What stops us from following financial advice? We may be more biased than you think

While improving consumers’ financial literacy has finally received the attention it deserves among policymakers, many people still lack the knowledge to make informed financial decisions. Thus, when it comes to financial matters, the majority of households turn to advisors.

Clearly, however, advisors’ recommendations—however beneficial they might be—do not translate into informed financial decisions if clients do not act on them. So what makes people follow financial advice once they have sought it?

It seems that demographic similarities between clients and their financial advisors make a difference. This is because people simply feel more comfortable with people like them. Sameness leads to mutual understanding in all kinds of personal relationships ranging from marriage and friendship to professional interactions. As a result, people are more likely to heed the opinions and advice of people like them.

The effect of sameness is not the same for all clients, though. Men are more likely to follow the advice of other men if they’re the same age. By contrast, women are more likely to follow advice from other women only when their financial advisors have the same marital and parental status (married women with children are much more likely to follow the advice of financial advisors who are also married mothers).

Moreover, financial knowledge matters: clients are more likely to follow financial advice only if there is a considerable knowledge gap between the client and the advisor.

The effect of sameness on following advice washes out, however, once clients learn more about their advisors. Demographic similarities become increasingly irrelevant the longer clients and advisors work together.

Clients’ implementation of financial advice can be explained in large part by how they perceive the interaction with their advisors rather than rational considerations about whether the recommendations actually suit their needs. Client-advisor matching based on similarities can harness the effect that demographically closer people benefit from easier mutual understanding. The fact that sameness fosters interpersonal trust formation independent of fundamentals, however, makes people vulnerable. It would be easy for advisors to exploit this in their own interest.

Featured image: Photo by Headway. Public Domain via Unsplash.