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Why Financial Advice Cannot Substitute for Financial Literacy?

Listed author(s):
  • M. Debbich

This paper examines the ability of financial advice provided by sellers of financial services to substitute for financial literacy of customers. I set up a simple theoretical model in which an informed financial advisor communicates with a less informed customer of financial services. Given the existence of a conflict of interest from the advisor's perspective, the model predicts that only well financially sophisticated customers receive relevant information from the advisor. This fact tends to prevent less financially sophisticated customers from asking advice although they are the most in need of financial guidance. Overall, the model predicts a monotonic relationship between financial literacy and the demand for financial advice. I then use a representative sample of French households (PATER 2011) to test the predictions of the model. I find that financial literacy is strongly associated to the probability to ask a financial advisor. Decomposing the measure of financial literacy, I show that the relationship is weakly monotonic which provides support to the fact that financial advice cannot substitute for financial literacy. This result is robust to alternative specifications and instrumental variables regressions.

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File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/working-paper_534_2015.pdf
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Paper provided by Banque de France in its series Working papers with number 534.

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Length: 44 pages
Date of creation: 2015
Handle: RePEc:bfr:banfra:534
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Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS

Web page: http://www.banque-france.fr/

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  13. Johan Almenberg & Jenny Säve-Söderbergh, 2011. "Financial Literacy and Retirement Planning in Sweden," CeRP Working Papers 112, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  14. Annamarie Lusardi & Olivia S. Mitchell, 2005. "Financial Literacy and Planning: Implications for Retirement Wellbeing," Working Papers wp108, University of Michigan, Michigan Retirement Research Center.
  15. Margaret Miller & Julia Reichelstein & Christian Salas & Bilal Zia, 2015. "Can You Help Someone Become Financially Capable? A Meta-Analysis of the Literature," World Bank Research Observer, World Bank Group, vol. 30(2), pages 220-246.
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  17. Annamaria Lusardi & Olivia Mitchell, 2006. "Financial Literacy and Retirement Preparedness: Evidence and Implications for Financial Education Programs," Working Papers wp144, University of Michigan, Michigan Retirement Research Center.
  18. Lusardi, Annamaria & Mitchell, Olivia S., 2007. "Baby Boomer retirement security: The roles of planning, financial literacy, and housing wealth," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 205-224, January.
  19. Leora F. Klapper & Annamaria Lusardi & Georgios A. Panos, 2012. "Financial Literacy and the Financial Crisis," NBER Working Papers 17930, National Bureau of Economic Research, Inc.
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  21. Annamaria Lusardi & Olivia S Mitchelli, 2007. "Financial Literacy and Retirement Preparedness: Evidence and Implications for Financial Education," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 42(1), pages 35-44, January.
  22. Inderst, Roman & Ottaviani, Marco, 2012. "How (not) to pay for advice: A framework for consumer financial protection," Journal of Financial Economics, Elsevier, vol. 105(2), pages 393-411.
  23. Almenberg, Johan & Säve-Söderbergh, Jenny, 2011. "Financial literacy and retirement planning in Sweden," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(04), pages 585-598, October.
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  27. Kristopher S. Gerardi & Lorenz Goette & Stephan Meier, 2010. "Financial literacy and subprime mortgage delinquency: evidence from a survey matched to administrative data," FRB Atlanta Working Paper 2010-10, Federal Reserve Bank of Atlanta.
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  29. repec:ecj:econjl:v:122:y:2012:i::p:449-478 is not listed on IDEAS
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