Advisors need to care about financial literacy. Here's why

Though not yet an industrywide movement, many financial advisors are now signaling a willingness — even a desire — to join the growing effort to improve financial literacy in this country. Many are already involved, some deeply so. 

It appears that two trends have contributed to this phenomenon. First, it has become easier and less expensive for advisors to support the cause. Second, advisors have become more aware of the compelling reasons to get involved, reasons that include serving their own interests.

What is financial literacy?
There is no universal definition of "financial literacy." In 2010, the Government Accountability Office defined it as "the ability to use knowledge and skills to manage money effectively … (including) … the ability to understand financial choices, plan for the future, spend wisely and manage the challenges that come with life events such as a job loss and saving for retirement or a child's education." 

More recently, a 2020 report by the U.S. Financial Literacy and Education Commission stated: "Financial literacy describes the skills, knowledge and tools that equip people to make individual financial decisions and actions to attain their goals."

The lack of a single definition makes measuring financial literacy with consistency difficult. In 2014, the Standard & Poor's Ratings Services Global Financial Literacy Survey gauged financial literacy around the world by assessing knowledge of diversification, numeracy, inflation, and compound interest. It found that only 57% of U.S. adults were financially literate, with results varying among demographic groups. While the U.S. lagged countries such as Denmark, Norway, and Sweden (tied for first place at 71%), we performed better than most other countries. Financial literacy rates averaged only 33% globally and were as low as 13% in some areas.

While a 57% financial literacy rate exceeded the global average, the S&P survey nevertheless revealed that, by some measures, almost half of the adults in this country are not financially literate. Presumably, our children fare even worse.

How can advisors help?
Advisors have several means for joining the effort to improve financial literacy, and most of them are relatively easy and inexpensive. According to a 2022 CNBC/Acorns/Momentive survey, 83% of parents said they are responsible for their children's financial literacy, but many admitted they never talk to their children about the topic. And according to Next Gen Personal Finance, most states do not require students to take a personal finance class to graduate from high school. To start, then, advisors can approach local schools to offer classroom assistance, curricula, workshops, seminars, and mentoring programs.

Advisors can also offer continuing financial education for adults in their communities. Additionally, they can utilize their websites, social media, and other platforms and tools to educate the broader public. Indirectly, advisors can support organizations, including nonprofit organizations, that are specifically dedicated to promoting financial literacy.

With the proliferation of artificial intelligence, the options expand further. AI already is having an impact on how advisors work externally with clients and internally with their teams. Those who are eager to tackle the problem of financial illiteracy can now consider AI applications to amplify their reach.

Why should advisors be interested?
We can begin with a useful analogy to "health literacy," which the Centers for Disease Control define as "the degree to which individuals have the ability to find, understand and use information and services to inform health-related decisions and actions for themselves and others." The CDC understands that educated consumers of medical services are better consumers of those services as measured by efficiency and effectiveness, and so it is with financial literacy. Broader financial literacy means a better educated and broader consumer base for financial advisors. It also means a more efficient and effective use of financial services.

A related benefit is a larger, more diverse pool of future employees for advisory firms to hire. A more financially literate populace should lead to more people interested in financial planning. In turn, more colleges and universities will offer financial-planning programs, and, ultimately, there will be a deeper pool of talent. The demand is certainly there. According to the BMO Real Financial Progress Index, millennials and Gen Z overwhelmingly seek greater financial literacy.

Beyond those benefits, there is a broader set of reasons why advisors should care. To start, by improving financial literacy we can make progress in addressing some of the systemic problems we face as a society. These problems range from a lack of access to financial resources to overdependence on the government to protecting against growing levels of financial crime to avoiding systemic collapses such as occurred in 2008 when too many people did not understand their mortgages or their ability to support them.

Ultimately, however, financial literacy is a key to long-term societal sustainability. As we face increasingly dangerous levels of inequality that threaten the fabric of our society, the solutions cannot come only from our government. Businesses must also do their part, and few are as qualified as financial advisors to take the lead. By doing so, we can ensure that the society that has allowed our industry to flourish will be positioned to do so for many years to come.

Perhaps most importantly, financial advisors who believe in the power of their services also believe that their clients are happier and will live better lives because they are the beneficiaries of good financial planning. It stands to reason, then, that if better financial literacy leads to more people benefiting from good financial planning (whether provided by financial advisors or not), it will also make the world a happier place. That should be reason enough for every financial advisor to care about improving financial literacy.