Good Advice, Good Outcomes? How Financial Advice-Seeking Relates to Self-Perceived Financial Well-Being

Abstract

As personal finances become increasingly complex with the devolution of longevity risk in retirement to the individual and proliferation of financial products, the use of professional financial advisors to management one’s finances is increasing. While several studies have examined the effect of financial advice on investment performance, limited research has been done on the effectiveness of professional financial advising for altering financial behaviors or self-perceived financial well-being. Using a large national data set on financial capability recently released by the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation we examine use of professional financial advising and its effect on financial behaviors and well-being, including overall financial satisfaction, spending relative to income, difficulty paying bills, and financial preparedness separately for those in retirement and those still in the labor market. In order to address any potential endogeneity between seeking financial advice and subsequent financial outcomes we implement an instrumental variables (IV) identification strategy that exploits exogenous variation in receipt of advice generated by respondents overall trust of financial industry professionals. Across specifications we find that financial advising is associated with improved financial behavior and well-being for non-retired persons. For retired person we find that financial advising generally has a positive effect on financial behavior and well-being when estimated using a linear probability model; however with the use of the IV this positive relationship becomes weaker. Our findings add a different dimension to previous analysis of the effect of financial advice that has primarily focused on investment performance, fees, and portfolio allocation.