Tag: CFP

Introducing fpPathfinder: Flowcharts And Checklists For Diligent Financial Planners

Introducing fpPathfinder: Flowcharts And Checklists For Diligent Financial Planners


Financial planning is full of complex decisions. From handling the nuances of Social Security planning (e.g., whether part-time income may trigger the Earnings Test, or whether past non-FICA earnings could trigger the Windfall Elimination Provision), to navigating the complex set of rules tied to retirement accounts (e.g., how to delay RMDs from a traditional IRA, or the rules for when and how to make a backdoor Roth contribution), the reality is that it can be challenging to remember how all of the many different components of financial planning might interact with each other when making recommendations to clients. Yet managing this complexity is crucial for financial advisors, as the failure to do so can lead to both omissions (e.g., a key rule that gets missed) and errors (e.g., failing to recognize the full breadth of issues that had to be considered in the first place).

Fortunately, checklists are a proven method for helping professionals manage such complexity. As highlighted in his famous book “The Checklist Manifesto”, author (and doctor) Atul Gawande illustrates that one of the easiest ways to handle the daunting complexity that face professionals today is simply to create a checklist of the key steps thatmust be taken, or the key factors that must be considered. In fact, checklists have been widely adopted and demonstrated to be successful in avoiding errors in many professions, including both airline pilots and surgeons. One limitation of checklists is that many people prefer to learn visually, though, which in turn has led to the adoption of flowcharts in professions such as computer programming, where the purpose of the flowchart is largely similar to a checklist (e.g., to help ensure quality control for complex processes that require consistent outcomes), but to do so more visually than a bullet-point checklist.

Yet despite the effectiveness of both checklists and flowcharts, the reality is that one of the biggest barriers to adopting the use of such tools is creating the tools themselves, as it is both time consuming, and can take considerable knowledge to develop these tools in the first place. To address the challenge, we’re excited to announce the launch of fpPathfinder, a new business specifically created to provide checklists and flowcharts for financial advisors, to use either internally in their own practices when evaluating client scenarios and formulating recommendations with clients, or directly with clients as a way to illustrate and explain key financial planning concepts and decisions.

As a starting point, fpPathfinder is offering a “Retirement Planning Essentials” package of visual flowcharts that can be used to cover key retirement planning issues, from eligibility to make tax-deductible IRA contributions and take tax-free Roth distributions, to the specialized claiming rules for Social Security benefits for divorcees or surviving spouses, the rules for delaying RMDs from a traditional IRA, and the rules for when and how to make a backdoor Roth contribution. Over time, fpPathfinder plans to launch additional flowcharts covering both retirement planning and other topics, as well as a complementary set of checklists for common planning scenarios, a voting system for members to express interest in what flowcharts to create next, and the opportunity for advisors to white-label the flowcharts with their own name and brand. Ultimately, fpPathfinder hopes to be a valuable resource for helping financial advisors adopt the checklist and flowchart processes common among other professions – as a means to both help advisors avoid errors and omissions, and to elevate the value of services that advisors provide to their clients!


Professional Complexity And Minimizing Errors & Omissions

Financial planning, like most professions that provide some kind of advice to clients, is complex. Not only is there a sheerly immense amount of information to learn in order to craft technically accurate and appropriate advice recommendations to clients in the first place – the CFP Board lists 72 different Principal Knowledge Topics to be mastered in order to fulfill the education requirement for CFP certification – but it’s even more challenging to remember how all these different components might interact with each other as a part of someone’s financial world.

For instance, when it comes to Social Security alone, it’s straightforward toidentify the client’s projected benefits (on their Social Security statement), and there are many calculator tools to help evaluate the prospective benefits of delaying Social Security. But how often does the advisor alsoremember to verify that the client doesn’t have too much in part-time earnings in retirement to trigger the Earnings Test for those under full retirement age? Or remember to ask the client if they were previously married to a spouse for at least 10 years, such that there could be an ex-spouse’s spousal or survival benefit? Or ask if the client had a prior (or current) job where he/she did not participate in the Social Security system (which can trigger the Windfall Elimination Provision)? Or consider the sequence of return risk impact on the portfolio by taking higher withdrawals in the early years while delaying Social Security?

