From Theory to Practice

Overviews and practical implications of research presented at the FPA Annual Conference 2020

Journal of Financial Planning: December 2020


Walt Woerheide, Ph.D., ChFC®, RICP®, is professor emeritus at The American College of Financial Services. He has held appointments as a professor of finance at the University of Illinois at Chicago, the University of Michigan–Flint, and Rochester Institute of Technology. He is a former president of the Academy of Financial Services. He has refereed articles for 16 different journals, including the Journal of Financial Planning, served on multiple program committees for professional associations, reviewed numerous textbooks, and serves as an outside referee for promotion and tenure cases.

FEEDBACK: If you have any questions or comments on this article, please contact the editor HERE

At FPA Annual Conference 2020, there were nine research abstracts selected by a blind peer-review process for presentation at the research track, co-sponsored by the Journal of Financial Planning and the Academy of Financial Services.

The foci of these abstracts were to provide research-based suggestions to financial planners for improving their practices. This article is a summary of these presentations and, more importantly, the conclusions and implications of the research. The abstracts are reviewed in the order in which they were presented in the program.

Facilitating Virtual Client Meetings for Money Conversations: Skills, Strategies, and Outcomes

by Derek R. Lawson, CFP®; Meghaan R. Lurtz, Ph.D.; Megan A. McCoy, Ph. D., LMFT; Sarah D. Asebedo, Ph.D., CFP®; ; Jaclyn Cravens Pickens, Ph.D., LMFT-A; Dorothy B. Durband, Ph.D., AFC®; Stephen T. Fife, Ph.D., AFC®; Blake T. Gray; Jerry Sheridan; Kristy L. Archuleta, Ph.D., LMFT; and Megan R. Ford

Financial planners have long grown accustomed to communicating with clients in other than face-to-face meetings. With the COVID-19 pandemic, virtual client meetings are now the norm.

To effectively serve clients, it is critical that financial planners learn the most effective techniques for conducting these remote sessions. However, there has not been much research into the best techniques for virtual meetings by planners, as well as little research into how using only remote sessions will affect client success and client satisfaction.

Fortunately, there has been substantial research regarding virtual meetings within the mental health profession, and financial planners should be able to benefit from a knowledge of this research. This research is guided by the theory of polymedia, which focuses on understanding interpersonal relationships within the context of multiple media technologies used daily. It covers six fundamental areas. These are:

Client relationship and connection. Effectiveness starts with a good relationship between the planner and the client.

Communication skills. Effective verbal and nonverbal communication skills and strategies are essential to master and adapt for virtual client meetings. Examples of necessary skills include listening, attending, eye contact, use of minimal encouragers and silence, and conflict resolution.

The physical environment. It is important to arrange a professional meeting space. Backlighting when on camera makes a big difference. Keep the camera at eye level, so the practitioner is neither looking up nor down into the camera. The planner should use an agenda and pre-meeting checklist and wear professional attire. Pay attention to privacy and security, which would include the use of headphones or white-noise machines.

The psychological environment. In the medical field, clients tend to report high satisfaction from teletherapy, but therapists tend to be resistant to its use. A greater sense of discomfort with this unconventional modality may exist due to a lack of training and efficacy on the digital environment for the professional, whereas clients gain a sense of comfort and control over their location and space.

Client confidentiality. There are many more issues regarding confidentiality in virtual meetings. These include video conferencing program capabilities to secure client information, confirming the client’s identity, safeguards to prevent unintended client confidentiality breaches, and awareness of any other participants on either side of the meeting.

Risks of advising at a distance. Assessing crisis or stress and anxiety for either party may be more difficult because both verbal and nonverbal cues may not be readily observed.

What are the implications for financial planners? Virtual meetings may well increase client satisfaction. They should reduce the costs of operations as well as increase the practitioner’s geographic range of clients as clients no longer need to be able to easily access the planner’s office. There appears to be lower client dropout rates. Finally, there is more opportunity for collaboration.

