Abstract
The low level of financial literacy in many countries suggests that households are at risk of sub-optimal financial decisions. In this paper we assess to what extent financial advisors can substitute for the households' lack of financial knowledge, by analyzing the effect of investors' financial literacy on their decision about how much to rely on financial advisors. We model the strategic interaction between poorly informed investors and better informed advisors facing conflict of interests. We find that advisors reveal information only to the more knowledgeable investors, who anticipating that are more likely to consult advisors. Investors with lower financial literacy either invest by themselves (without any professional advice) or delegate their portfolio choice completely, su ffering the agency costs of such decision. These results are con firmed empirically, where we investigate the effect of financial literacy on the demand for financial advice using the 2007 Unicredit Customers' Survey. Overall, our results suggest that non-independent advisors are not sufficient to alleviate the problem of low financial literacy.