What is the Value of Financial Planning?
I was chatting with a long-time friend about my work, and he basically asked: What is the quantifiable value of the financial planning work that you do for clients? While we discussed benefits at length, it bothered me that I could not cite any exacting research to back my claims. The next day I was able to find a few papers on this issue and - with the risk of appearing overly self-serving - here is what I discovered.
Biggest Regret - No Financial Planning
A recent survey by the deVere Group asked wealthy individuals what their financial regrets were. A majority responded that not having a financial plan earlier in life was their top regret. Clearly, many individuals and families see the value of planning, but this does not answer the question of value and where it comes from.
Thinking back on the major financial decisions I’ve made over the years, I have to admit that some of the best ones were a result of working through them with my wife (and my worst choices were made on my own). Still, my experience is obviously not a scientific assessment.
Fortunately, the Financial Planning Association (FPA) helped sponsor a study to assess the value of financial planning a few years ago. Here are a few of the benefits that the study highlights:
- A higher degree of confidence – especially during periods of market uncertainty.
- Feeling more in control.
- A deeper understanding of financial activities.
- Better ability to save and take advantage of employee benefits.
- Feeling better prepared for unexpected events.
- More likely feel on track to meet goals.
Defining and Measuring the Value
While the FPA study addresses the benefits in a general way, it still does not translate them into measureable performance. Just last year, Morningstar released a research paper on how smart financial planning decisions can impact retirement. In the paper they propose that the incremental improvement - that they refer to as “Gamma” - can equate to as much as a 1.82% increase in average annual return!
The paper importantly points out that Gamma benefits will vary for different types of people. I think that leads back to the idea that there is significant value harnessing a variety of perspectives and collaborating with professionals to achieve success.