The Demand for Financial Advice of Italian Investors. The Role of Financial Knowledge and Overconfidence

Our paper ‘Financial Advice Seeking, Financial Knowledge and Overconfidence: Evidence from the Italian Market’ investigates the relationship between the propensity to seek for professional advice, financial knowledge, and overconfidence (ie the unmotivated confidence in one’s own knowledge and abilities), as well as the determinants of financial knowledge and overconfidence for a representative sample of Italian financial decision makers.

As shown by an extensive strand of the literature and by fieldwork evidence, low levels of financial knowledge, as well as biases in the selection and processing of information, may drive sub-optimal financial choices. Several financial markets regulators are striving to prevent poor financial outcomes through investor education programmes and/or unbiased financial advice, devised as a substitute for financial capability. In particular, the European regulatory framework, contained in the MiFID legislation and MiFID2 rules (amending MiFID and due to come into force in January 2018), amongst others, encourages the development of independent and high-quality advice services.

However, the effectiveness of both investor education and financial advice may be challenged by individuals’ behaviours and reactions. Unbiased financial advice can substitute for financial competence only if unsophisticated investors seek the support of professional advisors. Furthermore, advice may not reach overconfident investors, deciding on their own on the basis of self-assessed rather than actual capability. Conventional financial education initiatives may exacerbate overconfidence and/or other biases, further distorting investors’ decision-making.

In order to analyse the demand for professional advice of Italian investors and the role of financial knowledge and self-confidence, our study uses a novel survey, the 2015 Observatory on ‘The approach to finance and investment of Italian households’, conducted by GfK Eurisko on behalf of the Commissione Nazionale per le Società e la Borsa (Linciano, Gentile and Soccorso, 2015). This survey reports information on investment styles, levels of financial education, financial experience, self-assessed financial capability, and some biases that may affect risk perception and investment choices for a representative sample of Italian financial decisionmakers. As a robustness check, we employ alternative financial literacy indicators, among those used in previous work, as well as alternative excessive self-confidence indicators.

We find that financial literacy positively affects financial advice seeking, either directly or indirectly. In particular, depending on the indicator of financial literacy used, financial knowledge is positively associated to the propensity to rely on an expert and negatively related to high self-confidence, which in turn is found to discourage the demand for advice.

According to our results, financial advice acts as a complement to, rather than as a substitute for, financial capabilities. On policy grounds, this confirms the concerns about the regulation of financial advice being not enough to protect the investors who need it most. Additionally, our findings suggest that investor education programmes may be beneficial not only directly, ie by raising financial capabilities, but also indirectly, ie by enhancing peoples’ awareness of their financial capability and by hindering overconfident behaviours and behavioural biases. This latter outcome mitigates the worries about financial education fuelling confidence without improving competence, thus leading to worse decisions (Willis, 2008).

Our paper contributes to the regulatory debate on the development of financial advice as a tool of investor protection. It also delivers relevant policy insights for the Italian context, where the vast majority of individuals exhibit both a low degree of literacy and a high propensity towards obtaining informal advice (ie consulting relatives, friends and colleagues) rather than professional advice.

A further innovative feature of our study is the analysis of the impact of both measured financial knowledge and self-assessed capability on the propensity to seek advice, and the simultaneous investigation of the determinants of financial knowledge and individuals’ perception of their ability in making financial choices. Such an approach has a twofold advantage. On the one hand, it contributes to a full modelling of the drivers of self-confidence in financial matters, as measured by the alternative indicators mentioned above. On the other hand, it allows the capture of both the direct and indirect effects of financial knowledge on the willingness to look for a professional support, thus shedding light on the ‘transmission channels’ of policy measures aimed at raising literacy and advice seeking.

Finally, our methodological approach makes our results robust with respect to potential endogeneity of financial literacy and self-confidence, and alternative definitions of the financial literacy indicator and of the self-confidence measure. Moreover, the ample data set we could access allows us to control for potential omitted variables problems.

Nadia Linciano, Monica Gentile, and Paola Soccorso are researchers at the Commissione Nazionale per le Società e la Borsa (CONSOB).