2024 Journal of Financial Planning Research Papers

Should Financial Planners Ever Be Passive on Value or Growth?

• Numerous funds comprising hundreds of billions of dollars are allocated in public markets to ETF investments in factor strategies related to value and/or growth. These funds may be passive or actively managed, but in either case they are designed to provide exposure (positively or negatively) to the “value” factor that has been demonstrated repeatedly in academic literature to exhibit a return premium.
• The value factor has been defined in several different ways by practitioners but has been most consistently defined and thoroughly researched in academic literature by the HML factor (the returns to high book-to-market stocks minus low book-to-market stocks) of Fama and French (1992). By definition, HML partitions value and growth firms by book-to-market, and therefore the “growth” factor is simply a negative exposure to HML.
• Even among the most popular, most liquid funds, value- and growth-factor exposure varies among funds and through time, sometimes dramatically. Financial advisers need to monitor this exposure carefully to be sure their clients are positioned as intended.

‘I Haven’t Really Thought About It’: Consumer Attitudes Related to Long-Term Care

• The U.S. population is aging. One in six people in the United States are 65 years old or older (Caplan 2023). Approximately 70 percent of this age group is expected to need some form of long-term care at some point (Digital Communications Division 2022). Because of the projected growing need for long-term care, understanding how people are thinking about and planning for their potential long-term care needs is vital.
• Drawing on data from a series of semi-structured focus groups (N = 84) and a national survey (N = 1,450), this study sought to understand people’s perceptions, interests, language, and emotions related to long-term care and long-term care planning.
• Results suggest that most people have not seriously considered that a long-term care event might happen to them, and they were mixed about whether they were financially prepared to afford their care should they experience a long-term care event. About one-third of survey respondents said that they had not spoken to anyone about the possibility of experiencing a long-term care event. Women, people with children, and people with current or former caregiving experience generally expressed greater interest in long-term care insurance offerings.
• Implications of this research highlight opportunities for financial professionals to provide education and dispel misconceptions about long-term care, to act as facilitators in conversations with loved ones around long-term care, and to tailor solutions for their clients’ needs.

The Benefits of Behavioral Nudges: Using Choice Architecture to Improve Decisions and Shape Outcomes in Retirement Savings Programs

• An increasing number of private and public organizations have borrowed insights from behavioral economists to design nudges as part of their choice architecture in retirement plans to enhance financial outcomes on behalf of employees.
• Lawmakers recently endorsed further nudging in retirement plans with the passage of the SECURE 2.0 Act. The new bill includes expanded automatic enrollment and auto-escalation features, higher catch-up contributions for late-career employees, an option to establish workplace emergency savings programs for qualifying employees, and the ability to offer small immediate incentives to plan participants.
• Despite the widescale success of and broad support for these behavioral nudges, some detractors warn of the potentially intrusive nature of nudges, arguing that intentional paternalistic interventions can invade individual liberty and usurp autonomy. Other objectors claim that nudges are ineffective in addressing individuals’ preferences because those interests are too varied and are indecipherable to the retirement plan designer.
• This paper explores (1) situations in which some level of paternalism is unavoidable; (2) how carefully crafted nudges can be used to inform decisions and shape outcomes without inhibiting individual agency; (3) how choice architecture (the deliberate arrangement of defaults, and the organization of options within the decision environment) can be used to bridge the gap between information and action; and (4) how new nudges in workplace retirement plans could significantly improve employees’ short- and long-term financial positions.

Comparative Perspectives on Virtual Financial Planning: Similarities and Differences between Planner and Client’s Assessments of Virtual Client Meetings

• This research uses the theory of polymedia (Madianou and Miller 2012) to study perspectives on productivity and confidence in virtual financial planning meetings.
• Results suggest that planners are more likely than clients to think virtual meetings will be productive.
• Client results show a significant, positive relationship between their confidence in troubleshooting virtual environments and their view that these meetings can be as productive as in-person meetings.
• Planner results show a positive relationship between their confidence in navigating virtual environments and their view that these meetings can be as productive as in-person meetings.
• Planners should be proficient in troubleshooting technical issues to increase client confidence and be intentional about determining which clients require in-person meetings.

LLMs Can’t Be Trusted for Financial Advice

• ChatGPT and other large language models (LLMs) do not understand the text they input and output.
• Three prominent LLMs were tested with 11 financial-decision prompts.
• The LLM responses were seemingly authoritative but riddled with arithmetic and critical-thinking mistakes.
• Financial planners are unlikely to be replaced by LLMs anytime soon.

Guaranteed Income and Optimal Retirement Glide Paths

• Deciding on asset allocations over time and portfolio withdrawal rates remain key considerations for retirees. These decisions are impacted by factors such as the investor’s wealth level, degree of risk aversion, the desire to leave a bequest, and the presence of guaranteed income, such as Social Security. This paper considers these issues as they relate to utility levels for retirees. 
• Initial equity allocations from 0 to 100 percent were examined. For investors with moderate and high levels of risk aversion, higher proportions of Social Security relative to overall wealth led to higher initial optimal allocations to stock. This is somewhat intuitive because the higher level of guaranteed income allows for more risk with the remainder of the portfolio. However, retirees who rely more on Social Security are less wealthy, and lower levels of wealth are generally equated with lower allocations to stock.
• Five different glide paths, which provide plans for changes in allocations to stocks over time, were considered: increasing the weight of stock slowly, increasing fast, decreasing slowly, decreasing fast, and constant. The typical guidance for retirees is to decrease their allocation to stock over time. This paper finds, however, that increasing glide paths, where the level of stock increases over time, are often optimal. 

