The value of financial planning

New study reveals significant differences between “planners” and “non-planners”

This except that I’ve annotated below comes from “Accounting Today” July 23, 2012 article titled “Families with Financial Plans Manage Money Better” includes some powerful data in support of the value of financial planning across all income levels:

Families who have prepared a personal financial plan report more success managing their money, savings and investments than those who have not, according to a new survey.

The report, released Monday by the Consumer Federation of America and the Certified Financial Planner Board of Standards, found that by a margin of 50 percent to 32 percent, and for all but the lowest income bracket (under $25,000) where few have a comprehensive plan, planners are more likely to feel they are on pace to meet all of their financial goals, such as saving for retirement or for emergencies.

By an even larger margin of 52 percent to 30 percent, and across all income brackets, planners are more likely to feel “very confident” about managing money, savings and investments.

The survey was conducted by Princeton Survey Research Associates International for the CFA and the CFP Board. It found that by a margin of 48 percent to 22 percent, planners are more likely to describe themselves as living comfortably; in addition, as many planners in the $50,000-$99,999 income bracket say that they live comfortably as non-planners in the $100,000 and above bracket. (A strong argument for middle income planning).

For those in these two highest income brackets, planners report saving a higher percentage of income and having built greater wealth than non-planners. For example, planners with incomes $50,000-$99,999 are more likely to report they save 10 percent or more of their income (57 percent vs. 39 percent) and to have accumulated at least $100,000 in investments (37 percent vs. 19 percent). (Spelling error corrected from the original source). This finding alone likely justifies the expense of professional financial planning.

For those in the two lowest income brackets, planners with credit cards report being much more likely to pay credit card bills in full. That is true both for those in the $25,000-$49,999 income bracket—46 percent for planners and 26 percent for non-planners—and for those with incomes under $25,000—41 percent for planners and 16 percent for non-planners.

Only 31 percent of the survey respondents said they had a comprehensive financial plan, while 65 percent indicated they follow a plan for at least one of their savings goals.

“Our survey clearly shows that having a personal financial plan helps both rich and poor achieve their financial goals,” said CFA executive director Stephen Brobeck in a statement. “Having a financial plan increases one’s confidence and effectiveness in managing, borrowing and saving money.”

The report acknowledged that the recent recession has left many American families struggling to make ends meet and to save for the future. The report found that 38 percent of the 1,508 household financial decision-makers surveyed said they live paycheck to paycheck, while only 30 percent indicated they felt comfortable financially and only 34 percent think they can afford to retire by age 65.

“Consumers understandably are more nervous about investing their money given recent revelations about financial fraud, manipulation and abuse of clients,” said CFP Board CEO Kevin R. Keller. “This doesn’t mean that people shouldn’t create a financial plan and be prepared. We encourage consumers to do their homework and find a financial professional who always puts the clients’ best interests first and abides by a fiduciary standard of care.”

The CFA-CFP Board survey used a number of questions asked by a 1997 CFA-NationsBank survey also developed with and administered by Princeton Survey Research Associates International. This made possible a comparison of consumer attitudes and habits in a year, 1997, when unemployment was lower and consumers were more optimistic, with attitudes and habits in the aftermath of the worst recession since the Great Depression.

In 1997, only 31 percent said they lived paycheck to paycheck compared to 38 percent this year, while the percentage who indicated they felt comfortable financially has fallen from 38 percent in 1997 to 30 percent in 2012.

In 1997, only 38 percent felt behind in saving for retirement, compared to 51 percent this year. In 1997, 50 percent said they thought they could retire by age 65 compared to only 34 percent this year.

In 1997, more families with college-bound children were saving for higher education (56 percent) compared to this year (48 percent). However, the proportion of those who say they have a retirement investment plan in place is about the same (51 percent in 1997 and 49 percent this year).

The 2012 survey also revealed that slightly more than half of respondents said “it’s hard for me to know who to trust for financial advice” (55 percent), “to me investing seems complicated” (52%), and “I’m worried about losing my money if I invest it” (55 percent), a significant increase from the 45 percent who expressed this worry in 1997.  However, these findings are not especially surprising in light of the financial crisis and its aftermath.

The original article is titled Families with Financial Plans Manage Money Better.

I’m already working on a separate piece (likely a video) on the “who to trust” issue. It seems that people do not know how to execute on this issue that primarily focuses on asset custody, fiduciary responsibility and potential conflict of interest. (This should not be a difficult topic. Simply confirm that the adviser has: 1) no custody or legal access to funds, 2) fiduciary obligation by law, 3) no potential conflict of interest like commission-based outcome or influence over other life events. Beyond that, it’s just personality, work procedures and credentials).


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