These challenges – writ large across a wide range of financial planning scenarios for clients – lead to two types of core concerns. The first is that, in the process of trying to consider all the issues, there’s an omission: a key rule that gets missed, perhaps something that is uncommon and only comes up rarely, but happened to matter in this particular client scenario. The second is that the advisor simply makes an error, as the sheer amount of complexity causes some particular interaction effect to be missed, by failing to recognize the full breadth of issues that had to be considered in the first place. We have the knowledge, but fail to apply it correctly.

Thus why most professionals (including financial advisors) end up buyingErrors and Omissions insurance, specifically to help insure against the consequences of those mistakes, whether driven by ignorance or ineptitude.

Ideally, the advisor is simply diligent enough to have studied and learned all the relevant issues, the potential interaction effects, and has the skillset to readily recall all of the key information at the exact time it’s needed.

Unfortunately, though, the reality is that few professionals are perfect all the time. In one study conducted in Australia, 400 mystery shoppers met and became clients of financial advisors, and in the process evaluated seven different client-experience categories (communication, compliance, quality of advice, understanding / needs analysis, referability, emotive reaction, the environment).  The “Understanding” scores were relatively high (ranging from 75.2 to 85.4) suggesting that the advisors consistently did a good job understanding the client needs. But the advisors’ ability to satisfy the need with a quality solution or strategy scored between 58.5 – 72.2. In other words, the advisors came up with a substantial range of different (and varying quality) solutions and recommendations to the exact same client situation and needs.

And beyond the range of mastery of the relevant financial planning knowledge from one professional to the next, the reality is that sometimes we get tired, or distracted, or clients don’t present all of the relevant information we needed to know (and we don’t realize the unasked question that needed to be asked)… or we simply forget an esoteric rule in a situation that doesn’t often come up.

As a result, while studying extensively and gaining experience as a professional – e.g., by earning CFP certification – is a crucial first step in becoming professionally diligent to minimize the risk of errors or omissions for clients, it’s rarely sufficient to prevent all the potential errors and omissions and lead to consistent quality advice.

Financial Planning Checklists And Flowcharts To Ensure Diligent Advice

As highlighted in his famous book “The Checklist Manifesto”, author (and doctor) Atul Gawande illustrates that one of the easiest ways to handle the daunting complexity that face professionals today is simply to create a checklist of the key steps that must be taken, or the key factors that mustbe considered.

One of the first groups of professionals to employ checklists were airline pilots. Because, as the pilots discovered when testing “next generation” bombers in the years leading up to World War II, airplanes had already become so much more complex than the first generation of simple gliders and propeller planes flown by the Wright brothers, that even experienced pilots couldn’t always remember the proper steps to take, especially in the heat of the moment – leading the first test of the Boeing B-17 bomber to result in a fiery crash due to pilot error(where the pilot was the Air Corps’ highly experienced Chief of Flight Testing!). Yet ultimately, a subsequent 1.8 million flight miles occurred in the B-17 bomber without a single crash… once a series of simple checklists (no more than a dozen or two items at a time for the pilot and co-pilot to review together) were created for takeoff, flight, landing, and taxiing.

Similarly, an experiment with checklists in the medical context was conducted at Johns Hopkins in 2001, and later expanded into an even larger multi-hospital experiment, where Dr. Peter Pronovost created a simple checklist to help reduce the frequency of infections when inserting a central line (a large 12-inch catheter inserted into the jugular vein in the neck to administer major medical interventions like chemotherapy, kidney dialysis, or long-term antibiotics). Pronovost created a simple 5-item checklist for the doctors: 1) wash hands with soap; 2) clean patient’s skin; 3) place sterile drapes; 4) wear sterile mask/hat/gown/gloves; and 5) put a sterile dressing over the site once the catheter is inserted. All were steps that doctors already knew, and had long since been trained to do. Nonetheless, once the initiative was rolled out, and anyone/everyone on the team was endowed with the authority to ensure the checklist was followed (and call out the doctors for not following it), the 3-month infection rate fell literally to zero. Just by having a simple checklist to ensurethe key items were always, consistently followed.

