Need financial advice? Don’t ask your mom, brother or best friend for help if they know what they’re talking about. At least, that’s what new research suggests.
People see greater improvement in their financial decisions and literacy when they ask for help from those with equally low financial competence, according to a study on financial decisions distributed by the National Bureau of Economic Research on Monday. When an informed person tries to assist an uninformed peer with financial decision-making, the results are less effective, the study said.
See: 5 Sins you’re getting bad financial advice
The researchers, who work at the University of Toronto, Stanford University, Loyola Marymount University and the University of Oxford, analyzed the decision-making process of about 460 participants. Their experiment involved five steps around compound interest-accruing investments, including three decisions to be made and two interventions during which they received financial education or watched an unrelated video.
During the first phase, participants made decisions about their investments. During the second, they discussed the decisions with a peer and, during the third phase, they made additional decisions independently.
Improvements were most pronounced when both peers were learning concepts instead of when one was mimicking the more informed person.
Ultimately, discussing financial decisions benefited people most when they came up with options together. Doing so will eventually assist individuals when they make private decisions. Improvements were most pronounced when both peers were learning concepts rather than mimicking the more informed person, the study found.
The researchers suggested peers might learn together in their own time, while getting advice from someone who knows more may result in a biased opinion or might even over-complicate and confuse the less informed party. “The beneficial effects of communication are especially pronounced in interactions between people who are similarly unskilled, and who seem to be more adept at addressing each other’s questions and concerns at the appropriate level and pace,” the researchers said.
While the latest study suggests that financial advice from someone who is well-informed may not have the best results, plenty of people turn to those they know for financial advice. Many non-affluent consumers seek financial advice from family and friends, who they deem trustworthy, according to a 2010 Society of Actuaries report. Family and friends may know personal details, but they might also provide inappropriate advice because they’re uninformed or have ulterior motives, the report said.
Wealthy investors turn to another type of source completely — social media — according to a survey of more than 1,000 investors by Global X Funds, an exchange-traded fund company in New York. More than half who work with advisers use mobile apps on a weekly basis to learn about the markets.
Also see: Low-income families are getting terrible financial advice online
Many Americans cannot afford to pay for professional advice, but there are ways to get financial help for a low (or no) cost. Financial planners sometimes work pro bono, which means they are volunteering or not charging for their services. Companies or local community organizations may also host financial planning programs free of charge.
Employees with an employer-sponsored retirement plan — a 401(k) account or a defined benefit pension plan — can call their plan provider for help. Online investment platforms, including Betterment and Ellevest, offer investment accounts and recommendations at a lower cost than a traditional adviser.
Eventually, it may be worth consulting with a professional adviser, especially when financial situations become more complex after buying a home, starting a family or receiving an inheritance.
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