Gauging Investment Knowledge: Is It Time To Fire Yourself, Or Your Advisor?

It has become increasingly important for individuals to become financially knowledgeable and to be able to plan and manage their financial assets, and especially, to be able to save and invest for their retirement years.

Complicating matters is the shear volume of financial information accessible to retail investors, and the large number of investment options to choose from.

The good news is that several surveys on investor knowledge have shown that the majority of Canadian investors (84% – BMO Nesbitt Burns) are confident that they are managing their investments well.

Informed investors:

• make better decisions
• are more disciplined about sticking with their investment plan
• can converse more knowledgably with their advisors

Gender differences

Sadly, it is suggested that women’s financial knowledge falls behind that of men (Canadian Financial Capability Survey):

• Based on correctly answering five key financial literacy questions related to interest, inflation and risk, Canadian women had lower financial literacy scores than men.
• Women were less likely than men to consider themselves to be “financially knowledgeable (31% vs 43%) and were less likely to state they “know enough about investments to choose the right ones that are suitable for their circumstances” (48% vs 63%).
• In couples where the male partner is mainly responsible for the long-term management of the household finances, only 10% of the women answered the questions correctly.
• On the other hand, when couples share the responsibility for long-term financial management, or where the woman’s contribution to household income is similar to that of their male partner, there is no gender difference in financial knowledge.

Seeking financial advice

One strategy to compensate for lack of financial knowledge is to seek financial advice.

• 52% of women reported that a financial adviser influenced their decisions compared with 44% of men.

However, both males and females with higher levels of financial knowledge also rely on advice from a financial adviser. This suggests that financial knowledge and the use of formal financial advice may complement one another rather than be substitutes for one another.

The 2016 CSA (Canadian Securities Administrators) Investor Education Study revealed that there has been a steady increase since 2006 in the percentage of Canadians working with a financial adviser (56%).

• Seven out of 10 investors use their investment advisers as a source of investing information.

Other sources of investment information include the media (27%), bank websites (26%) and family and friends (26%).

How are we investing?

Even though there is a lot of information available about all types of investments, investors know the most about GICs (58%), and Mutual Funds (55%), and are the least knowledgeable about ETFs (19%).

For the last 10 years, approximately three quarters of investors have rated themselves as “knowledgeable” or “somewhat knowledgeable” about mutual funds. And, interestingly, mutual funds seem to be the primary choice for the majority of investors.

A September 2016 survey commissioned by IFIC (The Investment Funds Institute of Canada) shows that investors have more confidence that mutual funds (86%) would enable them to meet their retirement goals over other investments such as stocks, GICs, bonds and ETFs.

In 2016, nine out of 10 mutual funds were purchased through a financial (investment) adviser – and investors are generally satisfied with the advice given to them.

People under 44, (62%) are more likely to purchase investments online than older people (13%).

Final thoughts

People are obviously paying attention to their investment and financial planning needs. Yet, research still shows that people often know the right things to do, but fail to do the right things.

Our wealth is important and should be taken seriously.

How can we ensure we really are savvy investors and not just think we are?

• Know your investor profile
• Know how much risk you can tolerate
• Be aware of how much you need to save
• Figure out how much you need to live on now and in the future
• Choose the appropriate investments to meet your goals

Spend time educating yourself about personal finance and the markets, and have a general knowledge about investments and how various factors can impact your portfolio. Using a financial advisor can also be a great help.

You can use this quiz – Is it time to fire yourself, or your advisor? – to gauge your investment knowledge and see how well you and/or your financial adviser are managing your wealth.