The key point is that checklists don’t need to be terribly complex to reduce the frequency of adverse outcomes in complex situations. They’re not necessarily intended to cover every possible situation – as the edges of complexity are still where professional expertise reigns – but instead to ensure that the core essential steps that at least cover the overwhelming majority of cases are applied consistently. And the professional is at leastprompted to spot where there may be an issue that in turn merits further diligence.

On the other hand, one key challenge of checklists is simply thatapproximately 65% of the population are visual learners, who need to seewhat they’re learning or are supposed to do in order to fully assimilate the information. As the saying goes, “a picture is worth 1,000 words”.

Accordingly, in professions like engineering and computer programming, it is more common to use flowcharts as a way to sort through and evaluate the key information in a process. The basic concept remains the same – the flowchart serves as a means to ensure that all the steps of a process are properly considered and followed, in the proper sequence, without skipping any key steps that could lead to the wrong outcome. And can be especially effective because the visual nature of the flowcharts allows small, lesser known rules to place just as much “weight” as the other rules, since it clearly shows all the relevant options to consider at each decision point. In fact, one of the earliest uses of flowcharts was specifically to help ensure quality control for complex processes that required consistent outcomes.

Introducing fpPathfinder For Financial Planning Flowcharts and Checklists

Several years ago on this blog, I made the case that it was time for financial planners to adopt checklist as a way to improve the consistency (and therefore the overall quality) of financial planning advice. The more comprehensive financial planning becomes, the more complex it also becomes, and the greater the risk that even a well-trained and well-intentioned advisor fails to identify and spot every possible planning issue, opportunity, or concern from memory alone. And as Gawande illustrates in his book, checklists (and flowcharts) help to reduce this risk and better ensure a consistently diligent planning process.

Notably, though, such tools aren’t just a means to have simpler navigation of complex processes, and as a way to ensure that a financial planning situation is thoroughly researched and considered from all angles. Instead, financial planning flowcharts and checklists have a number of important uses, including:

  • Client educational tool:  Clients can benefit from checklists, and especially visual flowcharts, just as much as a planner.  Much of what individuals hear and learn from the mass media related to financial planning is incomplete, and does not fully capture the complexity of the financial planning process. It can be overwhelming for clients, leading them to make a bad decision because they did not invest the time or energy to learn everything they needed to about the issue.  Flowcharts in particular provide an alternative method of presenting that information, in a way that allows the client to quickly and easily understand the scope of the issue, and the advisor can walk them step by step through the key decisions that must be made along the way.
  • Respond to client questions faster:  Some of the best opportunities to create value for clients comes from quickly addressing their challenges in times of need – the unscheduled client call with what “should” be a simple and straightforward planning question that has important consequences.  But if the planner is preoccupied or distracted, he/she may not give the most thorough answer, or not remember to ask the appropriate probing questions.  At best, this could lead to the planner needing to do more research before calling back with answers (which takes a lot of time). At worst, the planner could give improper advice off the cuff that could actually harm the client (either through error or omission). Checklists or flowcharts readily available as a desk reference for the planner ensures that all the major decision points and issues have been addressed right there on the spot, saving time for the advisor, and getting the client the answer they wanted quickly.
  • Show actual complexity: Sometimes clients may be unaware of the extent of how complicated financial planning decisions can really be.  Flowcharts in particular can be used to more effectively frame the depth and complexity of a conversation.  A good example deals withthe issues related to eligibility and timing for claiming Social Security.  It is especially important to show and consider the number of less-common-but-extremely-important rules and exceptions that must be considered before claiming, such as the Earnings Test, deemed filings, the Windfall Elimination Provision, and the Government Pension Offset rules.  From a client’s perspective, this can give them confidence knowing that their planner is thoroughly covering all the issues.
  • Uncover more planning opportunities. There are times when planners may not connect the dots between two seemingly separate planning issues.  In reality, many planning issues are interconnected, and advice in one area can open advice discussions in other areas. For example, a planner could use a flowchart as a guide to rememberpossible IRMAA penalties before doing a Roth conversion, and a discussion about the taxability of Social Security benefits could lead to a discussion about changing a municipal bond portfolio because its income is still included in Social Security provisional income for tax purposes.
  • Quick introduction to a new concept.  Using a checklist or flowchart prior to doing research on a financial planning issue is akin to providing a 10,000 foot overview. It doesn’t provide all the detailed knowledge, but it quickly gets the planner to hone in on the major issues that affect the client issue they are working on.  From there, the planner can jump into other resources to clarify or deepen his/her understanding.
  • Avoid careless errors. In some cases, planners run the risk of making a mistake.  They may misremember one of the steps in a Roth conversion, or don’t think through a Backdoor Roth contribution correctly, leading to a slew of subsequent problems for the client. Perhaps it could be as simple as a careless error, or perhaps it’s caused by a planner who was unqualified to give the advice on a specific topic and didn’t take enough time to (re-)research the issue first.  While no tool can prevent those problems from happening 100% of the time, a series of easy to use checklists can drastically reduce the likelihood of those mistakes happening.
  • Remember old / odd rules:  There are many cases when financial planners are simply rusty on certain rules, or the nuances associated with those rules.  Rules around IRA contribution amounts and contribution limits are often a sticking point for many planners, because the numbers change (i.e., are inflation-adjusted) almost every year.
  • Multi-Advisor Quality Control.  In his “Checklist Manifesto” book, Gawande references a finding that doctors and nurses make a mistake 1% of the time.  But what’s surprising is that doctors and nurses do somuch every day, that a 1% error rate translates to about 2 mistakes per day, with potentially fatal consequences for patients.  Applying that finding to financial services, planners can use simple tools like checklists and flowcharts to improve the quality of advice and client outcomes across their entire practice, especially when multiple (especially newer associate) advisors are involved, ensuring that they make fewer mistakes (and making the compliance and legal departments happier!).
  • Study tool:  For students and new planners working toward their CFP certification, checklists and especially visual flowcharts can be useful study tools to help make a concept “stick” and easy to recall.  What makes flowcharts particularly interesting is how the CFP Board exam tends to test not just on the rules, but on the exceptions to the rules (often using “tricky” questions).  In these cases, flowcharts excel due to their ability to illustrate not just the rules, but the nuances and exceptions associated with the rules, in a visual format most conducive to the majority of the population who are visual learners.
  • Quick reference: Instead of cracking open a voluminous reference guide, or trying to verify the most accurate rules online, it can be easy enough to have a series of fast reference checklists or flowcharts within arms reach.

