Studying the Value of Financial Planning

Update:  Preet Banerjee wrote a Globe and Mail piece on the FPSC study as well.  Thanks to Preet for including my remarks in his article.

Financial planners would like to be able to say that their services give their clients peace of mind and a feeling of control over their financial futures. To this end, a new study seeks to measure the differences in financial comfort between those who use a financial planner and those who don’t.

The Financial Planning Standards Council (FPSC) approached a market research firm to perform such a study. The results from the first year of a five year study are summarized starting on page 7 of the April 2011 FPSC publication called FPStandard.

The most obvious problem for a study of this kind comes from the fact that financial planners tend to prefer wealthy clients, and wealthy people are much more likely to feel good about their finances than poor people. It would hardly be surprising if a bunch of rich people with financial planners felt better about their finances than a bunch of poor people without planners. We can hardly conclude that the financial planners made the difference.

To remedy this problem, this new study controls for net worth. This means that we compare the feelings of investors who are all in the same range of net worth. Unfortunately, the tables summarizing the study results on page 10 do not seem to show the data that was controlled for net worth.

The only mention of the data controlled for net worth I found was in a bullet point on page 9 saying that the value of financial planning was apparent in some net worth ranges. By implication this seems to mean that it was not valuable in other net worth ranges.

A curious comment in the same bullet point is that because financial planning showed value for low net worth people, this “effectively debunks the myth that financial planning is only useful for the rich.” I wasn’t aware that this myth exists. The criticism related to net worth that I’m aware of is that planners themselves prefer wealthier (and thus more profitable) clients.

Another complication here is that many people think they have a financial planner, but they are really just working with mutual fund salespeople. Financial professionals come with different amounts of training and different designations, but few investors understand the distinctions.

The crazy thing about this numbers game is that the final study will likely show that financial planning brings improved peace of mind and feeling of control over finances even when we control for net worth. When marketers quote only the results without controlling for net worth, they undermine the study’s legitimate message.