The role of financial literacy and advice in financial decision making

Abstract

Financial decision making is complex and individuals either need to have the financial knowledge to make the correct decisions, or they need to ask for advice from experts. However, there are two key questions pertaining to financial advice. Firstly, do financially unsophisticated individuals know that they need advice, and do they therefore ask for assistance? Secondly, if they do ask for advice, are financially unsophisticated individuals able to assess the quality of the advice received? A growing body of research is focused on determining to what extent financial advice can act as a substitute for low levels of financial literacy. To date, studies have found conflicting results. This study used data from a national survey of South Africans to determine whether advice could substitute for low levels of financial sophistication. Additionally, the quality of advice in preretirement cash-out decisions was assessed using survey data collected at a university. The results indicate that professional financial advice complements financial literacy, while advice from other sources could substitute for low levels of financial sophistication. Furthermore, the study found that with respect to pre-retirement cash-out decisions, financially unsophisticated individuals followed advice from human resources departments or fund administrators and received quality advice.