Investigating the Efficacy of a Life Settlement to Offset Temporary Life Insurance Premiums in Retirement Age Years: Behavioral Finance Implications

• This paper compares funding a 20-year life insurance need beginning at age 65 with either term insurance or a permanent policy which, absent a death, is sold for a lump sum through a life settlement contract at the end of year 20. This study compares the net present values of the two scenarios under varied assumptions. 
• This analysis requires a decision based on uncertainty. The discount rate used by the household owning the policy is a variable. The eventual life settlement offer is 20 years in the future. The offering price will vary by the life expectancy assumptions and required hurdle rates of the life settlement professional 20 years hence. 
• The paper discusses the implications of behavioral finance motivators and boundaries in decision-making.
• This study varied the household discount rate and the buyer’s hurdle rate from 1 to 15 percent. Life expectancy after the settlement ranged from one to 15 years. Within the parameters of this study, a range of combinations of discount rate, hurdle rate, and life expectancy assumptions favors a permanent policy coupled with a life settlement. In contrast, the remaining combinations favored buying term insurance from a purely objective point of view. 
• Planners cannot dismiss either scenario out of hand when planning for temporary life insurance protection during retirement years. They must consider the behavioral finance implications in the underlying assumptions and their client’s potentially irrational (in behavioral economics terminology) behaviors. 

Customer Trust and Satisfaction with Robo-Adviser Technology

• Robo-advisers are digital tools that are algorithm-based and provide customers with automated financial advice without human intervention (Huang 2022; Hildebrand and Bergner 2021). Robo-advisers may or may not use artificial intelligence. Artificial intelligence (AI) is a development in technology that is making processing large amounts of data much more manageable than can be done by a human (Jarek and Mazurek 2019).
• This sequential explanatory mixed methods study examined how customers rate trust and satisfaction with robo-adviser services, and it examined the relationship between customer trust and financial services among professionals in the United States who use robo-adviser services.
• The findings of this study showed a lack of education: that robo-advisers exist, how they operate, and how much AI resides in them. There was found to be overall customer trust in both a traditional adviser and a robo-adviser, with reputation of the firm representing a significant positive influence on enabling that trust.

Net Present Value Analysis of Roth Conversions

• In most conventional treatments, the advisability of a Roth conversion hinges on a comparison of present to future tax rates. If future tax rates will be higher, conversion is indicated.
• This paper argues that future tax rates are unknowable, and that this uncertainty needs to be incorporated into the decision process around Roth conversions.
• The time course over which tax savings accrue has also been ignored. For the mass affluent, conversions typically serve to reduce required minimum distributions. Because RMDs continue for life, tax savings from reducing future RMDs may take decades to accumulate.
• RMD-reducing Roth conversions fit the classic model for net present value analyses. There is a large one-time tax payment at conversion, followed by years and years of tax savings. Savings postponed until the distant future must be discounted. The conversion pays off only if the discounted value of future savings exceeds the cost to convert.
• This paper develops the implications of the long, slow, uncertain payoff for conversions. Clients need to be comfortable with a payoff that may not be complete until 20 or 30 years have passed, and which may be comparatively small in present value terms.

Don’t Sweat the Big Stuff—It’s the Small Stuff That Makes the Difference: The Effect of Having Savings Rules, and the Relationship between Financial Knowledge and Household Savings Behaviors of Americans

• The current study is an extension of the earlier work of Rha, Montalto, and Hanna (2006). They found savings behaviors were strongly affected by savings goals, foreseeable expenses, and savings rules defined as a mechanism of self-control.
• This study expands upon that research and, using the behavioral life cycle hypothesis as the theoretical foundation, examines whether having savings rules, a mechanism of self-control, and financial knowledge increases the likelihood that Americans will engage in saving behaviors defined as net saver. The study tests for the effects of a moderating variable—savings rules.
• Logistic regression results support the theoretical model. Specifically, having savings rules and, to a lesser degree, subjective financial knowledge are positively associated with being a net saver. Savings rules do not guarantee net savings; however, savings without rules are rare.
• The results suggest that subjective and objective financial knowledge are also predictors of whether a household is a net saver, but not necessarily more so than simply following good savings habits.

Why Are There So Few Women in the Financial Services Industry?

• We find that innate, fundamental psychological needs such as autonomy, relatedness, and competence explain female financial planners’ happiness with their jobs and desire to stay in their current firms. 
• The perceived happiness and attrition of women financial advisers can be influenced by offering female advisers the responsibility for client acquisitions, changing the perception of the meaningfulness of their work, and providing opportunities for self-advocacy. 
• At the same time, women can be encouraged to stay with their firms when they are given the responsibility for client acquisition and when they see the firm focusing its efforts on female retention. 

Efficient Portfolios with Social Security as an Asset

• Social Security provides retirees with a quasi-guaranteed lifetime income stream that increases with inflation and can be considered a government-backed “annuity.” This paper examines the impact of including the value of expected future Social Security payments as an asset, along with stocks and bonds, in efficient portfolios. 
• The value of Social Security to a retiree depends on the individual’s life expectancy, the level of benefit payments, and market interest rates, all of which change over time. The mean and standard deviation of the returns on Social Security were estimated based on its expected annual payouts and the changes in its valuation over time. Based on this paper’s estimations, Social Security provides a higher return than government bonds with a lower level of risk.
• The paper’s results show that including Social Security in mean-variance efficient portfolios with stocks and bonds resulted in considerably higher allocations to stocks (relative to the stock–bond total) at the beginning of retirement compared to the guidance when Social Security was not included. The value of Social Security declines over time as retirees age and face higher probabilities of death. As this happens, the optimal allocation to stocks as a percentage of financial assets gradually declines and is offset by an increase in bonds.