Background

Studies show that many Americans lack financial literacy, which is in turn correlated with negative financial behaviors. Financial counselling and financial literacy have been suggested as advice solutions to improve financial literacy and financial security.

Methods

• This paper provides an overview of financial advice models, reviews past research on the effectiveness of financial advice, and examines who uses financial advisors.
• Financial advice is defined as third-party services that help consumers to make financial decisions.
• The paper begins with an overview of financial advice models in the context of broader efforts to improve consumers’ financial literacy and bolster their financial security. It then provides information about existing financial advice models, including technical experts, transactional agents, counselors, and coaches.
• The paper references 88 sources, published between 1973 and 2010.
• The author conducts secondary analysis of the 2009 Financial Industry Regulatory Authority (FINRA) Financial Capability Survey to estimate consumers’ use of financial advice, which surveyed 1488 people in the USA on a range of financial matters and included questions on behaviours and attitudes.

Findings

The paper provides a model categorising financial advice models within a broader financial capacity-building framework and provides a summary of each model of advice (technical experts, transactional agents, counselors, and coaches).

• Financial coaching proved to be the least studied area, although this model benefits from a growing literature in psychology.
• Expert financial advice is widely studied, especially by economists. Yet despite the development of theoretical models on expert advice, evidence of its impact is lacking in the literature. Among the most robust studies, it appears that advising does not yield substantial benefits in terms of investment returns.
• There are many applied studies on financial counselling where descriptive studies report positive outcomes, however, these are not sufficiently robust (i.e. do not have a control group) to show positive impacts.
• Financial coaching remains the least developed of the four models.
• The literature on transactional agents is well developed, but given the recent shifts in regulations for brokers and advisors related to fiduciary duty, this is an area for more study.

Regarding take-up, the empirical results suggest that:

• A majority of respondents report that they have used some form of financial advice.
• People with low financial literacy are less likely to obtain advice.
• Factors correlated with low financial capability are also related to lower take-up of financial advice.

Recommendations

• If broadening access to advice is a policy goal, more efforts might be needed to increase the availability of low-cost, objective, high-quality advice for households with low educational attainment and low incomes. There is a high correlation between advice seeking and financial literacy. As such, the demand for financial advice may increase if financial literacy levels increase across the population.
• The author recommends that more research is needed to better define, quantify, and measure the impact of each of the advice models presented. Establishing causal effects will require new data and even field experiments. More robust evidence on the costs and benefits of various forms of financial advice can help inform policy decisions and guide consumers regarding the value of professional advice.

Points to consider

• This is a working paper that discusses financial advice models and take up of financial advice in USA and so may not be transferable to the UK.
• Information is not provided on the research methodology for the literature review element of the paper, though 88 references are provided. The author highlights the scarcity of theoretical literature regarding why each form of advice is expected to affect financial behavior and longer-term outcomes.

Key references

Financial Industry Regulatory Authority (FINRA) Financial Capability Survey (Applied Research and Consulting 2009)