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Tangible Proof of the Monetary Value of Professional Financial Planning Advice

When it comes to financial planning most people would agree that they "should" have a financial plan.

So why is it that 70% of US households don't have a financial plan?"

People come up with all kinds of reasons why they haven’t planned for their financial future:

  • It takes too much time.
  • It's complicated and there are too many options.
  • It makes me feel anxious (e.g., shame, guilt, embarrassment).
  • It will place too many restrictions on me.
  • It costs too much.
  • It’s hard to talk about money and we end up fighting about it.

As a Certified Financial Planner™ (CFP®) professional, I have always believed financial planning provides substantial benefits for those who put forth the effort. (My belief developed during my sophomore year of undergrad when I took a personal finance and budgeting class at the suggestion of an ex-girlfriend who saw how money burned a hole in my pocket).

While I can see the value planning has for those who do plan, the benefits are not always tangible. Unlike other professionals who have an immediate impact on the client’s situation (e.g., a doctor, attorney, mechanic), the impact of professional financial planning may take years and even decades to realize.

This is perhaps the single biggest reason why most people don’t see the value of doing financial planning—it just takes too long to get some quantifiable results.

Thanks to the recent study “A Comparison of Retirement Strategies and Financial Planner Value," we now have empirical and quantifiable evidence of the positive impact of professional planning advice.1 The goal of the study was to evaluate what effect, if any, that a financial planner had on retirement savings and net worth.

It was the first study to assess advisor value using something other than gross investment performance. The study also differentiated among types of advisors.

Like other studies, this one found that 70% of US households have not determined their retirement situation. The 30% that evaluated where they stood for retirement were spread among three groups:

  1. 13% are do-it-yourselfers – no planner help at all.

  2. 11% work with a comprehensive financial planner that integrates one or more of the six main financial areas
        into an analysis: cash management, risk management, investments, retirement, tax planning and estate planning.

  3. 6% worked with a non-comprehensive advisor who had not done a retirement needs analysis. This group included
        a higher proportion of financial product salespeople such as stockbrokers.

The researchers found that households that work with a comprehensive planner had significantly more income, net worth and retirement savings and change in retirement savings from 2004 to 2008 than either of the other two groups. The table below summarizes the results for the mean and median values of retirement savings and net worth from the study.

values rounded to
nearest 000


Do-it-Yourselfer

Comprehensive Financial Planner

Non-comprehensive financial advisor

Mean

     

Net Worth

$401,000

$799,000

$579,000

Retirement Savings

164,000

$247,000

$113,000

Change in Retirement *

$78,000

$84,000

$15,000

Median

     

Net Worth

$210,000

$473,000

$268,000

Retirement Savings

$20,000

$78,000

$30,000

Change in Retirement *

--

$12,000

--

* Change from 2004-2008

The most fascinating finding was that after adjusting for the socioeconomic status and education of the groups, the researchers found consistently that those who use a comprehensive financial planner were much better off than their peers who did not.

Many people believe they don’t need a financial planner because they are smart enough to figure it out on their own.

The reality is this: Smart people realize how much they don’t know and know their own limits. The really smart people work with qualified comprehensive financial planning professionals to provide them with knowledgeable advice and guidance, especially when it’s about something as important as securing their financial future and retirement.

This study confirms what real financial planners already believe: Those who use a Certified Financial Planner™ professional have a higher level of satisfaction with their overall financial position.

Where do you stand?



 

__________

1 By Terrance K. Martin Jr., Ph.D.; and Michael Finke, Ph.D., CFP±, published in the November 2014 issue of the Journal of Financial Planning. This study used data from the 2004 and 2008 National Longitudinal Survey of Youth (NLSY79). The survey began in 1979 and consists of a random sample of 12,686 people and is representative of US men and women who were born between 1957 and 1965. During the 2008 survey, respondents were between 45 and 52 years old. Annual interviews were conducted by phone or in-person and continued every second year from 1994 onward.

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