fpPathfinder LogoGiven all these opportunities and uses, we’re excited to announce the launch of fpPathfinder, a new business specifically created to provide checklists and flowcharts for financial advisors, to use either internally in their own practices when evaluating client scenarios and formulating recommendations with clients, or directly with clients as a way to illustrate and explain key concepts, or simply walk through the decision-making process and the key choices and issues to consider with the client.

Can I Make A Backdoor Roth IRA Contribution 2018

As a starting point, we’re offering a “Retirement Planning Essentials” package of visual flowcharts that can be used to cover key retirement planning issues, from eligibility to make tax-deductible IRA contributions or take tax-free Roth distributions, to the specialized claiming rules for Social Security benefits for divorcees or surviving spouses, delaying RMDs from a traditional IRA, or the rules for when and how to make a backdoor Roth contribution.

Over time, we plan to launch an ever-wider range of flowcharts (both within and beyond retirement planning), a complementary set of checklists for common planning scenarios, a voting system for members to choose which flowcharts or checklists they’d like to see next, and the opportunity to white-label the flowcharts and checklists with your own name and your firm’s logo (in a range of color choices).

fpPathfinder LogoBecause again, as the Checklist Manifesto, and the entire history of flowcharts and checklists have shown, even diligent professionals can benefit from simple tools to help ensure they’re giving the right recommendations to the clients they serve! AndfpPathfinder aims to fill that void when it comes to helping financial planners better serve their clients!

 (Disclosure: Michael Kitces is a co-founder of fpPathfinder.)

So what do you think? Do you use checklists or flowcharts in your practice? Can flowcharts help with client education? What flowcharts would you find most useful? Please share your thoughts in the comments below!

