Executive Summary
Notwithstanding its risk and the painful volatility of the past decade, stock investing is still a cornerstone of financial planning advice. However, investing in equities - even just a little bit - is not for everyone. Some aren't interested in the risk; the trade-off just isn't worth it to them.
Of course, financial planning advice has much value to offer beyond just how to allocate an equity-centric portfolio. There's just one problem... financial planning advice may still be so equity-centric, that people who don't want to take investment risk just don't use a financial planner at all, as a recent Journal of Personal Finance revealed!
The inspiration for today's blog post was a brief article by Jason Zweig in last week's Wall Street Journal entitled "Who Needs Financial Planners, Anyway" discussing a recent article entitled "The Demand for Financial Planning Services" by Sherman Hanna in the Journal of Personal Finance.
The good news of the article was that, in analyzing data from the Federal Reserve's Survey of Consumer Finances, it appears that approximately 25% of households utilize the services of a financial planner (as of 2007), up from 21% of households a decade earlier, and representing a total increase of almost 7.7 million households that started working with a planner (although notably, the research refers to financial planners, but it's not clear whether the data really makes a distinction between comprehensive financial planners and the general category of financial advisors). Given some of the criticisms of financial advice only reaching a limited number of the affluent, this can be viewed as a very positive trend on the expanding reach of financial planning.
However, in further analyzing the data of who consumes financial planning services, a disturbing trend also emerged: one of the key factors in determining whether a household is interested in seeking out the advice of a financial planner is its willingness to take investment risk. As the results show, 28% of families willing to take "average" levels of risk use a planner, and 33% of families who are comfortable with "above average" risk use planners. But amongst those who aren't willing to take any risks, the use of financial planners is a mere 11% (and this is after controlling for age, income, net worth, and other factors). In other words, there appears to be a strong self-selection bias occurring here - people who are comfortable taking risks as stock investors seek out financial planners, while those who are not comfortable with stock risks tend not to seek out a financial planner at all (despite the other value that planners can provide).
Unfortunately, these results suggest to me that overall, financial planning is still too equity- (and therefore risk-) centric in the advice that it gives, and as a result carves out and excludes a material portion of the population for whom its advice doesn't feel relevant or appropriate. Given the trend for the increase in the use of financial planners - even though it's been an incredibly difficult decade for equities - it would appear that financial planning is making some progress in convincing the public of the value it has to add beyond investments, as the percentage of households using a planner is on the rise even though I doubt the tolerance for stock investing has climbed over the decade. Nonetheless, it still raises the specter that financial planning as a profession could be in serious trouble if the stock market has even more protracted difficulties and the general public sours further on equity investing.
Personally, I do still believe there's a value opportunity in investing a portion of one's net worth in equities for the long run, so the point of this post is not to bash stock investing. But we as financial planners do need to take a good, hard look in the mirror. Why is it that we'll suggest whether to spend 20% of our income on a car, or only 5% on a car and save the rest, is a "personal values" choice, yet investing in a purely fixed income portfolio is "never" appropriate for anyone because every client needs and deserves the long-term returns that equity investing provides (even though sometimes it doesn't actually provide those returns over a relevant time horizon)?
Why don't we have more discussions with clients about how to achieve financial success by investing in a portfolio of TIPS, that provide some real return while also hedging against inflation, providing as close to a risk-free accumulation strategy as any available? Yes, it would mean clients have to spend less and save more because they won't participate in equity returns... but so what? Isn't that just part of the trade-offs and personal value decisions that we should help every client evaluate? And sometimes, equities don't actually deliver the expected returns, and the TIPS portfolio could even be the superior path, not merely the steadier one!
I realize that some people will probably use this discussion as a chance to stab at the AUM-based financial planning business model, but I don't necessarily think it is the culprit. Our tendency for equity-centric advice generally appears to span all business models; I've seen similar equity-centric advice behavior ranging from hourly planners to wealth management firms. Some business models may face this conflict more than others, but the equity-centric nature of our advice is, I believe, a learned behavior from our curriculum and our culture as planners, not merely a consequence of one particular business model.
So what do you think? Have we as financial planners indoctrinated ourselves into a "cult of equity investing" that is making itself unappealing to anyone who doesn't want to adopt our own equity-centric views? Are we as financial planners projecting our above-average risk tolerance tendencies onto our clients, and not doing a good enough job of providing advice truly based on their risk tolerance? Have we bet our profession on the long-term growth of the stock market?
