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Studies Show Tangible Value of Financial Planning

Mature couple with laptop.Some professionals know immediately when their work has a positive impact for their clients or customers. An electrician finds a short in the lighting system and restores power. A car mechanic makes a repair and sends someone on their way. A doctor prescribes just the right medication and the patient gets well. An attorney wins a lawsuit.

In other professions, the effect on clients isn’t as obvious or easily measured. It can take years for a therapist to see changes in a patient’s behavior. Similarly, a minister has no way of knowing the full impact of a sermon. Neither does a financial planner see the immediate impact of many recommendations, especially in retirement planning where judging success can take decades.

This is why I was intrigued when I read about a recent research study titled “A Comparison Of Retirement Strategies And Financial Planner Value.” The study, by professors Terrance Martin and Michael Finke, was published in the November 2014 issue of the Journal of Financial Planning.

The research evaluated the impact, if any, the use of financial planners had on retirement savings. The study used 2004 and 2008 data from the National Longitudinal Survey of Youth, a random sampling of 12,686 people which began in 1979 and now consists of participants who are in their late 40’s and early 50’s.

The survey found that 70% of US households hadn’t done any evaluation of their retirement standings. That didn’t surprise me, as other studies I’ve previously cited show that 70% of Americans live month to month. It doesn’t shock me that people with no retirement savings haven’t evaluated their retirement needs; I’m guessing most of them are smart enough to know there isn’t anything to evaluate. Retirement income for them will consist of their Social Security plus, if they are fortunate enough, their company or government pension.

Of the remaining 30% of US households that had evaluated where they stood for retirement, more than a third—13% of the overall study participants—evaluated their retirement needs themselves. Eleven percent used a comprehensive financial planner to help them evaluate their needs, and 6% used a non-comprehensive advisor who had not done a retirement needs analysis for the client. The last group included a higher proportion of financial product salespeople.

The research found that the clients who engaged a comprehensive financial planner had significantly more income, net worth, and retirement savings than either of the other two groups. Interestingly, the group that did their own planning had more retirement savings than those who used a non-comprehensive advisor.

Obviously, one possible reason for this difference could be that those with higher incomes and education could afford the services of a financial planner. However, the study considered that possibility by controlling for the economic differences of the groups.

This study highlights the connection between successful saving and assessing your retirement needs. Apparently, those with no clear idea of how much money they’ll need for comfortable retirement living are less likely to save. Providing that assessment may be an important part of the value provided by comprehensive financial planners.

A similar result is found in another study done in 2011 by Aon Hewitt. This study, “Help in Defined Contribution Plans: 2006 Through 2010,” found that people who used professional investment help averaged earnings of 1.86% a year more, net of fees, than those who did it themselves.

The bottom line in acquiring retirement wealth is that there is no quick solution outside of winning the lottery. It takes careful planning, good advice, and lots of patience to realize the goal of providing well for one’s retirement.

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