- The intent of this paper is to help financial advisers prepare for a client discussion about the required minimum distributions (RMD) withdrawal strategy, which many Americans follow.
- Clients who plan to follow this strategy need to be advised that the asset allocation they choose affects the volatility in the RMDs.
- It also affects the expected total number of dollars paid out over a client’s retirement life expectancy.
- Based on historic returns, the tradeoff between the volatility in RMDs and the expected number of dollars paid out is examined.
- This paper explores the complexities involved in the estate planning process for blended families and offers guidance for financial planners based on the principles of financial psychology.
- Theoretical frameworks from the field of psychology offer insights into the formation and development of blended families and some of the unique challenges they face.
- It is important for financial planners to recognize how conflicting interests from current and former family members impact a client’s emotions and financial decision-making.
- Financial planners could benefit from understanding how to take a more comprehensive approach to helping clients recognize their money beliefs and biases by integrating financial psychology into the estate planning process.
- Financial psychology tools can help financial planners better understand blended families’ unique challenges.
- Between 2007 and 2009, American aggregate household wealth declined by 20 percent (Dettling, Hsu, and Llanes 2018). By 2012, however, aggregate household wealth surpassed its 2007 peak and continued to increase through 2016. Although the Great Recession and its subsequent recovery has been extensively studied, little is known about the association between changes in wealth during these periods and changes in bequest expectations.
- Based on Hurd and Smith’s (2001) model of consumption and saving, we expected a positive relationship between changes in wealth and changes in bequest expectations. The purpose of this study was, however, to explore whether a modest or significant decline in wealth that occurred during the Great Recession was linked with a drop in bequest expectations. Similarly, this study investigated the magnitude of wealth increases during the recovery that were associated with a return to expectations held prior to the Great Recession.
- Using data from the Health and Retirement Study (HRS), this research found that during the Great Recession, both significant and modest declines in wealth were associated with a drop in bequest expectations. However, no relationship was found between increases in wealth and a rise in bequest expectations. Following the Great Recession, only wealth increases at the highest end of the distribution were associated with a return to previously held bequest expectations.
- Financial planners can use these results to better understand shifts in bequest expectations during various economic cycles and provide the necessary interventions to help clients meet their long-term wealth transfer goals and objectives.
An Evaluation of the Association Between Marital Status and Financial Risk Tolerance
- Financial planners collect vast amounts of data from individual clients to determine appropriate investment strategies. It is important to be able to accurately categorize appropriate financial and investment recommendations to ensure regulatory compliance, client acceptance, and financial planning strategy adherence, all of which foster trust, understanding, and further validation of the professional relationship.
- This paper describes how the marital status of a financial decision-maker is associated with their financial risk tolerance. This paper makes conclusions with respect to whether a client’s marital status needs exclusive consideration in the context of financial planning and the investment management process.
- Using data from 1,174 financial decision-makers, it was determined that marital status is not uniformly associated with financial risk tolerance.
- Financial knowledge emerged from the analyses as the most important descriptor of financial risk tolerance across genders. Additionally, older respondents were found to be less willing to take a risk.
Retirement Glide Path Options in an Uncertain, Low-Interest-Rate Environment
- Some retiree asset allocation decisions may be based on projections made using long-term historical average returns of the different asset categories. With stock and bond returns at their long-term averages, a 4 percent initial withdrawal rate over a 30-year retirement was a possibility even for conservative investors with portfolios heavily weighted toward bonds. This pleasant picture changes dramatically when the current bond environment is considered.
- After spending much of 2020 below 1 percent, 10-year U.S. Treasury yields have increased to about 1.6 percent as of May 2021, still far below their long-term average. With inflation averaging 2 percent and possibly headed higher, bonds are providing negative real returns for retirees in need of safe cash flows. In addition, if bond yields do climb back up to their long-term averages, retirees holding bonds will be hit with significant capital losses along the way.
- Rather than assuming that bond rates and inflation will return to normal over five or 10 years, as some other papers have done, this analysis considered scenarios where rates return to normal over five, 10, 15, 20, 25, 30 years, or never. While a quick recovery for interest rates would mean large upfront capital losses for new retirees, failure rates for portfolios heavily weighted with bonds peak if rates recover in about 15 years.
- This study found that post-retirement glide path choices that would have worked in the past are no longer safe investment choices in this environment. With a 20–80 stock–bond mix, a 4 percent withdrawal rate over 30 years is simply not a viable option. Even with lower withdrawal rates and/or shorter retirement horizons, retirees are best served with decreasing glide paths that boost their early allocation to stock. Decreasing glide path options result in lower failure rates across the different portfolio equity levels, but the higher the allocation to stock, the less the choice of glide path matters.
