learn something new. You can start by going to a Financial Planning Week event.

6. Track your spending so you know where that darn money is going. You’d be surprised of how much you can squeeze out in savings when you are accountable for every dollar spent.

7. Create a monthly budget.

8. Pay yourself first and start a savings and/or investment program. Even small amounts add up if you save regularly.

9. Pay off debt — especially credit card debt that can result in high interest fees for late payments. Keep your credit rating healthy and don’t forget to pay those bills on time!

10. Get help creating a financial plan that looks at the whole picture. CFP professionals say it’s never too early to start, nor do you have to be wealthy to have a plan. Planning is for everyone!

11. BONUS TIP: Brainstorm a few of your own ideas of what you can do to celebrate Financial Planning Week and make them meaningful for you. Remember – it’s about your life.


  • FPSC executives are available for media interviews; also, CFP professionals from various regions across Canada are available to discuss financial planning topics.
  • Looking for statistics on Canadians’ emotional and financial wellbeing? Read the highlights on FPSC’s Value of Financial Planning Study.

About Financial Planning Week

Now in its third year, Financial Planning Standards Council (FPSC) and the Institut québécois de planification financière (IQPF) have jointly declared October 17-23, 2011 as Canada’s Financial Planning Week. During the Week, each organization will be spearheading industry events and public outreach activities in their respective markets. Financial Planning Week is part of an ongoing effort by both organizations to make financial planning more a part of Canadians’ lives. Stay up-to-date at www.financialplanningweek.ca / Twitter @FPWeek, and join us on the LinkedIn and Facebook page for Financial Planning Week.

About Financial Planning Standards Council

Financial Planning Standards Council (FPSC) is a not-for-profit organization which develops, promotes and enforces professional standards in financial planning through Certified Financial Planner® certification, and raises Canadians’ awareness of the importance of financial planning. FPSC’s vision is to see Canadians improve their lives by engaging in financial planning. Currently, there are more than 18,000 CFP professionals in Canada and more than 133,000 CFP certificants in 23 countries worldwide. See www.fpsc.ca for more information.

CFP®, Certified Financial Planner® and CFP (with flame logo)® are trademarks owned outside the U.S. by Financial Planning Standards Board Ltd. Financial Planning Standards Council is the marks licensing authority for the CFP Marks in Canada, through agreement with FPSB.

©2011 Financial Planning Standards Council. All rights reserved.

For further information:


Heather Mills
416.593.8587 x 235 or hmills@fpsc.ca

Eileen Chadnick
Chadnick Communications (for FPSC)
416.631.7437 or eileen@chadnick.com