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2013 Graduate Research

The 2013 CFP Board Registered Program Conference featured a research poster session for doctoral students to share their unpublished research and studies exploring one or more areas related to the personal financial planning profession.

Research Poster Titles:

Racial Difference in Trust and the Effect on Retirement Decisions

Lua Augustin
Texas Tech University
Terrance K. Martin Jr.
Texas Tech University

Using the 2008 National Longitudinal Survey of Youth, this study investigates whether racial differences in trust can explain decisions to consult a financial planner and the variation in accumulated retirement wealth. Blacks and Hispanics are more likely to report having low trust compared to non-Black, non-Hispanic respondents. The results show evidence that low trust impacts the two outcome decisions of Blacks more relative to non-Black, non-Hispanic respondents. Low trust minimally affects Hispanics relative to non-Black, non-Hispanic respondents as it related to the decision to consult a financial planner and the accumulation of retirement wealth. Marginal effects of Tobit regression analysis show no evidence of racial difference in the effect of a financial planner.

Lost in fees: An analysis of financial planning compensation

Yuanshan Cheng
Texas Tech University
Michael Finke

Texas Tech University

This article studies the empirical results of fee estimations from clients on compensations paid to their primary financial advisors. A private survey in financial planning industry with 1,407 respondents is used. Questions of fee structures of their primary financial advisor and the amount of fees clients think they paid to their advisors in last 12 months are analyzed. We find that 23% of clients do not know how their primary financial advisors charge for the services and 33% of clients do not know how much they paid in the last 12 months. For the other two third of respondents who thought they know how much they paid, 80% of them gave an inaccurate rate below the industry standard charge ratio based on clients’  investable assets under managements. Our result from the logistic regression is showing that the odds of unawareness of the exact fees paid becomes even worse when the fee structures get complicated when comparing "fee only (calculated as a percentage of assets)" with "A combination of fees and commissions", "Commissions only" and "fees only (not linked to assets)". The variances of unawareness of the exact fees paid are not explained by education level or marital status. But other than expected learning process, our results show the longer time working with their primary financial advisors, the higher chance for clients to "relax their self-interest" and ignore fees. And also non-consistent impacts are found on age and income levels. Our study shows empirical results of the naivety of clients in fees paid and has further implications for the necessity of financial planning service compensation  structure and amount discourses.

Risks of Using Free Online Retirement Planning Tools

Brigham Dorman
Texas Tech University

The use of online retirement planning tools has become more popular. Studies are showing it might be more beneficial not to use such tools. This paper focuses on the reliability of online retirement planning tools and the risks involved by using them. The findings suggest that the users of such tools need to be more aware of the risks in using the tools as well as the producer of such tools needs to provide more information about the tools to properly educate its users.

The research this paper conveys uses a common method of comparison. It employs five different online retirement planning tools and compares each of them, using a simple retirement planning scenario, with one of the professional retirement planning tools, MoneyGuidePro.

Progress has been made, regarding the gathering of social security information, in attempting to prevent user error. On the other hand, the study found there continues to be a lack of user education and an inability to adequately address longevity risk, rates of return, and drawdown. The inconsistency in required information and default settings among free retirement planning tools lead to different results and demonstrate an imbalance of sufficient planning assistance to users. The credibility of these free tools is in question. Regardless of the results produced, these tools are recommending users to seek out a qualified financial professional.

Retirement has been and is becoming more of a norm. The impact of proper education and tools with sufficient calculations weigh heavier than before. Users of online retirement planning tools may benefit more from completely ignoring these tools and relying on expert advice from qualified financial planners.

Gender Difference in Search for Financial Information

Areerat Lertchaipitak
Texas Tech University

Most individuals have to make decisions on saving and investing in their lifetimes. Since saving and investment products are difficult to choose compared to other kinds of goods, individuals may experience some difficulties with this process. Those who search for financial information find better saving and investing opportunities than those who do not. This paper observes the search for financial information as it relates to gender. Consistent with prior research, the results of this study also indicate that females tend to not actively engage in high level of search for financial information compared to males. Higher risk tolerance, higher education, higher wealth, and higher financial assets all positively influence both genders toward increased in search for financial information. Understanding search behavior of females and males can help financial advisors and educators counsel their female and male clients appropriately.

Time Preference and Retirement Planning Strategies

Terrance Martin Jr.
Texas Tech University

Prior research use time preference to explain low retirement wealth accumulation of American households. Using the National Longitudinal Survey of Youth 1979, I evaluate the effect of time preference on the choice of four retirement planning strategy. Further, I examine whether the relation between time preference and accumulated retirement wealth differs based on the reported retirement planning strategy. Results show a negative relation between time preference and the choice of a retirement planning strategy. Respondents with high rate of time preference are more likely to not have a plan for retirement and accumulate less retirement wealth. Respondents with high time preference and but implement a dual retirement strategy report higher rates of retirement saving relative to other groups.

