Financial literacy and the use of financial advice—a non-monotonic relationship
Can financial advice serve as an effective substitute for financial literacy? It all depends on the investor.
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.
The authors used for their analysis two datasets commissioned by the Financial Industry Regulatory Authority Investor Education Foundation: the National Financial Capability Study (NFCS) 2015 State-by-State Survey and the NFCS 2015 Investor Survey. The State-by-State survey assesses the financial capability of the U.S. adult population using a nationally representative sample of 27,564 Americans aged 18 or older. The Investor Survey provides additional insights from 2,000 State-by-State respondents who reported having investments outside of retirement accounts.