Advisors To Receive Guidance For Meeting New CFP Standards

Advisors To Receive Guidance For Meeting New CFP Standards

This week, the CFP Board announced the formation of a new “Standards Resource Commission”, a blue-ribbon panel of 13 experts who will be tasked with creating resources, such as fact sheets, FAQs, videos, webinars, and more, to provide further guidance to CFP professionals about what they must do to meet the new Code of Ethics and Standards of Conduct scheduled to go into effect next October 1st of 2019. As while the high-level duty of CFP professionals under the new standards is straightforward – to act in the best interests of the client at all times when providing financial advice – the nuances of determining when, exactly, the advisor has taken “reasonable” steps to meet that requirement is less clear (highlighted by the fact that the CFP Board’s new Standards use ‘reasonableness’ in 28 different instances!). In fact, CFP Board CEO Kevin Keller noted that in talking to CFP certificants directly during the CFP Board’s Town Halls, there was a clear desire for more concrete and specific guidance about what, exactly, CFP certificants are expected to do in order to comply with the new rules, in areas ranging from required disclosures to clients and upfront planning agreements, determining the depth of due diligence that’s necessary to prove a “best interests” recommendation, to interpreting various compensation situations and whether the advisor can permissibly hold out as “fee-only” or not. Accordingly, the Standards Resource Commission was created, in a similar vein to the Commission on Standards that CFP Board created in 2015 to establish the latest version of the new standards themselves, and will include both independent practitioners like Linda Leitz and Bill Prewitt and Randy Gardner, large-firm representatives from Fidelity, Northwestern Mutual, Schwab, and Raymond James, fiduciary experts Blaine Aikin and Fred Reish, and consumer advocacy representatives including Pamela Bank of Consumer Reports and Lori Trawinski of the AARP Public Policy Institute.

CFP Board Expands Fiduciary Requirements, Finalizes New Ethics Code

CFP Board Expands Fiduciary Requirements, Finalizes New Ethics Code

This week, the CFP Board officially released its new Code of Ethics and Standards of Conduct, which was unanimously approved by the organization’s board of directors and will go into effect on October 1st of 2019. The new Standards cap what was ultimately a more-than-2-year process since the Commission on Standards was first announced in late 2015, and culminated in an initial proposal, a round of public comments, a re-proposal based on that public feedback, and then a second public comment letter period that led to a few final adjustments. Overall, the biggest shift of the new Standards is that going forward, a CFP professional will be required to act as a fiduciary at all times when providing financial advice, as opposed to the old version of the Standards which only required a fiduciary duty when actually delivering a financial plan (or material elements of financial planning). Notably, the CFP Board moved forward with the expanded fiduciary rule despite substantial opposition from the brokerage industry for the CFP Board to delay until the SEC comes up with its own fiduciary rule, though some critics suggest that because the CFP Board maintained compensation neutrality and did not impose substantial limitations on conflicts of interest for CFP professionals they still didn’t go far enough in trying to lift the fiduciary standard as it will apply to CFP certificants working at brokerage firms. Nonetheless, because the new Standards do at least require firms to “adopt and follow business practices reasonably designed to prevent material conflicts of interest that would compromise their ability to act in the clients’ best interests”, questions also loom large about how exactly CFP certificants at broker-dealers can and should comply, and whether any major firms will abandon the CFP marks in the wake of the new standards (as State Farm did with its nearly 500 CFP certificants after the standards were last updated in 2008). Yet with the success of the CFP Board’s public awareness campaign, it would arguably be even more painful in the current environment for any firms to publicly abandon the CFP marks because of their new fiduciary obligations. Ultimately, though, the real question will come in the future when the CFP Board actually has to enforce its new higher standard, and apply it to real-world situations across a variety of advisor business models.

Major Brokerage Trade Groups To CFP Board: Slow The Effort To Raise Mark’s Fiduciary Standard

Major Brokerage Trade Groups To CFP Board: Slow The Effort To Raise Mark’s Fiduciary Standard

