Financial Advice: A Substitute for Financial Literacy?

By Collins, J. Michael | Financial Services Review, Winter 2012 | Go to article overview

Financial Advice: A Substitute for Financial Literacy?


Collins, J. Michael, Financial Services Review


Abstract

A lack of financial literacy can hamper the ability of individuals to make well-informed financial decisions. For people who exhibit problems with financial decision making, financial advice has the potential to serve as a substitute for financial knowledge and capability. However, data from the 2009 FINRA Financial Capability Survey indicate that advice more often serves as a complement to, rather than a substitute for, financial capability: individuals with higher incomes, educational attainment, and levels of financial literacy are most likely to receive financial advice. © 2012 Academy of Financial Services. All rights reserved.

JEL classification: D14; P46; G29

Keywords: Financial planning; Financial capability

1. Introduction

Recent studies of financial literacy demonstrate several common themes: First, individuals in the United States and other nations lack numeracy and financial literacy (for a review, see Lusardi and Mitchell, 2007a). Second, scores on financial knowledge measures tend to be lower for consumers with low incomes and low educational attainment (Agnew and Szykman, 2005; Bernheim, 1998; Lusardi and Mitchell, 2007b; Mandell, 2004). In addition, consumers' understanding of interest rates appears to be a particular area of weakness (Moore, 2003). Finally and importantly, people appear to engage in financial behaviors that might be construed as mistakes (Agarwal, Amromin, Ben-David, Chomsisengphet, and Evanoff, 201 1 ; Campbell, 2006).

Studies of financial behavior often conclude that financial education, counseling, and advice might help individuals engage in financial practices that support longer-term financial security. Evidence of the effects of financial education programs on behavior is still emerging and remains inconclusive (for a review see Collins and O'Rourke, 2010). A separate line of inquiry concerns the extent to which individuals use financial advice and counseling to mitigate their incomplete knowledge - that is, whether or not people are sophisticated enough to turn to advice to ameliorate their own weaknesses with regard to financial capability. This study examines the ways that financial advice and counseling might serve as a substitute for consumers' inadequate financial knowledge.

There appears to be ongoing demand for financial advising services. The size of the financial advice industry is difficult to estimate, in large part because it is a diverse field. To gain a sense of the industry's scale, it is useful to examine figures on the number of individuals employed as financial advisers.1 According to the U.S. Bureau of Labor Statistics (BLS), 208,400 individuals were employed as personal financial advisors in 2008. By comparison, the BLS estimated that 317,200 individuals were employed in the securities, commodities, and financial services field and 450,000 were employed as insurance sales agents (Bureau of Labor Statistics, 2010). These fields are somewhat different in that advice is often secondary to the sale of financial products, although most financial advisors also sell or broker financial products, making these distinctions subtle. BLS does not provide employment statistics for financial counselors, but because much of the financial counseling industry is based in non-profit agencies, tax filings offer a snapshot of the scale of the counseling field. Based on 2008 IRS tax form 990 records, about 2,100 nonprofit agencies across the United States are engaged in financial counseling (Collins, 2011). The average agency reported fewer than 10 staff, suggesting that approximately 21,000 people work as financial counselors nationally. Thus, personal financial advisors alone represent a significant set of service providers relative to related fields, and in prior decades the field has grown at a steady rate.

2. Prior studies of financial advice

The literature indicates that personal financial advisors play five main roles: (1) offering information, (2) defusing biases that lead to common mistakes, (3) facilitating cognition, (4) overcoming affective issues, and (5) mediating joint decision making. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Financial Advice: A Substitute for Financial Literacy?
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.