Hyperbolic Discounting:The Empirical Evidence of Required Minimum Distribution Spending

Eakamon Oumtrakool
Texas Tech University

Retirees are struggling with sensible decumulation decisions. Those who have present-­‐bias preferences may be most vulnerable to spending too much early in retirement. Using 2010 wave of the Health and Retirement Study, we investigate the effect of hyperbolic preferences on required minimum distribution (RMD) spending using binomial logistic regression. We find evidence that more hyperbolic individuals are more likely to spend the RMD than those with less hyperbolic preference score. However, cognitive ability is not associated with decision to spend the RMD among retirees. Understanding the spending decisions among retirees has important implications for policy since it highlights the unintended consequence of reducing longevity risk through endorsement of a smooth consumption path from defined contribution savings.

The Effect of Moving in with Parents on Savings Rates of Young Adults

Patrick Payne
Texas Tech University

The recent global recessionary period has caused young adults to return to living with their parents in large numbers. These individuals (known colloquially as “the boomerang generation”) reduce their living expenses by sharing their parent’s home. A commonly cited purpose for this household consolidation is to permit the young adult to either accumulate assets or eliminate debts. According to Modigliani’s life cycle hypothesis, households that face an increase in real income will reduce their savings rate. This discrepancy between the hypothesis and the stated objectives of the returning children is the genesis of this work. This paper seeks to determine what effect returning to their parent’s household has upon the savings rates of these boomerangers by analyzing data from the National Longitudinal Survey of Youth, 1997 cohort. Analysis here defines the savings rate as the balances of checking and savings accounts net of household debt as a percentage of gross income. This savings rate will be compared to the  household’s savings rate before moving in with parents, as well as to the savings rates of households that never return to living in their parent’s household.

Sketching a Portrait of Risk Tolerance

Abed Rabbani
University of Georgia

An important aspect associated with the financial planning processes involves helping clients identify, analyze, and manage risk. This poster reports findings from a study designed to determine if portraits of risk tolerance can be developed for pre-retiree Americans. Some have argued that risk tolerance is domain specific, and that financial planners should not rely on nonfinancial risk indicators as tools for planning. This study shows that while the use of a financial risk-tolerance assessment should be a standard of practice, it is also possible to develop a portrait of risk tolerance that provides a broader perspective of a client’s willingness to engage in risky behavior, be it financial or otherwise. Data for this analysis were obtained from the 2010 National Longitudinal Survey of Youth, 1979 sample. Results indicate that people hold relatively constant, and inter-correlated, attitudes regarding the level of risk they are willing to take when making driving, financial, occupational, health, interpersonal, romantic, and major life choices. This poster can assist financial planners when they begin to discuss concepts related to risk taking with clients. Knowing, for instance, that someone is willing to take driving and health risks may be a clue that the person, when given appropriate information and guidance, may also be willing to engage in risky financial behavior. Knowing about a client’s general risk-tolerance portrait may help a counselor or planner better match product and service recommendations to what drives a client’s fears and expectations about the future.

Human Capital Protection among Females

Janine K. Scott
Texas Tech University

In the past, more males than females had the need for earnings protection, since there was more labor participation among men. However, women have increased participation both in the labor market and in more male-dominated professions (Bryant & Zick, 2006). Disability and life insurance protects a household’s most vital asset, human capital. The aim of this study is to examine disability and cash value life insurance demand among women with high human capital (characterized by education, health, and financial sophistication) across the past decade. Using the 1998, 2001, 2004, 2007 and 2010 data from the Survey of Consumer Finances, first we use chi-square and Chow tests for each year to assess differences in protection among males and females with similar human capital characteristics. Then a binomial logistic regression model is tested for each survey year to investigate the odds of demanding disability and cash value life insurance separately. Results demonstrate for 1998, 2004, and 2007 there is a significant difference between males and females in cash value life insurance demand. The odds of demanding disability insurance is significantly greater with a financial planner in 2004, 2007 and 2010 and greatest for cash value life insurance demand in 2010. Implications include tailoring different life insurance sales strategies for females in addition to bundling insurance products such as disability insurance to solicit wider consumer participation.

Financial Advice and the Decision to Annuitize

Lawrence Verzani
Texas Tech University

Normative studies have proposed the annuitization of at least a portion of wealth as a hedge against longevity risk as optimal. Empirical studies however show that few retirees choose to annuitize. This “Annuity Puzzle” is likely explained not just by than traditional utility maximizing models that assume economic agents of unlimited cognitive ability with full information but by behavioral models as well. In lieu of making the annuity decision on their own, households can rent the expert advice of a financial planner. We examine the relationship between households who have sought the advice of a financial planner and their decision to annuitize in comparison to those households who have not sought the advice of a financial planner. We find that households that have rented the expert advice of financial planner are more likely to address their longevity risk by annuitizing wealth.
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