A1468
Title: Financial literacy and advice: substitutes or complements?
Authors: Demetris Koursaros - Cyprus University of Technology (Cyprus) [presenting]
Abstract: The relationship between financial literacy and financial advice is investigated. A simple two-period model of convincing between a financial advisor and a household is first introduced. In the model, households have heterogeneous beliefs with respect to the distribution of true returns. More dispersed beliefs correspond to less sophisticated households. It is shown that financial advisors face a lower cost to shift beliefs and convince a financially unsophisticated household to invest in a larger amount, which is however a sub-optimal decision for the household, and earn a higher reward. Eventually, households which are more financially sophisticated are more likely to ask for financial advice. The model is extended in many directions and simulation exercises are provided. A novelty of the model is that the sophistication level of the advisor is allowed to vary and empirical predictions are provided for the matching with households with different sophistication levels. It is tested within a large sample of Canadian financial advisors and their clients.
