Can You Distinguish Between Mozart and Meat Loaf?

Financial literacy is an interesting subject. I think that is like the curse of “interesting times.” What does it mean?

On Monday, Richard Charter of fee based financial planner Newport Private Wealth in Toronto, phoned about one of my blog articles. Financial Planning and Garden Sheds We talked about several things but one of them was the fear and frustration that comes with dealing with clients who are not involved with the process. The ones who say, “If you think it is a good thing to do, we will do it.” The subtext is “I don’t have the time to acquire the skills needed to make a rational judgement” or possibly, “This stuff is so boring.”

An adviser who deals with uninvolved clients is taking huge risks. Everything that happens is your fault. Well, maybe the client will accept responsibility for the good things.

Financial advisers must develop literacy in their clientele. Clients do not need to be fluent in techniques, but they need to be competent in establishing a strategic plan and they need to be aware of how their goals attach to the world at large. If there is not that level of awareness, they will fail to provide you with all the information you need to carry out your work. Never mind timely disclosure.

More to the point, only an involved user can make reasoned decisions and judge value. With coming changes in the industry, establishing your value proposition and connecting it to your client’s level of awareness will be crucial. It is a good idea to help clients acquire the tools to judge.

For a client, financial literacy is like musical literacy. I can tell the difference between Mozart and Meat Loaf with no effort. I know what music affects certain moods that I have, but I don’t know how you are affected. I know I like music in major keys better than in minor keys – usually. I can enjoy the benefits of music without being able to write a symphony or even play the harmonica. I can enjoy the benefits while knowing very little.

A client’s relationship with their financial plan should work the same way. You do not need to know how life insurance works but you do need to know what it does and when it is appropriate for you. Same with debt instruments like mortgages or accumulation products like RRSPs. Know how they affect you, not necessarily how they do it. I have no knowledge of how fuel injection works but I can drive my car.

Harry Markopolous took a 5-minute look at the Madoff fund and knew it was a fraud. It did not pass the smell test. The smell test skill is one that everyone can learn to some degree. As a client, pay a little attention, read a little, try to connect the pieces. You will be wrong sometimes, maybe often, but ask the questions. Keep it simple. Complexity disguises more than it clarifies.

Every interaction improves your ability to understand.

Eventually it will be like listening to music. With zero ability to write, read or play music, I can still notice a discordant note. That is the minimum skill level to look for with your financial plan. Know enough to tell when something doesn’t fit.

Advisers should get busy with helping people learn the skill. That help will not involve what a product is or how it works or how it compares to other similar things. It will only be about what it does and what are the conditions under which it will work best.

A client who is tuned into the idea of underlying conditions and knows that when they see this collection, there is a solution, somewhere. “I remember adviser telling me that if I see this to call.”

When it comes to product “Know How” is nice but “Know Who” will serve most people better.

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. | Twitter @DonShaughnessy | Follow by email at moneyFYI

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