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Saving and financial market participation are actions that support many lifecycle consumption goals. Studies have shown that these actions affect financial outcomes, including the prospect of declaring bankruptcy, the ability to meet ongoing financial needs and the prospect of a comfortable retirement (Cole et al., 2014).1 Because of their importance, a variety of academic and policy initiatives seek to understand the factors associated with these actions and to increase levels of savings and financial market participation. We investigate two critical drivers of financial market participation: trust and financial literacy. Prior studies have analyzed these two drivers separately, but not simultaneously at the level of detail offered here. Considering these relationships is important because, in addition to driving participation, levels of trust and financial literacy may affect the potential vulnerability of market participants.
We find both trust and financial literacy are related to financial market participation, to the use of specific products, and to preferences for the use of intermediaries – including preferences for robo advisor platforms. Importantly, we find that although increases in trust are consistently correlated with increases in financial market participation, increases in financial literacy have a different relation to market participation. From low to middle levels, increases in financial literacy are associated with declines in average levels of financial market participation. From middle to high levels of financial literacy, rates of financial market participation increase. We find this to be linked to preferences for different account types.
We also document a relationship between our measures of financial market participation and perceived economic well-being, using Consumer Financial Protection Bureau (CFPB) measures of well-being. Our findings support research suggesting that increasing levels of both trust and financial literacy can increase financial market participation and thereby improve financial well-being. At the same time, we highlight the potential vulnerability of those with high levels of trust and low levels of financial literacy.
We further explore the vectors through which these attributes operate. For example, we find that those who report the lowest levels of financial market participation have the lowest average measured levels of trust-in-others. Similarly, we find those who hold brokerage accounts to be more trusting, on average than those whose only market participation is through an employer-sponsored retirement account. We find that,...