Helping clients avoid the cost of financial ignorance

Financial Awareness Day, observed annually on Aug. 14, promotes financial literacy and encourages individuals to take steps to improve their financial well-being.

In other words, Monday is the day when advisors can proudly tell their clients: "The more you know, the more you will make — and the less it will cost you."

A recently released Allianz study showed that almost a third of Americans lack sufficient skills and knowledge to make sound financial decisions and that this ignorance costs the average household as much as $5,059 a year. Over a decade, this lack of awareness could amount to a deficit of $84,458 compared to households led by people who understand financial basics, the report said.

The study also showed that 58% of Americans have average financial literacy and only 10% demonstrate high financial literacy, which was roughly in line with the results in the majority of the other six countries surveyed.

Allianz surveyed more than 1,000 people in the U.S. and six other countries for the study, asking them a series of questions designed to test their understanding of financial basics such as interest rates, inflation, and investment risks and returns.

Dean Tsantes, a Vienna, Virginia-based financial planner at VLP Financial Advisors, believes a lack of financial awareness is a substantial part of the reason why two-thirds of Americans struggle to make ends meet and why 401(k) withdrawals are up nearly 40% from a year ago.

“If someone like a financial planner sat down with them years ago and explained the value of changing their lifestyle and spending habits, then they would not only be better off financially, but savvier when it comes to finances and where their money is going,” Tsantes said.

Kelly Famiglietta, partner at Charles Stephen, part of Osaic, added that advisors take the emotional aspect of investing out of the equation.

“Our money is emotional to us no matter how seasoned we are at investing our own money, and this can lead to emotional decisions,” Famiglietta.

Brandon Dixon-James, president and wealth manager at Resilient Wealth Management, part of Osaic, said the value of an advisor and the financial education they provide is truly highlighted when a strategy created under normal circumstances is put to the test.

“As time goes on, life happens. Markets become volatile, there’s a job loss in the family, or a major life change. When so much is at stake, as humans we become irrational in our thinking and then in our decision-making," Dixon-James said. "My job at that point is to bring things back to rational thinking and a reminder of the objectives.”

Ludovic Subran, chief economist at Allianz, explained in the release how over long investment periods, such as when saving for retirement, a lack of financial awareness can literally cost a fortune.

“By acquiring basic knowledge and skills, people can move from low to average financial literacy and put a lot more money in their pockets," Subran said.

As to how much more money they can add to their bank account, the Allianz study said a person with high financial literacy can expect to earn an extra $5,198 per year, which is almost 5 times the median weekly earnings of full-time workers in the U.S. right now. Over the course of 30 years, this adds up to $880,825, according to Allianz.