- Addressing the issue of “wealth gap,” particularly among people of color and other disadvantaged groups, has been one of the primary focuses of many politicians, activists, and industry leaders as well as financial services professionals. Small business ownership is an established method for individuals of varying backgrounds to amass significant wealth.
- In this paper, we aim to assist financial advisers in understanding the challenging landscape for African American business (AAB) owners and utilizing this knowledge to help their clients improve their business outcomes by studying the role personal credit has on access to credit.
- Using the 2019 data from the Survey of Consumer Finances (SCF), we first show that AAB owners have worse credit profiles than business owners of other ethnic groups. We also document a positive association between better personal credit and the use of personal financial planners for AAB owners, with the expectation that this will improve access to capital and therefore improve business outcomes.
- We also provide guidance for financial advisers to improve their efficacy in assisting African American business (AAB) owners in improving business outcomes, such as utilizing decentralized finance as a means for obtaining capital and mitigating the discrimination risk inherent in obtaining credit from traditional banking institutions.
Does Advisor Channel Influence Passive Fund Choice?
- Historical differences in compensation may influence how representatives from broker-dealers, registered investment advisers, and dual registrants select funds.
- Evidence from advertising content suggests that active-fund families promote characteristics such as recent returns that are appealing to investors and reward commission-compensated advisors, but do not predict future performance.
- Using a survey that asks advisors to list the top three criteria they use when selecting mutual funds for a clients and their investment style, we find that registered representatives (from RIAs) favor more salient characteristics such as expense ratio while representatives from broker-dealers and dual registrants favor recent returns and active investing strategies.
- Registered representatives from RIAs are more likely to follow a passive investing strategy and consider expense ratio as an important fund characteristic, while there is no statistical difference between representatives from broker-dealers and dual registrants.
- These findings are consistent with the existence of conflicts that favor the promotion of active investing strategies among advisors who are regulated as fiduciaries.
The Role of Personal Financial Salience: Part II
- Personal financial salience (PFS) was recently introduced as a concept that describes “how individuals allocate attentional, perceptual, and cognitive resources to their personal financial situation” (Pearson 2021, 87). The study that introduced PFS utilized app- and web-based financial planning product (A&WFPP) usage to proxy PFS, and then used the PFS variable to show that individuals who frequently use these products are more likely to find it easier to cover their bills, have an emergency fund, have a plan for their children’s college education, and have a plan for retirement.
- Using similar methodology, this follow-up study examines the effect of PFS on financial satisfaction and retirement insecurity. Financial satisfaction is defined as satisfaction with one’s financial condition, and retirement insecurity is defined as an individual’s fear of running out of money during retirement.
- While prior research showed that higher levels of PFS are associated with objective measures of financial health, this study shows that higher levels of PFS are associated positively with non-objective measures of financial health. The empirical results reveal that, when compared to individuals with low PFS levels, those with high PFS levels are more likely to have higher levels of financial satisfaction. Furthermore, those with high PFS levels are more likely to have low retirement insecurity.
How Do Commodities Fit into Client Portfolios?
- Academic literature suggests that since the mid-2000s, improved investment technology may have resulted in the “financialization” of commodity markets. This financialization is defined as the participation in commodity markets of institutional investors that have not historically been part of the commodity trading complex. Whether due to financialization or not, since 2005, the correlation structure of commodities with other assets, and perhaps their expected returns, has been altered. This paper summarizes these changes, and their implications for investment planning.
- Since 2005, return correlation between the Bloomberg Commodities Index and the S&P 500 has been 49 percent, compared to –30 percent 1973–2004. This change has significantly reduced the ability of commodities to contribute to an efficient portfolio in a modern portfolio theory framework.
- The correlation of returns to the Bloomberg Commodities Index with inflation has been very high since 2005, at 64 percent. This correlation comes primarily from the correlation of commodities with unexpected inflation. The index is slightly negatively correlated with inflation expectations. This is in contrast to pre-2004, when commodities returns were correlated with both expected and unexpected inflation. Commodities’ high correlation with unexpected inflation makes the asset class an appealing inflation hedge despite its limited contributions to an efficient portfolio.
- The current study is a replication and extension of the early work of Sharpe et al. (2007). They found strong empirical support for financial life planning in fostering trust and commitment in the planner–client relationship.
- To expand on Sharpe et al. (2007), the study at hand provides an in-depth exploration of the theory of trust and commitment developed by Morgan and Hunt (1994) with a focus on the antecedents to the formation of commitment and trust from a client’s perception.
- Structural equation modeling (SEM) results support the theoretical model. Specifically, that trust and commitment are built by the following antecedents: (1) communication abilities, (2) an absence of opportunistic behavior, (3) perceived relationship benefits, (4) the costs of terminating the relationship, and (5) shared values.
- These results suggest that technical skills alone, such as generating high investment returns, may not be sufficient to build client trust and commitment and provide continued financial life planning support.