Financial Literacy: A case of home equity release schemes

Financial literacy allows financial planners to provide unbiased and relevant recommendations to their clients as well as help them to mitigate clients’ behavioral biases. By recognizing clients’ behavioral biases, financial planners can take steps to mitigate their effects and make more rational and effective decisions (Barber and Odean, 2000; Shefrin and Statman, 1985; Huberman, 2001, Baulkaran and Jain, 2024). Financial planners’ ability to mitigate clients’ behavioral biases will likely increase with a greater degree of financial literacy. Financial literacy in the context of home equity release schemes refers to the planner's ability to understand the nuances of these products, assess their suitability for different client profiles, and communicate the associated risks and benefits effectively to clients (Baulkaran and Jain, 2024 and Baulkaran and Jain, 2023). Baulkaran and Jain (2024) highlights that while financial planners are generally knowledgeable, they may still fall prey to behavioral biases that can influence their recommendations. Given that financial literacy is paramount in financial planning and advising services, we examine financial planners’ knowledge of home equity release options. We show that financial planners’ total financial literacy score across different home equity release options is 64%, with the 75th percentile score being approximately 79%. Financial planners appeared to underestimate their knowledge. For example, 54% of planners rank their knowledge of reverse mortgages as very high to extremely high compared to an average score of 60% for reverse mortgage questions. Using Tobit regression, we show that several demographic characteristics explain financial literacy total scores as well as reverse mortgage scores. Also, we show that financial planners with high overconfidence bias scored less on the literacy questions. Finally, the planners specializing in retirement planning tend to have a high literacy score.