How Cognitive Ability and Financial Literacy Shape the Demand for Financial Advice at Older Ages

Abstract

We investigate how cognitive ability and financial literacy shape older Americans' demand for financial advice. Using an experimental module at the Health and Retirement Study, we show that cognitive ability and financial literacy strongly improve the quality but not the quantity of financial advice sought: more financially literate and cognitively able seek financial help from professionals. They also utilize more 'free' financial advice that may entail potential conflicts of interest. Finally, among those not seeking financial advice, people with higher cognitive function tend to distrust financial advisors, leading them to avoid these services.

Cognitive functioning, financial literacy, and judgment in older age

“…Collins, 2012; Calcagno and Monticone, 2015). Cognitive ability and financial literacy can also affect delegation ‘since delegation requires a complicated process of acquiring, screening, and monitoring information about financial advisors and their services’ (Kim, et al ., 2019, p. 1). Agnew et al .…”

“…While Kim et al . (2019) found cognitive ability was not associated with advice seeking, conditional on having sought advice, cognitive ability positively predicted advice quality. Similarly, not seeking advice because of self‐confidence (rather than distrust or ignorance) was negatively associated with cognitive ability.…”

“…Financial advice is available to assist financial decision making. Kim et al (2019) suggested that it is not clear theoretically whether cognitive ability and financial advice are positively or negatively associated, and that it may be conditional on the type of advice. Models of financial advice seeking propose both a substitution effect, where advice from someone more knowledgeable and skilled is substituted for those lacking financial literacy, and a complementarity effect where the more financially literate seek advice 'because they anticipate that they will receive valuable information from advisors' (Calcagno and Monticone, 2015, p. 366).…”

Cognitive Decline, Limited Awareness, Imperfect Agency, and Financial Well-being

“…1 There is an expanding literature on late-in-life financial mistakes. This literature investigates how cognitive decline is related to mistakes in using financial products (Agarwal et al, 2009), investment mistakes (Korniotis and Kumar, 2011), stock market participation (Christelis, Jappelli and Padula, 2010), wealth loss (Angrisani and Lee, 2019), and seeking financial advice (Kim, Maurer and Mitchell, 2019). See also Lusardi, Mitchell and Curto (2014) and that document decreasing financial literacy over age.…”

Cognitive Functioning, Life Satisfaction, and Their Relationship with the Financial Attitudes of Older Individuals Who Participate in an Active Aging Program

“…One’s financial capabilities appear to decline after the age of 60; however, confidence in one’s financial decision-making skills does not appear to diminish with age [ 36 ]. Several studies have also shown that those with financial literacy and greater cognitive ability tend to seek financial help from professionals [ 37 ]. It appears, therefore, that cognitive functioning is related to various financial aspects.…”