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Vol. 72, No. 5, September 2018
FOCUS ON Investment & Financial Planning
Insights into the Users of Robo-Advisory Firms
Ann Sanders Woodyard, PhD, CFP
John E. Grable, PhD, CFP
Robo-advisory firms have established a growing presence in the marketplace in the past several years and, while limited in use, have appeal for young, technologically savvy consumers. This analysis of American investors considers the characteristics of those who exclusively use robo-advisory services and how they differ from those who exclusively use brokers and financial advisors. Results indicate users of robo-advisory services are young and confident in their financial abilities yet distrustful of traditional channels of financial advice.
Insights from the American Association of Individual Investors Asset Allocation Survey
Kenneth M. Washer, DBA, CFA, CFP
Robert R. Johnson, PhD, CFA, CAIA, CLF
Gerald R. Jensen, PhD, CFA
The American Association of Individual Investors (AAII) has conducted a monthly allocation survey since 1987 that asks participants to identify their allocations to stocks, bonds, and cash. The authors find evidence that stock allocation changes are positively impacted by the prior month’s stock return and negatively impacted by the prior month’s stock allocation change. This paper also shows that the survey allocations outperform common rule-based active and passive strategies.
The Rate of Return on Homeownership When Using FHA Financing
Clarence C. Rose, PhD
For middle-class Americans, housing is of utmost importance and the greatest source of net worth. However, the current homeownership rate in the United States is at a near-record-low not experienced in decades, in spite of the record-low home mortgage interest rates and real estate market conditions in which the cost of renting is just as or more expensive than buying a home on a monthly cash outflow basis in many geographic areas. This article examines the rate of return on homeownership when using Federal Housing Administration (FHA) home mortgage financing under the current real estate market conditions.
Financial Planning Self-Efficacy: A Framework for Research and Practical Application
David C. Haman, MST, CFP
Dennis R. Laker, PhD
The psychological nature of the financial planner-client relationship has emerged as an integral component of the value of financial advising. For the last 30 years, behavioral finance has added dramatically to the understanding of the cognitive and emotional biases that lead persons to make financially destructive decisions when faced with risk. But decision making under risk is not the only manner in which financial planners should understand the psychological behavior of their clients. This paper introduces psychologist Albert Bandura’s self-efficacy and social learning theory to financial planners, offering an additional and complementary perspective to behavioral finance within the scopes of client behavior and decision making. Self-efficacy theory is not part of the Certified Financial Planner® (CFP®) education, so the concept of self-efficacy is likely to be unknown to most financial planners and there has been very little research devoted to financial planning self-efficacy. In this foundation paper, the definition, influences, and value of self-efficacy will be explained within the framework of financial planning and additional areas of needed exploration identified. It is important to recognize that, just as there are no systematic applications of behavioral finance for financial planners, this paper intends simply to introduce the importance of understanding self-efficacy to financial planners and offer suggestions for future research.
The Role of a Retirement Planner
Kenn Beam Tacchino, JD, LLM
Financial planning careers often focus on providing retirement planning services to clients. Investment management is a part of the package. However, many additional competencies are needed to professionally service a client’s retirement needs. Skills include calculating the assets needed to retire, determining the method for creating retirement income from retirement assets, and assessing the best age to claim Social Security, among other things. A review of over 20 services that are involved in comprehensive retirement planning may help an advisor to assess whether there are other areas of need with which they can help a client.
Advice for the New Planner
Redefining Retirement Planning
Emily Purdon, CFP, EA
Retirement is a process, not an event. Regardless of how hard your clients have worked preparing for retirement, the transition may prove difficult for them. Traditional retirement planning calls on technical expertise, but an approach that’s based on guidance, emotional support, and empathy will better serve your clients. Think holistically about how you can help your clients during this transition, and they will begin to view your client-advisor relationship as an essential component of not only their financial success but also their health and happiness.
Economics & Investment Management
An Introduction to Big Data
John E. Grable, PhD, CFP
Angela C. Lyons, PhD
This column provides an introduction to the use of big data and data analytics within the financial services profession. Although the concept of big data is not new, the tools and techniques used to analyze large data sets are becoming more sophisticated and precise. Based on new methodologies, it is likely that big data will fundamentally change the way in which financial advisors practice in the future.
Revisions and Reconsiderations with the New Tax Law
Dennis C. Reardon, JD, LLM, CLU, ChFC
We continue to monitor how the new tax law impacts estate planning. We look at the effect on overfunded trusts, irrevocable life insurance trusts, and irrevocable grantor trusts.
Ethics & Regulation
The Fiduciary Issue Made Simple
Ronald F. Duska, PhD
One can hope we eventually solve the legal issue of fiduciary versus suitability, but we should always remember that the ethics is clear and that it should determine what wise legislation would look like. Our primary duty is to serve the interests of our clients first.
Executive Employment Agreements and the Evolving Role of Mandatory Arbitration
Paul J. Schneider, JD, LLM
Given the prevalence of mandatory arbitration provisions in various commercial contexts, this column will describe how arbitration differs from adjudication and what advantages it has; will summarize the judicial history behind the continuing evolution of mandatory arbitration; will analyze what factors or considerations may be taken into account by an executive and his or her employer in determining whether to bargain for or against the inclusion of a mandatory arbitration provision in an employment agreement; and will suggest what elements of a mandatory arbitration provision should be the subject of negotiation by an executive.
Estimating Discretionary Money in Retirement: Spending Too Much … or Too Little?
Sandra Timmermann, EdD
We all believe in income planning as the cornerstone of a secure retirement: replacing a paycheck, activating Social Security and pensions, estimating projected health and long-term care costs, and planning for the unexpected. But are we really good at estimating the hidden opportunities—many of them small but cumulative—to spend money that we didn’t budget for that can chip away at savings? And what about those who are reluctant to spend money on simple pleasures and deny themselves enjoyment and convenience in their later years because they are afraid of spending too much?
Association Health Plans and the Evolution of Health Insurance
William S. Custer, PhD
In June 2018, the Department of Labor issued its final rule expanding the types of groups that could participate and administer Association Health Plans (AHPs). The new rule is intended to give small groups and self-employed individuals access to lower-cost health insurance. It has the potential to draw lower-cost enrollees out of the small group and individual insurance markets, increasing premiums in those markets. It also can be viewed as a test of how much the health insurance market has evolved over the past 2 decades.
On Turning 65
Douglas B. Richards, JD, MBA, CLU, ChFC
From the perspective of a 65-year-old who is not about to retire, financial service professionals who help their clients weather life’s financial challenges play a valuable role. Helping them make and execute financial plans, preparing them to make adjustments when necessary, and encouraging them to be patient and persistent in reaching their financial goals all play an important part in keeping them on the right path.
Qualified Plans & Retirement Counseling
Is That Retirement Calculator Right for Your Client?
Individuals in search of a free retirement calculator need not look further than Google for a large field from which to choose. These calculators can serve as a valuable tool for those thinking about the big picture of retirement. Since these calculators are an integral part of the retirement planning process, there is a need to evaluate them and create a set of standardized criteria to assess their validity for a given client. The users of these tools are average financial planning clients, but the beneficiaries of this analysis will be financial planners because they will be better able to understand their clients’ thinking. This paper will further educate planners on common calculators their clients may utilize, while also addressing which calculators best suit which clients.