by Riccardo Calcagno and Chiara Monticone; CeRP WP N. 117/11
The low level of financial literacy in many countries suggests that households are at risk of sub-optimal financial decisions. In this paper we assess to what extent financial advisors can substitute for such a lack of knowledge, by analyzing the effect of investors’ financial literacy on their decision about how much to rely on financial advisors. We model the strategic interaction between poorly informed investors and perfectly informed advisors facing conflicts of interest. We find that more knowledgeable investors are more likely to consult advisors, while less informed ones either invest by themselves (without any professional advice) or delegate their portfolio choice, suffering the agency costs of such decision. These results are confirmed empirically, where we investigate the effect of financial literacy on the demand for financial advice using the 2007 Unicredit Customers’ Survey. Overall, our results suggest that non-independent advisors are not sufficient to alleviate the problem of low financial literacy.
Published: April 2011