Most Australians are bombing when it comes to financial literacy.
1. If you put $100 into a no-fee savings account with a guaranteed interest rate of 2% per year, how much would you have in the account at the end of the first year, once the interest payment is made?
2. Imagine now that the interest rate on your savings account is 1% per year and inflation is 2% per year. After one year, would you be able to buy more than today, exactly the same as today, or less than today with the money in this account?
3. Is the following statement true or false? ‘Buying shares in a single company usually provides a safer return than buying shares in a number of different companies.’
4. Is this statement true or false? ‘An investment with a high return is likely to be high risk.’
5. Suppose that by the year 2020 your income has doubled, but the prices of all the things you buy have also doubled. In 2020, will you be able to buy more than today, exactly the same as today, or less than today with your income?
Those questions (answers below) were asked in a survey conducted by the Household, Income and Labour Dynamics in Australia (HILDA).
Just 24 per cent of respondents aged 15 to 24 answered all five questions correctly compared with 55 per cent for those aged 55 to 64.
Does that help to explain why banks could charge fees for no service for so long, as revealed by the banking royal commission?
The financial literacy of older Australian – as opposed to younger – is shown in YourLifeChoices’ Retirement Income and Financial Literacy Survey 2018. An overwhelming number of the 5000-plus respondents said they believed they didn’t need a financial planner, 86 per cent said they managed their own financial affairs and 65 per cent said they understood finances and investments either well or very well.
However, New South Wales Business School professor Pamela Hanrahan says too many Australians cannot make basic maths calculations.
“It's quite frightening really," she told ABC radio. “All the studies indicate that there's a significant portion of people who can't, for example, work out what 10 per cent of 100 is equal to.
“But the real difficulty is that because the system is complicated to navigate, because it involves lots of different parties who charge lots of different fees, people really rely on their advisers to give them appropriate guidance…
“That may go some way to explaining why [the practice of] fees for no service has existed for so long.”
Professor Hanrahan said financial advice clients had lost trust in a system where “you can be a car salesman one week and financial adviser the next”.
Also speaking on ABC Radio, Andrew Page, who runs online investment research platform Strawman, said he was not surprised at the banking inquiry revelations, in particular, the fees for no advice.
"It seems really bizarre, but the reason it can go on untracked is that it's not directly coming out of your wallet," Mr Page said.
"It's not directly being debited from your bank account.
"It's usually charged as an administration fee on your insurance product, or on your superannuation fund, as an annual fee.
"A lot of us will give that a sideways passing glance once a year and don't think about it, and as it is coming out at the royal commission, it's something that's become quite prolific."
Professor Hanrahan said one lesson to be learnt was that everyone should read their statements, make sure that they understood all the deductions, and to follow up if they had concerns.
The answers to the questions above are: 1. $102; 2. Less; 3. False; 4. True; 5. Exactly the same.
Do you always check your financial statements? Do you understand how to assess super fund fees? Are the fees properly explained on your statements?