Faced with savings rates and investment returns at record lows, the cost of educating children and caring for aging parents, and planning for their own retirement in an era of shrinking pensions, many Canadians have a real need to get their financial houses in order.
“Yet only one in four Canadians has a financial plan in place,” Cary List, Toronto-based president and CEO of the Financial Planning Standards Council, told the Financial Planning Vision 2020 Symposium in Toronto in November.
Enhancing their financial literacy is an important step in assuring Canadians’ financial well-being, and the introduction of basic financial education into the compulsory school curriculum is underway in many provinces. But financial knowledge is not enough. Gary Rabbior, president of the Toronto-based Canadian Foundation for Economic Education, said steps need to be taken beyond financial literacy to financial capability – “the development of knowledge, skills, attitude and behaviour.”
What can financial professionals do to help Canadians make the shift from knowing what to do with their finances and actually doing it? They need to become students of human behavior,” Mr. List said, “and hone their communication and soft skills.”
“As a society we have spent a lot of time designing products and innovations, but too little time getting people to use them,” said Dilip Soman, professor of behavioural economics at the University of Toronto.
And people need help with this, he added. “The laws of economics tell us to do certain things…but human beings are different from the mythological creatures that live in economics books…Human beings are emotional…irrational.” Behavioural economics, he noted, “tries to re-engineer the field of economics so that it applies to human beings.”
Human laziness often undermines productive behaviour, Dr. Soman said. As an example, he noted that organ-donation consent rates in developed countries jump from very low to almost 100 per cent. Research has found that many countries with low consent rates, such as Denmark and Germany, have opt-in systems whereby residents have to fill out organ donation cards or otherwise get themselves on registries in order to be a potential donor. But some countries, like Austria, where organ donation consent rates are extremely high, have opt-out systems; anyone who doesn’t carry a card stating that he or she had opted out is a potential donor. “Defaults work amazingly well,” he said, “because people are lazy.”
Confusion and unwillingness to appear ignorant can also fuel unproductive behaviour. When only a small percentage of eligible families accessed the Canada Learning Bond, a Government of Canada program introduced in 2004 to help low-income families educate their children, a problem came to light. “Families needed a bank account to get the payment,” Dr. Soman said, and many of those eligible, some of them newcomers to Canada, did not know how to open one. The solution, he said, was to teach lower-income Canadians how to open bank accounts.
Advisors need to understand the human capacity for procrastination, he said. “People are usually very willing to do the right thing as long as the right thing is in the future…the future always looks rosy.” He added that this applies to both saving for retirement and getting physically fit.
The trick, he said, is to get people to commit to something in the future, and make sure there is a locking-in mechanism in place. He suggested solutions similar to those offered by www.stickk.com, a website that binds users to achieving their goals by putting their reputations and their money on the line.
“Giving people too many choices can confuse the hell out of them,” Dr. Soman added. “If financial planners give clients a lot of investment options, they may have to hold their hands and help them decide.”
But while some clients want and need direction, others will want planners to take a more egalitarian approach. Lionel Laroche, president of MultiCultural Business Solutions, a cross-cultural consultancy in Markham, Ont., noted that many clients come from cultures that are more hierarchical than Canada. “At work, many immigrants expect clearer direction from their managers than Canadian managers expect to give employees,” he said. They may consider Canadian managers lacking in leadership, and Canadian managers may label them as lacking in initiative.
Financial planners, he said, should understand that new Canadians may expect a planner to give considerable time up-front getting to know their situations, and then take a more directive approach down the road, offering solutions that fit their unique needs.
Clients with non-hierarchical backgrounds, on the other hand, will want to be shown a lot of different investment options by their planners, Dr. Laroche added.
He cautioned against making assumptions based on a client or a prospect’s command of English. “I’ve seen financial planners who dismiss people who don’t speak English well,” he said, “but this has nothing to do with how much money they have.”
He recommended developing sensitivity to clients’ non-verbal communication. “Every culture has a range of emotions its people will display,” he said. People from France and francophone Canadians will display more emotions than anglophone Canadians, and Italians will display even more. “If [Italian actor-director] Roberto Benigni was your client in May 2008…he would have shown quite a bit of emotion,” he said. And he probably would have interpreted the typical anglophone Canadian advisor’s reaction to his situation “as you don’t understand or you don’t care.”
Conversely, Dr. Laroche said it may be difficult to read the emotions of the average Japanese, Chinese, Korean or aboriginal client.
To bridge the cultural divide, he suggested:
Asking clients to express how they feel about a situation, and show you understand the impact it has on them.
Monitoring the impact you have on clients. He gave the example of telling an immigrant to “break a leg,” and then having to explain that this is an English expression that means “good luck.”
Being patient with clients who need more silent gaps in conversations.
Using a round-table approach to meetings to encourage culturally diverse clients to speak up.
Clients from different countries may also have different views of investment risk. “People from Hong Kong, where markets and money are big topics of conversation, generally tolerate more risk,” Dr. Laroche said. “In Canada, stocks and derivatives are often seen as risky investments and bonds as safe investments, but in Mexico bonds are considered risky and land is viewed as a safe investment.
“People who are risk-adverse will also buy more insurance than those who are not,” he said. “The Japanese have a low tolerance for risk, and the number of people in Japan who have life insurance policies is double what it is in Canada, and the value of the policies is twice as great.”
But he also noted that generalizations about groups should not automatically be applied to individual members, who may not fit the pattern. The know-your-client approach should always be taken.
In his closing address, Mr. List noted a number of industry developments that will nurture good financial behaviour among Canadians. Sales jobs are becoming a thing of the past, and there is now more attention than ever being given to advisor-client relationships. “Doing what is best for the client is no longer optional,” he said.
And the certified financial planner designation is increasingly being recognized as the hallmark of a qualified financial professional. “In 2011, unaided brand awareness of the CFP was up 92%, to 25% from 13%, since 2006,” he said.
Another exciting change, he said, is that more younger people are entering the profession to replace baby boomer planners as they retire. More than 50% of CFP candidates are now age 35 or younger, up from 25% five years ago, and more than 30% are age 30 and younger, compared with about 10% five years ago.