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Despite its risks and the painful volatility of the past decade, stock investing remains a cornerstone of financial planning advice. But it’s easy to forget that investing in equities is not for everyone. Some aren't interested in the risk; the trade-off of even a small allocation to stocks just isn't worth it to them. Of course, financial planning advice has much value to offer beyond just how to allocate an equity-centric portfolio. There's just one problem... financial planning advice may still be so equity-centric, that people who don't want equity-style investment risk forgo the use of a financial planner altogether, as a recent Journal of Personal Finance article revealed.
Jason Zweig’s article in last week's Wall Street Journal,Who Needs Financial Planners, Anyway, raised the issue, citing a recent article, The Demand for Financial Planning Services, by Sherman Hanna in the Journal of Personal Finance.
The good news in Hanna’s research is that data from the Federal Reserve's Survey of Consumer Finances show that approximately 25% of households utilized a financial planner as of 2007, up from 21% of households a decade earlier. Nearly 7.7 million additional households started working with a planner over the last 10 years (although notably, the research refers to financial planners, and it's not clear whether the data really make a distinction between comprehensive financial planners and the general category of financial advisors). Given criticisms that financial advice only reaches a limited, affluent segment of the population, this is a very positive trend.
In further analyzing the data of who consumes financial planning services, however, a disturbing trend emerges: One of the key determinants of whether a household seeks out the advice of a financial planner was its willingness to take investment risk. As the results show, 28% of families willing to take "average" levels of risk used a planner, and 33% of families who are comfortable with "above average" risk used planners. But among those who aren't willing to take any risks, the use of financial planners was a mere 11% (and this is after controlling for age, income, net worth, and other factors). In other words, there was a strong self-selection bias – people who are comfortable taking risks as stock investors sought out financial planners, while those who are not comfortable with stock risks tended not to seek out a financial planner at all.
Unfortunately, these results suggest that overall, financial planning is too equity- (and therefore risk-) centric in the advice that it gives, or at least is perceived that way. As a result, financial planners carve out and exclude a material portion of the population for whom their advice doesn't feel relevant or appropriate, not due to income or net worth, but due to risk tolerance. Given the trend toward increasing the use of financial planners – even though it's been an incredibly difficult decade for equities – financial planning must be making some progress in convincing the public of the value it has to add beyond investments, as the percentage of households using a planner is on the rise even though I doubt the tolerance for stock investing has climbed over the decade. Nonetheless, that data show that financial planning as a profession could be in serious trouble if the stock market has even more protracted difficulties and the general public sours further on equity investing.
