Perversely, when it comes to quality financial advice, those who need it most are least likely to seek it out, says a paper from three academic researchers.
Among Americans age 50 and older, increased financial literacy and cognitive ability correlate with greater demand for higher quality, more sophisticated, financial advice, according to University of South Carolina’s Hugh H. Kim, The Goethe University Frankfurt’s Raimond Maurer, and The Wharton School, University of Pennsylvania’s Olivia S. Mitchell.
The correlation applies solely to the quality, but not the quantity, of the advice sought, the researchers found.
“Most importantly, the financially literate and more cognitively able tend to seek financial help from professionals rather than family members, and they are less likely to accept so-called ‘free’ financial advice that may entail conflicts of interest,” the authors state.
“The fact that both cognitive ability and financial literacy help shape the quality of financial advice sought implies that the mere existence of financial advisors will not, on its own, correct some older people’s sub-optimal financial practices."
Stated differently, a Field of Dreams-inspired “if you build it, they will come” approach has limitations because investors who are less financially literate essentially don’t know what they don’t know. Therefore, the onramp to attracting less informed clients must be paved with financial literacy, not just good intentions.
While investor empowerment is a noble goal, it's largely born of necessity.
In the past four decades, investors have been tasked with taking on more responsibility – and risk – for their financial affairs. People are living longer and increasingly managing 401(k) plans, instead of receiving pensions. They also are juggling debt payments and daily expenses while dealing with "increasingly complex financial products," the report points out.
The government plays a valuable role in protecting older Americans from financial chicanery, given that fraudsters frequently target the elderly as they possess more wealth than younger people and often experience declining cognitive abilities.
However, rules and regulations only go so far. While they can help prevent calamitous outcomes, and hopefully deter would-be crooks, the report suggests that they don’t provide the requisite spark needed to ignite financial freedom. For that, look to financial literacy.