Foreign Revenue Exposure: A New World of Risk

by David Blanchett, Ph.D., CFA, CFP®

A basic principle of good investing is to be diversified. One common component of diversification is international exposure. But what counts as international exposure? It is no longer reasonable to think of most large corporations as being associated with just one country. As evidence of this, the average correlations of returns between 21 major stock market indices, from 1920 to 2019, have risen substantially. This means a substantial reduction to the diversification benefits of what people traditionally think of as international investing. Ironically, the allocation to international investing by such entities as balance funds has been increasing over the last 30 years.

It is important to understand that the foreign revenue exposure of the major U.S. companies is roughly 38 percent, and it is even higher in many other countries. The foreign revenue exposure is more directly related to how well developed a country’s markets are, rather than just the size of a country’s GDP. Although, as the amount of foreign revenue exposure increases, the standard deviation of returns of that country’s markets declines, this appears to be more from the effect that countries with more foreign revenue exposure have larger markets.

This research focuses first on a subset of mutual funds from seven countries, where the goals of the funds involved intentionally domestic investments. This selection process produced 25 combination groups and 3,100 funds. The foreign domicile exposures for the holdings in these funds were relatively low at about 10 percent, as expected. However, the foreign revenue exposure is significant for some of these domestic equity funds. Simply put, some of these funds are much more international than they seem. Analysis of this data showed no relationship between a given sector and foreign revenue exposure. It also showed that small cap funds tend to have less foreign revenue exposure than large cap funds. Prior research showed that U.S. investors who demonstrated a significant domestic bias nearly doubled their foreign investment exposure when foreign revenues were considered.

This research next focuses on whether there is any relationship between foreign revenue exposure and the performance and risk of mutual funds. Using regression analysis, the results showed that both domicile and foreign revenue do about the same describing risk from a statistical significance perspective, and both are better than returns. Domestic-focused revenue indices had lower returns and higher risk than a market-cap weighted index. Although it is not clear that this historical pattern will continue, it does have implications for diversification purposes. There have been instances where a domestic revenue index will have substantially different returns than a market capitalization index.

What are the implications for financial planners? Foreign revenue exposure provides a different perspective on the underlying risks of a given investment, and unlike a company’s domicile, it is not binary. Hence, this factor allows for a more complete consideration of risks. This means that creating investments based on foreign revenue exposure may be of interest to certain investors. As global economies become increasingly interconnected, domicile as a traditional metric is likely to become less relevant in describing the risks of a given strategy. Even all U.S. equity portfolios are not truly 100 percent domestic.

Goal Proximity and Risk Aversion

by David Blanchett, Ph.D., CFA, CFP®; and Michael Finke, Ph.D., CFP®

One of the more important questions in portfolio theory is the extent to which a portfolio’s riskiness should be altered as one ages. A similar question arises when one is investing to fund a particular goal that has a specific time horizon.

Two datasets are accessed to provide insight on this issue. The first involves the completion of 13,282 risk tolerance questionnaires that required participants to select a goal with a specific time horizon and then identify which type of portfolio they would hold to fund this goal. The longer the time horizon, the riskier the portfolio that is chosen.

The second dataset contains information on over 350,000 investors participating in 529 plans. Two types of investment choices are available when starting one of these plans: glidepaths that are analogous to target date funds and static stock-bond allocations. The first observation is that most 529 plans are established when the prospective beneficiary is young, in many cases less than five years old. The age of the person funding the plan has a bimodal distribution. The bulk of funders are in the 30–45 age range, but there is also a bump in the 60–70 age range, which probably represents grandparents. In 77 percent of the plans, the beneficiary is the child of the funder, and in 18 percent of the plans, the beneficiary is the grandchild.

The next observation is that roughly three-fourths of the funds are established with age-based glidepaths, and only about one-quarter are funded with a constant allocation plan. This suggests that investors want to tie investment strategies to specific goals.

It is possible that the size of the 529 plan might impact how aggressive of a glidepath is chosen. That is, do people funding the plan with larger amounts choose more aggressive equity allocations? The data show there is virtually no difference in glidepaths chosen based on the size of the accounts. The age of the investor funding the plan does seem to make a difference, as younger people are clearly more prone to select a glidepath over a static allocation. However, grandchildren also get a much less aggressive portfolio. In terms of selecting an aggressive versus a moderate glidepath, the higher the prior year’s market return, the more aggressive the glidepath chosen.

