One surefire way to increase financial literacy: Disclosure

While a federal task force travels the country looking for ways to promote financial literacy, David Hague is actually doing it.

He teaches an advanced financial literacy course at Toronto's Sheridan College to accounting students, who are there because they have to be, and continuing education students, who are there by choice. Topics covered include managing household cash flow, basic investing and borrowing math, mortgages, credit card interest and the difference between buying something and leasing it.

Mr. Hague's assessment of the level of knowledge that students are bringing to the course? "Completely inadequate," he said. "Even the accounting students."

Unanimity on the need for more financial literacy is such that the federal government created a task force to advise it on strategies. The task force began national consultations April 6 in Vancouver and Yellowknife, and largely concludes them this week with a two-day stop in Ottawa.

More than 200 submissions were made, more than 170 people or groups made presentations and roughly 260 comments have been posted on its website. They'll all be weighed in writing a final report that goes to Finance Minister Jim Flaherty in December.

Mr. Hague himself addressed the task force last month, and his suggestions were among the smartest I've seen, but also the least likely to be implemented. He thinks people would be smarter consumers of financial products if they knew how much they were paying in fees, commissions and interest.

"Financial institutions, if they really believed in literacy, would start disclosing more information," said Mr. Hague, who retired from the financial industry early this year to focus on teaching and consulting. "This would open clients' eyes and force them to get more financially literate."

There are lots angles on financial literacy - incorporating it into public school curriculums, finding key messages and figuring out how to deliver these messages. But improved disclosure by banks, brokers, fund companies and insurers should be part of the mix, too.

Fees top Mr. Hague's disclosure priority list. "The simplest thing financial services providers could do to improve financial literacy in Canada would be to provide clients with a statement that details all interest paid on mortgages and lines of credit, all ATM fees, mutual fund fees, service fees, etc."

Suggestion to the task force: Let's start this process with mutual fund fees, which are currently disclosed as a percentage of the total assets in a fund. The cause of financial literacy would be well served by showing people how much they paid in dollar terms, so they could compare that to their actual gains or losses.

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Showing people how their investments have performed is another area where better disclosure is required. The investment industry preaches long-term thinking, but it too often shows clients only how their holdings have done in the past quarter.

Literacy starts with reading, but there's nothing to read in account statements like these.

Mr. Hague said sellers of financial products should also be required to disclose exactly what they're licensed to sell, and from which companies. If someone in a bank branch is trying to sell you the bank's own mutual funds, it would be worthwhile to know whether they can access the entire fund universe or just the in-house stuff.

Another of Mr. Hague's disclosure suggestions is that clients be told by letter when their financial adviser has been disciplined by regulators. (Advisers: please explain why this isn't a super idea that will save clients from being victimized).

So goes Mr. Hague's wish list. He said he's not expecting much from the task force, mainly because its top two people are financial industry heavyweights. Donald Stewart, the chairman, is CEO of Sun Life Financial and vice-chair Jacques Menard is the chairman of BMO Nesbitt Burns.

And yet, during a break in task force business on Wednesday in Ottawa, Mr. Stewart offered just a bit of hope on the disclosure issue. "Definitely, increased disclosure is something the [financial]industry has to take on," he said. Quite correctly, he pointed out that disclosure without the use of plain language could be pointless. But the head of Canada's second-largest insurance company didn't dismiss the idea of telling customers more about the selling process and cost of financial products.

"Increased disclosure in an inexorable trend in all aspects of business life," he said.

Mr. Hague, the cynic, said the task force members were polite and well-organized when he made his presentation, and they asked follow-up questions. "But I believe you'd need an archeologist to find any record of what I said."

The ABCs of the federal financial literacy task force

Origin: Announced in the 2009 federal budget, which came at the height of the financial crisis.

Mandate: Recommend ways to make Canadians smarter about borrowing, saving and investing.

Timeline: Public consultations are just finishing up and the next step is to present Finance Minister Jim Flaherty with a summary of findings in July; final recommendations in December.

Members: 13 in total, drawn from the financial services, business, credit counselling and educational sectors.

Check it out: financialliteracyincanada.com