Never before have so many Canadians been exposed to so much expert financial advice. Yet rarely have so many households been swamped with so much debt.
That, in brief, is the challenge facing the federal government as it struggles to prepare Canadians for a world of ever more complicated financial products. Its move, announced Tuesday, to ensure that low income Canadians have access to no-cost bank accounts, is easy to applaud. So is its appointment last month of Canada's first Financial Literacy Leader. The problem is that these and other strategies to turn us into a nation of informed consumers still fall far short of what is needed.
Despite what most of us believe, there is little evidence that financial education actually improves financial behaviour. There is even less evidence that the mere existence of good financial products does much to improve clients' welfare.
Lauren Willis, a professor at Loyola Law School in Los Angeles, examined the case for money-related training in a 2008 paper and concluded that "the pursuit of financial literacy poses costs that almost certainly swamp any benefits."
Prof. Willis found that assessments of the impact of financial education are nearly always too optimistic because they tend to rely upon the self-reported impressions of participants rather than actual gauges of their behaviour: "In one study, consumers who attended retirement-related financial classes thought their literacy had increased, but their scores on financial tests did not … in another, employees who reported at the end of a retirement investing seminar they would increase their savings generally failed to do so."
Financial education may increase consumers' confidence, but not their abilities, making them actually worse off than before, she writes.
Even if financial education has some short-term effects, their impact tends to dissipate, according to a study by Lewis Mandell of the University of Washington and Linda Schmid Klein of the University of Connecticut. They looked at 79 high-school graduates who had taken a personal finance course in previous years and found they were no more financially literate or thrifty than graduates who hadn't taken the course.
All of this jibes with experience. The past decade has seen an explosion of personal finance advice on the Web, along with the introduction of a vastly expanded array of products for savers and investors, ranging from low-cost index funds to online banking. The results? Dismal.
Canadians' debt loads are hovering near record territory in comparison to disposable incomes. Savings rates, while riding a recent uptick, still sag far below their levels of decades past. And legions of payday lenders attest to the fact that many Canadians still don't understand that better deals are available elsewhere.
The recent rush to improve financial literacy may simply reflect a desire on the part of lenders and government to wash their hands of the issue. Offer people courses in personal finance and you can henceforth claim you have done all that is needed.
Of course, by the same logic, a short course in physical fitness and health care would obviate much of the need for doctors. In an age of increasingly complex financial products, more is needed than a quick fix of financial literacy.
Prof. Willis does have some thoughts on how the system could be improved. For instance, regulators could impose a fiduciary duty on financial advisers to act in their clients' best interests. They could also require banks to offer low-cost "plain vanilla" versions of all their products that would be the default choice. Both are worthwhile notions that go far beyond Ottawa's current crop of worthy but timid improvements to a broken system.