Reaching Out for Financial Advice in Old Age

Older Americans might be in trouble. They control a large share of the nation's wealth, yet many are not prepared to manage it. Cognitive abilities decline with age, and most older Americans eschew financial advice. Those are some of the findings of a National Bureau of Economic Research analysis of the 2016 Health and Retirement Study, a longitudinal survey of people aged 50 or older. NBER researchers added several questions about financial advice to the HRS, which also measures cognitive ability and financial literacy. The goal of the study was to determine how cognitive ability and financial literacy influence the quantity and quality of the financial advice sought by older Americans.

One of the study's major findings is how infrequently older Americans seek financial advice. Only 35 percent of respondents had reached out for guidance on handling their finances. Another major finding of the study: seeking financial advice is not influenced by cognitive ability or financial literacy. In other words, cognitive ability and financial literacy have no affect on the quantity of financial advice sought by older Americans.

The quality of financial advice is another matter. "More cognitively able and financially literate respondents tend to seek professional financial advice, rather than seeking casual help from family/friends," the authors report. Respondents with greater cognitive ability and financial literacy are more distrustful of financial advisors in general and especially wary of "free" financial advice from advisors who shroud their fees. The quality of financial advice is influenced by cognitive ability and financial literacy, the researchers conclude.

"Low cognitive ability and poor financial literacy can be a barrier to receiving quality financial advice," conclude the authors, "suggesting that researchers and policymakers may need to find new ways to evaluate and monitor financial behavior in an aging population."

Source: National Bureau of Economic Research, How Cognitive Ability and Financial Literacy Shape the Demand for Financial Advice at Older Ages, Working Paper 25750 ($5.00)