When people choose static allocations, it turns out that as the account ages, the equity allocation tends to become larger, which suggests people are not paying attention to the plan. But when new accounts are opened for older children, the equity allocation tends to be quite low.

What are the implications for financial planners? There is a strong preference for age-based glidepath funds, even though they are inconsistent with lifetime portfolio allocation. This suggests that investors want to tie investment strategies to specific goals. In addition, it appears that people have trouble understanding the glidepath concept.

Are Financial Apps and Websites Effective in Helping Individuals with Their Financial Goals?

by Blain Pearson, CFP®

We are witnessing the development of a plethora of app-based and web-based financial planning products (AWPs) that can provide individuals with financial guidance. Perceived value and product novelty have driven many individuals to utilize AWPs. The research question in this study is whether using AWPs facilitates users meeting their financial goals.

The data for this study is from the 2018 wave of The National Financial Capability Study that was a project of the FINRA Investor Education Foundation. The responses were divided into three groups based on the frequency with which the users utilized the AWPs. Slightly more than half made no use of these, about one-third used them sometimes, and about one-seventh (2,610 people) used them frequently. Five goals were surveyed in this study:

  • Degree of financial satisfaction
  • Spending and budgeting
  • Creation of an emergency fund
  • Establishing a plan for retirement
  • Saving for children’s college education

First, respondents were asked to indicate their overall level of financial satisfaction with their current personal financial condition, on a scale of 1 to 10, with 10 being the most satisfied. This was followed with questions about the degree of success with five specific aspects of one’s personal finances. These topics were as follows:

  • Spending compared to annual income
  • The ability to pay bills in a typical month
  • Attempts to determine how much to save for retirement
  • The creation of a three-month emergency fund
  • The creation of a college savings account

The regression results showed that, among the respondents, there was little difference in financial satisfaction between people who never used the AWPs and those who used them occasionally. However, there was a substantial increase in satisfaction among those who used these products frequently. This result held up across all five of the specific topic areas of financial management. That is, the  “sometimes” and  “frequent” users were much more likely to have annual expenses be less than annual income, to experience little difficulty in meeting expenses in a typical month, to have an adequate emergency fund, to have planned for retirement, and to have some savings for their children’s college education.

What are the implications for financial planners? Financial planners may do well to consider integrating the AWPs into their practices. The push notifications provided by this technology, along with the screen presence, appears to help clients become more satisfied with their finances and to achieve specific, basic goals. By clients using the AWPs, financial planners can focus more time on providing necessary advice and guidance because they are spending less time doing data analysis and computations.

Understanding the Potential of Tele-Financial Planning

by Brian Walsh, CFP®; Derek J. Sensenig, CFP®; Ives Machiz, CFP® ; Nicolas Stanley, CFP®, ChFC®, CIMA®, CLU®, CDFA®, EA; Matthew Russell; and Megan McCoy, Ph.D., LMFT, CFT-I™

Although the technology for virtual meetings has existed for almost a decade, there has been little research on best practices for tele-financial planning. However, there are strong similarities between mental health work and financial planning, and there is a substantial literature on tele-mental health. This research provides a comprehensive review of this literature.

The review period ran from 2010 to 2020, with 699 articles initially identified as of possible value. A preliminary review focused on 168 articles, and a comprehensive review was performed on 39 articles. The primary criterion for final selection was research where there was a similarity to the financial planning field clientele. The literature reviewed covered deliveries of virtual therapy ranging from basic therapy for young adults to the treatment of veterans with extreme post-traumatic stress disorder.

