Research & Initiatives
Financial stress can affect anyone – young or old, married or single, rich or poor. And when it does, its impact can overwhelm us at home and at work. Lost productivity due to employees worrying about personal finances is estimated to cost Canadian employers over $20 billion each year or 7 to 14 working days per year.
When combined, the academic literature, the industry surveys, government research and the lab’s preliminary analysis start to paint a picture of a challenging landscape. Six themes appear to be developing – but they are often deeply entwined and it is not yet clear which themes would be considered the ‘drivers’ of financial wellness versus secondary influencers.
Our Six Emerging Themes
The Three Neighbours
Virtually all of the studies we’ve examined conclude that there are three groups of households within the financial wellness spectrum. We broadly describe them as financially “comfortable,” financially “coping” and financially “stressed”. Of particular note is the prevalence of financial fragility.
The studies consistently note that the financially comfortable group are a minority – roughly one-quarter to one-third of the total households. The observation is important because financial stress is tightly entwined with physical and mental health and flows downstream to productivity, absenteeism and presenteeism issues. If two-thirds of the working population are ‘struggling,’ it doesn’t appear to set the stage for a financially resilient society or economy.
The Three Sisters: Savings, Spending and Debt
A recurring theme throughout the industry studies and the lab’s analysis is that savings, spending and debt play uniquely powerful roles in financial resilience. The lab’s analysis to date has concluded that each is a determining factor in the lab’s clustering algorithms. The challenge with that statement is that the three variables are interconnected to each other – income minus spending equals savings and if savings are negative, households often turn to debt. It is therefore dangerous to investigate each in isolation of the others. Any definitive conclusions will need to be in context.
Income - the Elephant in the Room
Most of the survey-based research notes a relationship between income and financial wellness but some also go on to note that income doesn’t have a causal relationship. At the lab, we’ve determined that income is one of many features of financial well-being, but income alone does not determine your location on the well-being spectrum (i.e. it matters, but doesn’t tell the whole story). There was a significant number of both high- and low-income households in all three clusters.
Literacy or Behaviour?
Financial literacy became a popular term in 1914. Since then a significant amount of resources have been invested in financial literacy on the assumption that “knowledge” played a defining role in financial wellness. However, some of the more recent research has concluded that while literacy is important, financial behaviours are a more dominant factor in financial well-being. At the lab, some of our early analysis has concluded that there is an inverse relationship between knowledge and well-being – some households with the highest confidence in their well-being tested quite poorly on their literacy.
The Role of Advice
Studies within the financial wellness sphere have generally ignored the impact of advice on financial wellness. Our research thus far has concluded that advisors manage portfolios consistent with the client’s suitability and that the advice is customized to their client’s unique needs. We also found that advisors are systemically safe and conservative in their advice and therefore appear to mitigate exposure to undue risk.
Most studies note a tendency for demographic or socio-economic factors to be correlated to financial wellness. Income, employment, regionality, age and gender are all mentioned as influencers in the studies. At the lab, we’ve found that demographics play a role but the role appears to be secondary effect when compared to debt, spending and behaviour. This observation is important because it implies that solutions cannot be deployed broadly across specified segments. Instead, solutions will probably need to be deployed one at a time and in the context of a households unique circumstances.