How Does Financial Education Pay Off?

How Does Financial Education Pay Off

So we’ve discussed the likely effects of having inadequate financial knowledge. Shortfalls in someone’s financial well-being or even retirement security are just a few possibilities. But it isn’t limited to just this alone.

A lack of awareness can also limit someone’s ability to capitalize on wealth-building opportunities. After all, consumers have access to a wide, diverse landscape of financial products. These selections offer differing levels of value depending on what the consumer needs, and the financial industry is also a dynamic, ever-changing space.

If you understand the fundamentals and keep up-to-date in your financial knowledge, you’re in a strong position to enhance and maintain your security. You become more empowered to make judgments about your current financial picture, and to make adjustments, if needed. Let’s look at some concretes of how this plays out in reality.

What are Concrete Ways Financial Education is Valuable?

There’s an old saying: “Don’t put all your eggs in one basket.” One of the fundamentals for having a secure future is diversifying your assets so they contain a suitable balance of risk and return potential. But without strong, fundamental knowledge, personal financial decisions can be intimidating and overwhelming.

Ultimately, this may lead to a number of undesirable outcomes:

• Consumers aren’t prepared to choose the best investments for their specific needs
• Over-reliance on just a few income sources – like relying only on Social Security in retirement – becomes a strong possibility
• It becomes difficult to judge the wisdom and expertise of a financial advisor consumers are working with
• It limits consumers’ ability to petition the federal government on issues which affect their livelihood

In short, a deficit in financial knowledge leads to a shortfall in quality of life. And think about this in the context of retirement planning. It's the point of, having accumulated assets over many years, now deciding how you will draw on them for income. Having an appropriate asset allocation of safe and risky vehicles, so you can receive the income you need for your lifestyle in retirement, is critical. What would happen if someone didn't have good financial education, and what might that mean for their retirement decisions?

Real-World Situations

Financial industry data shows the demand for guaranteed income products like annuities and life insurance is growing. Given the rise in consumer interest, insurance companies and regulators hoped to expand the number of guaranteed income product options available to consumers.

But the landscape has now changed. Earlier this month, the U.S. Department of Labor finalized its “fiduciary rule,” a 1,000-page publication with new regulatory requirements for the financial services industry. It’s a development with many implications for consumers and the advisors serving them alike.

One major takeaway is the regrouping of fixed index annuities as variable products, or products akin to variable annuities or securities. With the reclassification, fixed index annuities are subject to Best Interest Contract Exemption requirements – or requirements for advisors to disclose conflicts of interest in their compensation and take steps to reduce potential for it happening.

Some of the downsides of this new shift:

• Retirement savers with annuities or considering annuities – and brokers offering fixed index annuity options – are impacted
• As a result, transactions of fixed index annuity purchases will be subject to more scrutiny, which opens up doors for more private lawsuits
• This will lead to increased flux within the fixed index annuity market, leading to higher consumer costs and increased liability for insurance companies
• In turn, this can impact product offerings from insurance companies in the marketplace

It’s important to note this is just one of the changes under the new rule. The rule is still being reviewed by experts. But these changes may be so extensive and burdensome, it would be far more difficult for consumers to access quality financial advice.

What’s the Takeaway?

Developments such as the unveiling of the fiduciary rule show the importance of financial education. Ultimately consumers are the ones responsible for their future. Sound decision-making starts with knowledge, and educating oneself is the first step toward a stronger financial life.

To help consumers meet this goal – and to equip advisors to help their clients with educating themselves – is teaming up with Society for Financial Awareness (SOFA). Throughout April, we’re focusing on the importance of financial education and providing resources to help Americans increase their financial literacy.

If you're ready for personal guidance, can help you. Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

Author: Super User

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