Can financial advice serve as an effective substitute for financial literacy? It all depends on the investor.
Summary
Individuals have greater responsibility for personal financial matters today, even as financial markets and products have grown progressively more complex. In this paper, the authors provide theoretical and empirical analyses of the effects of financial literacy on investors’ use of financial advice. They describe how investors with various levels of financial literacy can best utilize financial advisors, while highlighting the importance of information for gauging the quality of advice.
Key Insights
- Investors have three options regarding the use of financial advice: self-investing without any advice, consulting advisors to help with decision-making, and delegating decision-making to advisors.
- For investors with low financial literacy, delegation is preferable to self-investment and consulting.
- As financial literacy increases, consulting becomes preferable to delegation due to the increased capability for identifying financial advisor quality and decreased costs in implementing accepted advice.
- At still higher levels of financial literacy, self-investing without a financial advisor becomes preferable as the least costly approach.