The findings fall into these three broad categories:

Effectiveness. Although two studies did conclude that in-person treatment was more effective than virtual interventions where both had the same populations, all the rest found virtual delivery of therapy services to be just as effective as in-person services. Just as important, the research shows there is no significant difference in client satisfaction between virtual and in-person therapies. This occurred despite the concern by practitioners that there would be a reduction in satisfaction. In cases where virtual therapy produced a higher level of customer satisfaction, this increase was attributed to shorter delays in scheduling an appointment, as well as the greater comfort by clients being able to remain in their home instead of traveling to an office.

Efficiency. Tele-mental health allowed for critical interventions to individuals in rural communities who otherwise would not have had access to care, as well as allowing practitioners the ability to serve clients at multiple sites from one location. Tele-mental health also appears to lead to a greater likelihood of the patient continuing a course of treatment; this means a greater adherence to a treatment plan and a continuation of services between the client and the provider. Tele-mental health also appears to allow for improved collaboration with other professionals.

Unique challenges. It is obviously critical that there be proper training and installation of any software, not only for the professional but also for the client. With video conferencing, the professional must pay particular attention to security and privacy issues. Even the smallest infringement of a client’s trust could irreparably harm the relationship

What are the implications for financial planners? For planners who have heretofore been skeptical about teleconferencing, this literature strongly suggests it is an appropriate method for meeting with at least some clients. There is still much to learn about which specific client populations would be best served by virtual practices rather than face-to-face delivery. Finally, any approach to client interaction that includes video conferencing as a mode for client communication must address: (a) proper hardware and training; (b) privacy concerns; and (c) dropout concerns.

The Connection between Personality, Well-Being, and Risk Aversion

by Taufiq Hasan Quadria; Sarah D. Asebedo, Ph.D., CFP®; and Esteban Montenegro-Montenegro

This research looks at how the relationship between the big five personality traits and risk-aversion is connected to an individual’s sense of  well-being, then looks at the relationship between these same traits and overall well-being, and then, finally, at how the overall well-being affects risk aversion.

More specifically, the study looks at the relationship between these big five personality traits and a global measure of risk aversion, and then tests whether  well-being facilitates an indirect relationship between them. The big five personality traits are extraversion, agreeableness, openness, conscientiousness, and neuroticism.

The global measure of risk aversion was estimated as a latent variable with a confirmatory factor analysis using five indicators measuring the respondents’  risk aversion in five different domains. These domains are as follows: high-stake activities, low-stake activities, financial matters, occupation, and health. Well-being is estimated as a second-order latent construct from first-order latent variables that includes the following: positive affect, cognitive enjoyment, positive relations with family, positive relations with friends, purpose in life, and perceived mastery.

The data for this study is drawn from the 2014 and 2016 waves of Health and Retirement Study and the 2016 RAND HRS Longitudinal Data. Seven hypotheses are tested. The first five deal with the relationship between the big five personality traits and the degree of  risk aversion. The sixth one deals with the relationship between well-being and risk aversion. The last one considers whether well-being facilitates an indirect effect between the big five personality traits and a global measure of risk aversion.

The results first show that conscientiousness and agreeableness are directly associated with higher levels of risk aversion, and that openness-to-experience, extraversion, and neuroticism are directly associated with lower levels of risk aversion. Next, each of the big five personality traits has statistically significant associations with overall well-being. This supports the argument that because overall  well-being is significantly associated with lower levels of risk aversion, it facilitates several indirect effects regarding the relationship between the big five personality traits and a global measure of risk aversion. Specifically, openness-to-experience, conscientiousness, and extraversion were each indirectly associated with lower levels of  risk aversion through higher levels of overall well-being; agreeableness and neuroticism were each indirectly associated with higher levels of risk aversion through lower levels of overall  well-being.

The results of this study are consistent with resilience theory and the notion that stronger intrapsychic and social functioning are related to greater resiliency for potential variability in life outcomes (as measured by global risk aversion).

What are the implications for financial planners? First, it is well known that with different economic and market conditions, a person’s risk tolerance changes. If intrapsychic and social characteristics are also fluid during these times, then they may help explain shifts in risk tolerance scores. Second, the factors in the well-being construct used in this study are related to less risk aversion. As these factors shift for clients because of life transitions or other reasons (like the COVID-19 pandemic’s health and associated market environment), financial planners can be more prepared for how these changing conditions might affect clients’ willingness to accept risk in their financial decision-making.

