Why Financial Advice Cannot Substitute for Financial Literacy?

44 Pages Posted: 21 Jan 2015

See all articles by Majdi Debbich

Majdi Debbich

Paris School of Economics (PSE)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2015

Abstract

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.

Keywords: Financial Literacy, Financial Advice, Household Finance

JEL Classification: D14, D82, G11

Suggested Citation

Debbich, Majdi, Why Financial Advice Cannot Substitute for Financial Literacy? (January 2015). Banque de France Working Paper No. 534. Available at SSRN: https://ssrn.com/abstract=2552515 or http://dx.doi.org/10.2139/ssrn.2552515

Majdi Debbich (Contact Author)

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

HOME PAGE: http://www.parisschoolofeconomics.eu/fr/debbich-majdi/

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