Rich people overestimate their literacy, ignoring advisors
Whether people ask for professional financial advice, depends heavily on confidence in their own financial literacy. According to Dutch research based on a national survey and bank investor data, particularly rich people don’t seek advice, relying significantly on what they think they know. However, they appear to overestimate their knowledge.
These research results are reported in the latest november edition of the Journal of Economic Behavior & Organization. The report refers to other scientific researches that found the same outcomes.
Actual savvy don’t ignore advisors
The most self-convinced people, mainly found within rich households, ask for expert help roughly half as much as the least convinced. Striking is that there’s no relationship, positive or negative, between the demand for professional advice and people who actually do have high financial literacy. The actual financial literate people do not ignore financial advisors significantly.
The researchers point to other literature, showing overconfidence is related with a higher tendency to engage in risky financial behavior. Within this context risky is perceived as without help of a financial advisor. Another analysis, done by Von Gaudecker in 2015, shows that most losses from insufficient diversification are suffered by non-advised investors with low financial literacy.
Holding a mirror
There are contradicting outcomes of researches concerning the added value of financial advisors. On the one hand it is found that financial advice has positive effects on investment decisions. However, there are also studies showing advisors can do more harm than good.
Therefore, the researchers state that ‘policy makers should be careful to put financial advice forward as a mechanism to curb the ill effects of low financial literacy.(…) Steering people towards more accurate self-assessments seems a more promising route.” Their advice is to confront financial consumers with the disparity between their self-assessed and test based results. Dependent on the results, they would be allowed to access execution-only financial services.
Why do others not ignore advice?
The research report also provides explanations for the negative relationship between asking financial advice and financial literacy: illiterate people would be extra motivated to seek advice, because they tend to gather and process financial info more slowly. Moreover they would be less aware of potential pitfalls of hiring an advisor, namely the advisor’s incentive structure that creates a conflict of interest.
The report as well refers to research that could explain why actual financially literate people don’t ignore advisors: they appear to be able to induce advisors to provide better information. In addition, sophisticated investors would have higher opportunity costs of time, enabling them to better plan meetings with advisors.