Are you financially literate?

Author Ray Anderson Published 6 July 2009

The global economic crisis has brought attention to the decline in value of superannuation assets held by individuals and other investors across Australia and elsewhere. The fact that equities can decline in value is nothing new, and has occurred many times over the years. Equally, the collapse of investment vehicles such as Timbercorp, Storm and others has led many to question the role of financial advisers in the decision-making process of ordinary 'Mum and Dad' investors. You have to ask, how financially literate are these investors? Do they know the terms and conditions of their investments? Do they know what they're getting themselves in to?

Financial literacy is hugely important in this marketplace of increasingly complex and sophisticated investment products. Mum and Dad investors are earning, saving and investing billions of dollars, but are they really capable of making informed and effective decisions about their investments?

Recent surveys indicate that very few people are confident in their ability to invest; one even found that 21% of Mum and Dad investors with a Self-Managed Superannuation Fund didn't understand what the Sole Purpose Test was in relation to their fund. Enter the financial planner and investment advisor—ever crucial to most people's investment decision making.

A 20–21 June 2009 Weekend Financial Review article “Sunk by Storm’s cloud of confusion” documented those who lost money on Storm Financial Services. While we know that investors relied on the expertise of financial advisers, we must ask whether they understood the terms and conditions of their investment, whether they were aware of the meaning of margin calls, and whether they understood that they were risking their whole investment.

Naturally, we are all sympathetic to the plight of investors in times of economic crisis. But all investors must learn from the experience: take more care when investing and seek independent advice about investment assurances and terms and conditions.

Like the Wall St stock market crash that precipitated the Great Depression, this most recent financial crisis has spurred further regulation of the financial planning industry. But investors should still take it upon themselves to educate themselves about investing so that they may make better investment decisions. After all, tighter regulation won't prevent advisers from behaving improperly, and it won't prevent another global financial crisis.

For a Mum and Dad investor perspective on the share market before the global financial crisis, visit:
www.businessday.com.au/business/in-defence-of-the-mum-and-dad-investor-20080409-24ry.html

For accounting profession perspectives on the global financial crisis:
www.globalissues.org
www.asia.wsj.com
www.ifac.org

For more information on financial literacy:
www.understandingmoney.gov.au
www.anz.com.au