Financial literacy and financial advice: Theory and empirical evidence

The issue of financial literacy has recently gained relevance for several reasons. Social security reforms in the US and in many European countries are placing increasing responsibility on individuals for their financial security in old age. Workers will have to decide both how much to save for retirement and how to allocate their retirement savings. At the same time, the complexity of financial instruments is increasing and households have to deal with new and more sophisticated financial products. Various institutions raised their concerns about the low level of households’ financial literacy across several countries and about the need to provide financial education (European Commission, 2007; OECD, 2005; President’s Advisory Council on Financial Literacy, 2008). These developments suggest the importance of investigating the level of financial literacy, and its role in households’ financial decision making.