Financial Advice, Investment Knowledge, and Portfolio Diversification

by Johnson Antwi, Tiffany Murray, AFC®; and Michael Guillemette, Ph.D., CFP®

Investors should hold well-diversified portfolios, but many do not. This research looks at two items that may affect the degree of an investor’s portfolio diversification. The first is the source of information used when making an investment decision; the second is both the investors’ objective and subjective investment knowledge about investments.

To evaluate these sources of influence, it is necessary to measure the degree of a portfolio’s diversification. In this research, portfolio diversification is rated from one to four. A diversification score of one means that these investors did not hold any investments outside of their retirement accounts. A diversification score of four means that these individuals were invested in stocks or bonds, mutual funds or exchange-traded funds (ETFs), and commodities or real estate investment trusts (REITs). A score of two or three meant the person had holdings in one or two of these groups. The information sources evaluated are family or friends, professional financial advisers, and the person’s own judgement. Next, the investor’s objective knowledge is measured based on the number of correct answers using six questions dealing with financial literacy. The subjective knowledge was based on the investors’ own opinions as to how knowledgeable they are.

The statistical evaluation of the impact of the source of information and the extent of investment knowledge on the degree of diversification is done using ordered probit models via maximum likelihood. These regressions also include education, approximate total value of non-retirement investments, age, household income, and financial risk tolerance as independent variables. The data is drawn from the 2015 National Financial Capability Study (NFCS) Investor Survey, with a sample size of 2,000 people. The majority (59 percent) of investors fall in level three.

The key results include the following:

  • Investors whose primary source of information was professional financial advisers were 4.37 percent more likely to be in diversification level four compared to investors who use their own judgement or family and friends.
  • Although investors with a higher objective investment knowledge are approximately 2.44 percent more likely to be in diversification level four, this is not statistically significant.
  • Investors with higher levels of risk tolerance tended to be at levels three and four, and those with less tolerance for risk were in levels one and two.
  • The interaction term of investors using their own knowledge and who had high subjective knowledge tended to be at level four.
  • Investors with high subjective but low objective information tended to hold less diversified portfolios.

What are the implications for financial planners? Because it appears that subjective financial knowledge is an important factor in a client’s degree of diversification, particularly when it is rated as substantially higher than objective knowledge, planners should evaluate this characteristic, in addition to finding a clients’ risk tolerance score, to assist with the delivery and communication of financial recommendations.

The Role of Disappointment Aversion and Expectation Proclivity in Describing Financial Risk Aversion

by John Grable, Ph.D., CFP®; and Eun-Jin Kwak

Financial risk aversion and disappointment aversion are two closely related but distinct feelings held by investors. Investors may manage disappointment aversion by setting low expectations. In other words, many believe that when expectations are high, incurring losses may feel worse than if these expectations had been set lower. The tendency of an investor to set high or low expectations is called expectation proclivity.

In this research, disappointment aversion refers to the extra dislike someone exhibits to outcomes that are worse than their expectations. Financial risk aversion means the propensity of investors to prefer reduced uncertainty when making an investment decision.

This research has three goals:

  • To ascertain the degree to which disappointment aversion and expectation proclivity are related,
  • To identify who is most likely to exhibit patterns of disappointment aversion,
  • To determine to what extent the combination of disappointment aversion and expectation proclivity is associated with financial risk aversion.

To validate these goals, 525 individuals who were involved in financial decisions were surveyed. These participants were at least 18 years old and from the general population. Overall, the sample can be described as White, middle-aged, high-income, married homeowners with an education profile that skewed higher. Financial risk aversion was evaluated with a certainty-equivalent question. Expectation proclivity was measured by how high a person set expectations based on what others say about an investment. Disappointment aversion was measured by how disappointed a person would be if a speculative investment had a big loss.

