Why Do So Few Individuals Seek Professional Financial Advice?
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Although 76% of respondents to FINRA’s 2012 national financial capability study reported not being satisfied with their personal financial situation, very few sought financial advice, with 9% seeking debt counseling and 30% seeking insurance advice. This discrepancy motivated our research paper titled “Who Seeks Financial Advice?” This article summarizes the key findings from that research.
Understanding the factors that influence the demand for financial advice provides the industry with information that can help identify potential new clients and deliver a critically needed financial service. Our research focused on women, the young (aged 18-44) and the financially illiterate because of the characteristics that distinguish and affect the financial behaviors of these groups.
The empirical literature on gender differences shows that females score lower than males in financial knowledge tests, are less likely to be satisfied with their personal financial situation, and are less confident in their financial skills. Young adults exhibit a weak understanding of basic financial knowledge, which negatively affects the quality of their financial decisions and leads them to commit financial mistakes. Additionally, individuals who are not financially literate are less likely to own stocks and to prepare for retirement.
The results of our research can be summarized into five main findings and implications for financial advisors:
- Income and the subjective assessment of risk tolerance are the key consistent factors across all groups that have been found to influence the decision to seek different types of financial advice. As income increases, respondents become more sophisticated and show a greater tendency to request the services of financial professionals due to the benefits to be gained from relying on financial experts in managing their investments and financial affairs. Because an important feature of financial services is the agency problem, individual investors lack a mechanism to monitor their financial advisors and risk tolerance might indicate individuals’ willingness to tolerate outcome uncertainty.
- Financial literacy has been found to affect the demand for financial advice positively. The five financial literacy questions asked in the FINRA study measured respondents’ understanding of compound interest, inflation, bond prices, mortgage interest and risk-return trade-off. When consumers recognize the complexity of managing their investments and the benefit of using an expert’s advice, they are more likely to seek professional financial advice.
- The subjective assessment of financial knowledge, which could be a proxy for self-confidence, affects the demand for financial advice. Consumers who have low self-confidence are less likely to seek financial advice because they lack the ability to monitor this agency relationship and to evaluate financial products.
- Financial fragility has a negative effect on the demand for financial advice. There were six signs of financial difficulties were reported by respondents. This variable is defined in our paper as a tendency to experience overspending, have difficulty covering expenses, lacking an emergency fund, being unable to come up with $2000 in the next month, not having any retirement plan, and reporting a high level of debt.
- Education consistently positively affects the seeking of all types of financial advice by all types of individuals.