(Photo: Thinkstock)

Bright people and financially literate people may be equally likely to seek you out, or avoid you, but for different reasons.

An increase in either cognitive ability or financial literacy appears to increase the odds that older people will seek out financial management help from someone other than their relatives, a team of three finance researchers reports in a new working paper posted on the website of the National Bureau of Economic Research (NBER).

An increase in cognitive ability appears to increase the odds that older people will be too skeptical to trust sources of financial advice identified as “financial advisors,” but financial literacy by itself may have somewhat less effect older people’s level of skepticism, the researchers found.

(Related: How Much Cash Would It Take to Get People to Delay Retirement?)

Hugh Hoikwang Kim, a faculty member at the University of South Carolina business school, wrote the working paper, or academic paper draft, together  with Olivia Mitchell and Raimond Maurer.

The new article does not mention annuities specifically, in the text, but Mitchell has published many widely read papers on annuities over the years, and one of the papers cited in the source list is about the annuity market.

The Kim team that wrote the new paper used data, drawn from the 2016 Health and Retirement Study (HRS), on how 1,180 U.S. residents ages 50 and older have been handling their finances, and what they think about financial advice. The HRS team let the Kim develop its own survey questionnaire module.

The Kim team then analyzed the results from their module alongside cognitive ability and financial literacy scores from the main HRS survey.

Here’s a look at five things to know about the survey results.

1. Only 34% of the respondents said they had received financial advice.

About 76% of all of the participants said they had received money help from outside their networks of friends and relatives, and about half said they had received advice other than investment advice.

2. About 14% said they had received free advice.

If you work on a commission, you may see that as a good way to help people get access to financial advice and financial products without them having to pay additional fees out of their own pockets.

The researchers classified indications that participants had received free advice as a problem.

Free advice “of course is likely to be not truly free, rather to embed feeds in products involving potential conflicts of interest,” the researchers write.

3.  Cognitive ability and financial literacy had little effect on use of outside financial advice.

Use of two different techniques for analyzing the survey data showed that people with varying degrees of cognitive ability and financial literacy were about equally likely to get financial help of some type.

4. Higher cognitive ability increased the odds that people would seek more sophisticated types of advice.

Researchers typically talk about research data in terms of “standard deviations.”

People who are “one standard deviation above the mean” in terms of cognitive ability or financial literacy are in the top 16% of people in terms of that measure.

The Kim team found that people in the top 16% in terms of either cognitive ability or financial literacy were more likely to get advice from people other than friends and relatives.

People in the top 16% in terms of financial literacy were 3.4% more likely to get advice from people outside their social circles, all other factors the researchers could measure being equal.

People in the top 16% in terms of cognitive ability were 11% more likely to get advice from outside their social circles.

People in the top 16% in terms of cognitive ability were about 28% more likely to say they avoided talking to financial advisors because of distrust.

Financial literacy by itself had no effect on consumers’ level of distrust.

5. Both financial literacy and higher cognitive ability reduced the odds that older consumers had used commission-based advice.

The researchers found that people in the top 16% in terms of financial literacy were 8.5% less likely to report using commission-based financial advice.

People in the top 16% in terms of cognitive ability were 12% less likely to report using commission-based financial advice.

Resources

A copy of the Kim paper is available on the NBER website, behind a paywall, here.

— Read The Impact of Cognitive Decline on Families’ Finances: RBC Survey, on ThinkAdvisor.

— Connect with ThinkAdvisor Life/Health on LinkedIn and Twitter.