The demand for financial professionals' advice: The role of financial knowledge, satisfaction, and confidence

Abstract

AbstractUsing a large, nationally representative sample provided by the Financial Industry Regulatory Authority (FINRA), individuals' use of professional planning advice is analyzed in the context of personal financial knowledge (objective and subjective), financial satisfaction, risk tolerance, and selected sociodemographic variables. The results indicate that different characteristics are associated with individuals using different types of financial advice (e.g., debt counseling vs. investment planning, or tax assistance). In general, financial knowledge (both objective and subjective) and satisfaction are positively related to using any type of financial advice, and specifically with using advice related to investing and saving, mortgage decisions, insurance, and tax planning. In contrast, knowledge and satisfaction are inversely related to the use of debt counseling. Other interesting relationships are noted among the demographic variables of interest, and implications for planners and policymakers are discussed. © 2012 Academy of Financial Services. All rights reserved.JEL classification: D14; G20Keywords: Financial planning advice; Financial knowledge1. IntroductionFinancial issues related to the allocation of scarce resources are known stressors for American families (Dew, 2008; Pittman and Lloyd, 1988; Zagorsky, 2003). Changes in the social contract between employer and employee regarding retirement funding (Westerman and Sundali, 2005), uncertainty in health care policy, increasing complexity in the tax code, an ever-broadening spectrum of financial products and services, a choice of over 8,000 mutual funds and nearly 1,000 exchange traded funds (Investment Company Institute, 201 1) all add to the elaborate array of information facing families making important decisions regarding the use and allocation of financial resources. Additionally, the trend in increasing income inequality in the United States has been associated with greater levels of household debt and mortality, and lower levels of self-reported well-being (Dynan and Ravina, 2007; Lacoviello, 2008; Wilkinson and Pickett 2008).The magnitude, multitude, and complexity of these financial decisions have caused many households to seek outside assistance. Sometimes a specific event will lead a family to look for advice from a financial professional; an unexpected job change, an addition to the family, an inheritance. In other cases, the impetus to seek a financial professional can be sourced internally, such as the realization that retirement is looming, debt is taking over the family budget, or that the tax code has attained a level of complexity that the household finds intimidating. Regardless of the initial trigger, a large percentage of families rely on outside assistance in making family financial decisions.Given the significant growth of the financial sector, particularly in the area of personal financial advice, the literature that explores the determinants of seeking financial assistance is relatively sparse. The available studies focus on estimating the size, as well as general demographic and economic descriptors of the segments of consumers who seek professional financial advice (e.g., Elmerick, Montalto, and Fox, 2002; Chang, 2005; Hanna, 201 1). Some recent studies point to the fact that certain psychological factors (e.g., financial satisfaction, risk tolerance), as well as financial knowledge may be related to the decision to seek professional financial assistance (Grable and Joo, 2001; Perry and Morris, 2005; Lusardi and Mitchell, 2007; Finke, Huston, and Winchester, 2011).The goal of the present study is to examine the correlations between the use of professional advice in various areas of personal finance and factors such as financial satisfaction, subjective and objective financial knowledge, and risk attitude. The study utilizes a rich data set collected by the Financial Industry Regulatory Authority (FINRA) during the recent National Financial Capability Study (NFCS). …

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