The first result is that clients setting low expectations are more likely to be disappointment averse. Next, there was some statistical support for disappointment aversion being positively associated with being female, older, married, White, and having lower self-esteem. More specifically, women tended to have greater aversion to being disappointed, and households with higher income had less aversion to being disappointed.

Finally, there was statistical support showing that participants classified as having low disappointment aversion and high expectation proclivity were more tolerant of financial risk. The converse was also found to be true, namely those who were categorized as having high disappointment aversion and low expectation proclivity were found to be more risk averse. Women were also found to be more risk averse, whereas participants who were employed on a full-time basis were more risk tolerant.

What are the implications for financial planners? The key takeaway is that the results run counter to popular wisdom. More importantly, simply relying on a client’s response to a measure of risk aversion may not provide sufficient insights into the future feelings and behaviors of the client. The client’s expectations proclivity and degree of disappointment aversion should also be evaluated. An investor with high disappointment aversion and low expectations may also be the type of investor who reacts the most negatively when faced with high return variation and losses.

Retirement Reassured: Managing Client Risks in Retirement with Guaranteed Living Withdrawal Benefits

by R. Scott Strait, Ph.D., and Mark Forman

Two of the most basic questions in financial planning are: how long will I live, and how much money will I need for retirement?

The common tools today involve probabilities that clients may outlive their retirement savings, a concept that is not always comfortable for clients. This research addresses one strategy and a technique for evaluating that strategy that may make more sense to clients.

Lifetime income guarantees eliminate the probability of exhaustion of funds, but the issue is whether they are cost effective. Specifically, this research considers whether one of today’s lower-cost advisory variable annuities with guaranteed living withdrawal benefits (VA/GLWB) will improve a client’s retirement options compared to the traditional 4 percent safe withdrawal rate (SWR). The measure of value used is the modified internal rate of return (MIRR). This measure is used because in scenarios in which one runs out of money under the SWR strategy, it is assumed that the investor draws cash from other resources, thus introducing negative cash flows into the analysis. This measure changes the framework for presentation to clients from one of discussing probabilities to one of comparing rates of return.

The sample client in this analysis is a 65-year-old couple who will retire at age 70. They have $1,400,000 in savings in their IRA. Their desired pre-tax retirement income is $100,000, and they expect $37,000 in Social Security benefits. This means an annual income supplement of $63,000. Using a capitalization rate of 6 percent indicates that the VA/GLWB would cost $1,050,000. That purchase leaves $350,000 for additional investment. The investments inside the VA/GLWB are 80 percent in an S&P 500 portfolio and 20 percent in bonds. This policy has combined subaccount and insurance fees of 1.9 percent. The SWR strategy has an asset allocation of 50 percent stocks in an S&P 500 portfolio and 50 percent in bonds. Fund fees are assumed to total .25 percent. An asset-based management fees of .75 percent is factored into both strategies. The analysis is based on the distribution of historical market returns from 1926 to 2018.

The results are that the VA/GLWB improved the MIRR by amounts ranging from 32 basis points to 97 basis points. This range in the difference is the result of running the test in many different scenarios, including whether insuring a couple or single life, varying the length of the deferral period, adjusting the age at which to begin taking income, and variations in the income horizon.

What are the implications for financial planners? This research indicates that using today’s VA/GLWB product has benefits of both minimizing the risk of clients outliving their savings (longevity risk) and potentially increasing total return. It can also allow a client to fulfill a bequest to heirs in the event of premature death. It mitigates the ‘fragile decade’ sequence-of-returns risk, and it allows the client to take higher risk in the non-annuity portfolio to maximize liquidity and legacy goals. 

In case you missed it:

Were you unable to attend these sessions during our FPA Annual Conference? No problem. You can find the recordings of all three parts of the academic research presentations, co-sponsored by AFS and the Journal of Financial Planning, at

The first part can be found here:

The second part can be found here:

The third part can be found here:

Each of these parts contains three 15-minute presentations and provides one hour of CFP Board continuing education credit. Members simply need to login, register, and use the code Fall2020Research for 50 percent off.

General Financial Planning Principles
Practice Management
Professional Conduct & Regulation
Career stage
Learning / Aspiring