Retirement planning data gathered from an online survey at a large university in October 2009 are used to examine differences in a variety of retirement planning measures between people who have and have not met with a financial advisor. Problems of self-selection and endogeneity are addressed through the use of propensity scores. The study’s major finding is that working with an advisor is related to several important financial planning activities, including goal setting, calculation of retirement needs, retirement account diversification, use of supplemental retirement accounts, accumulation of emergency funds, positive behavioral responses to the recent economic crisis, and retirement confidence. Use of a financial advisor was not related to self-reported retirement savings or short-term growth in retirement account asset values.
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These authors also employed a within-subjects time comparison by examining people who changed from being self-directed investors to being advised. Among the investors who received investment advice as of July 2007, 596 had only begun to work with an advisor during the previous 15 months. For those investors who switched to advised accounts during the period of the study, the authors noted a one-time increase in trading activity as part of an initial portfolio restructuring. These investors also demonstrated a number of presumably salutary changes. Their participation in automated savings accounts increased, their use of speculative investment vehicles decreased, and their portfolios became more diversified through increased use of index funds. Even though the pre-post period was fairly short, the time comparison essentially eliminated the problem of endogeneity, and the findings of the pre-post comparison largely paralleled those in the matched group analysis.
Three conditions must hold when using the propensity score approach. First, once one controls for observable covariates, potential outcomes must be independent of the treatment selection. This is known as the conditional independence assumption (CIA). In the current application, this means that meeting with a financial advisor should be random once covariates are held constant. In an attempt to meet the CIA, our analyses included variables that captured elements of the four conceptual categories identified in the framework: (1) retirement plan characteristics, (2) attitudes and perceptions regarding retirement planning and the larger financial marketplace, (3) objective and subjective assessments of financial knowledge, and (4) socio-demographic and economic characteristics of the respondent. The second condition that must be met is the common support assumption. That is, the estimated probabilities of meeting with a financial advisor for the treatment group must overlap with the estimated probabilities of meeting with a financial advisor for the control group and the probabilities have to be positive, irrespective of the covariate values (Caliendo and Kopeinig 2008; Imbens 2004; Smith and Todd 2005). In the current study, the trimming method was used to define the common support region (Smith and Todd 2005) which insured that individuals who reported meeting with a financial advisor had a counterpart who did not meet with a financial advisor but who nonetheless had the same estimated probability of having met with an advisor. The final condition that must be met is the stable unit treatment value assumption (SUTVA). SUTVA requires that the outcome for any individual depends on her/his participation only and not on the choice to see or not see an advisor made by any other individual in our sample. Given that our sample was unlikely to have more than one individual from the same household, SUTVA was likely satisfied in the current analyses.
Analyses done with the sample that included the 494 respondents who did not report their retirement savings generated the same results as those done with the sample that excluded them. The results for the former sample are available from the authors upon request.
In moving from the retirement savings sample to the more restrictive administrative records sample, very few of the descriptive statistics change. Most notably, respondents were slightly less likely to be female, educational attainment increased by about 0.7 of a year, and average household income rose to $101,310. Respondents in the more restrictive sample were moderately more likely to know about the opportunity to meet with a financial advisor free of charge through the university and they were slightly more likely to be future oriented than respondents in the retirement savings sample. They were also more likely to have a retirement plan from a previous employer and to have viewed their employer-administered retirement plan to be a major source of income during retirement. On all other dimensions, the two samples were virtually identical.
Of these, 43% indicated that they consulted with a professional advisor made available through their employer, while 57% consulted with a professional financial advisor who was not made available by their employer. Thus, although all benefits-eligible employees may see a financial advisor free of charge through their employer, many chose to use the services of an advisor who is not affiliated with their employer-provided retirement plan.
Regarding the job titles of the professional advisors consulted by members of the sample, more than 77% were described as “financial planner or consultant” or “investment advisor.” Other professionals, such as attorneys, accountants, and bankers, represented less than 10% of those named. This refers to anyone who indicated ever having met with a financial advisor. In our analyses, the question that asked about meeting with a financial advisor in the past 2 years was used rather than the “ever met” question because the question about meeting with an advisor in the past 2 years is more likely to identify respondents who had an ongoing relationship with a financial advisor. Unfortunately, this meant that the analyses could not distinguish between financial planners, insurance agents, etc., as there was no follow-up question asking about the occupation of the advisor the respondent had seen in the past 2 years.
The large percentage with an SRA was likely a reflection of two things. First, recall that individuals in the HPP plan have the option of setting up a 403b plan where the employer will match the employee’s contributions, which likely increased the employee’s incentive to establish and contribute to a SRA. Second, employees at this university may be more financially savvy about retirement matters than the general public given their relatively higher average educational attainment and income.
As a check of the CIA assumption, we conducted covariate imbalance testing of the matched means for individuals in treatment and control groups. These t tests, available from the authors upon request, revealed that although we have statistically significant bivariate differences in many of the covariates based on group membership (i.e., having and not having seen a financial advisor), in all cases these differences disappeared once the matching was done. This suggests that the CIA assumption was met in our propensity score analysis.
Alternative specifications of the logit model were estimated that replaced the income measure with the log of income and the self-assessed financial knowledge measure with a series of dummy variables. This alternative specification allowed for nonlinear effects of income and subjective financial knowledge. There were no substantive differences in the results when these model modifications were made. The results are available from the authors upon request.
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The research reported in this paper was supported by grants from the University of Utah’s Center on Aging and the University of Utah’s Institute of Public and International Affairs. The University of Utah Benefits Office and Kara Glaubitz also provided valuable assistance with this research project.
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Marsden, M., Zick, C.D. & Mayer, R.N. The Value of Seeking Financial Advice. J Fam Econ Iss 32, 625–643 (2011). https://doi.org/10.1007/s10834-011-9258-z
- Financial advisor
- Retirement planning
- Retirement preparedness