As the CFP Board’s proposed Standards of Conduct (which would expand the fiduciary duty for all CFP professionals) finishes their second public comment period next week, the major lobbying organizations for broker-dealers are pushing the CFP Board to step back from its fiduciary push. While both SIFMA (which represents the brokerage industry broadly) and FSI (Financial Services Institute, which represents independent broker-dealers) both claim to support the idea that advisors should act in the best interests of their clients, they are claiming that it would be better for the CFP Board to wait for the SEC to issue a fiduciary rule instead (which is rumored to be coming soon, although notably it was the CFP Board that originally lobbied for the SEC to adopt a strict fiduciary rule over 6 years ago, which the brokerage industry opposed at the time!). Arguably, there is a legitimate concern that the overlapping patchwork of regulations that apply to financial advisors already may be even more complicated by the CFP Board inserting its own set of rules… yet at the same time, after organizations like SIFMA and FSI were successful in stalling the SEC from rulemaking for years, it was only the movement of the Department of Labor, states like Nevada, and now organizations like the CFP Board, that seems to finally be stirring the SEC to action in the first place, for which the CFP Board can obviously adjust their rules in the future (if necessary or desirable) to conform to whatever fiduciary rule the SEC ultimately issues. In fact, the CFP Board publicly responded that it does still intend to forge ahead with its own fiduciary rule, and has been engaging in several public efforts to build momentum for its rule, including a full-page ad in the Wall Street Journal last month, and another that will run in Investment News next week highlighting an open letter from 21 academicians leading programs at universities around the country that they support the higher standards of CFP certification. To say the least, though, for all those CFP Board critics who claim that the CFP Board bends its will to the demands of large (broker-dealer) firms, this should be definitive proof that while the organization does appropriately recognize them as stakeholders (and did make some concessions in its revised proposal of the standards), it is clearly not beholden to them.

Managing The “Theater” Of A Financial Planning Meeting

Managing The “Theater” Of A Financial Planning Meeting


For financial advisors who pride ourselves on the quality of the advice we provide to clients, it can sometimes be easy to lose sight of the importance of the more physical elements of our business that seem qualitatively irrelevant to the value of the guidance and recommendations we give to clients. However, as a tremendous amount of psychological research suggests, we should be careful not to overlook the more “theatrical” elements of a financial planning meeting – from the clothes we wear and the way we present information to clients, to the design and set up of our office – as the “theater” of financial planning actually does influence our clients, and their ability to implement our advice in a meaningful manner.

In this  post, we will examine why it is important to both acknowledge and manage the theater of financial planning, particularly given the ways in which clients and prospective clients utilize the signals we as advisors send (both consciously and unconsciously) to decide everything from whom to hire, to what financial recommendations they should implement (or not!).

It is widely acknowledged that effective communication is an important aspect of what financial advisors do. However, something that is less commonly appreciated is the role that our environment plays in facilitating that communication. In his book, Suggestible You, Erik Vance examines the ways in which our suggestible minds are influenced by the stories we hear and the environments we hear those stories in. In particular, Vance examines the “theater of medicine”, and its surprisingly powerful role in shaping the perceptions and beliefs of patients, which can, in turn, influence their physical health and well-being as well!

Additionally, the physical spaces we occupy (such as our office) can actually say a lot about us. Though laboratory research in financial planning is still very young, and scholars are only beginning to delve into how the offices of financial advisors can optimally be designed, some research from other fields has found that our physical environments can actually say even more about our personalities than some commonly used tools and assessments. At the heart of this are ways in which our personality manifests in certain behaviors which leave physical evidence within our environments that is really hard to fake – from mementos we collect and things intentionally place out for others to see, to more subtle clues such as the way we dress and organize things on our desk.

Ultimately, financial advisors have many options for trying to better manage the theater of financial planning… from sending signals of our conscientiousness through our clothing (e.g., formal dress) and communication style (e.g., controlled posture and calm speech), to signals of our competence through education and professional designations (e.g., CFP certification), and even signaling our knowledge of and solidarity with niche communities that we service… there are many ways in which we can seek to manage the “theater” of our financial planning to help our clients adopt and implement wise financial planning practices!

(Derek Tharp Headshot PhotoMichael’s Note: This post was written by Dr. Derek Tharp, our Research Associate at Kitces.com. In addition to his work on this site, Derek assists clients through his RIA Conscious Capital. Derek is a Certified Financial Planner and earned his Ph.D. in Personal Financial Planning at Kansas State University. He can be reached at derek@kitces.com.)

Acknowledging The “Theater” Of Financial Planning

Sometimes financial advisors—and particularly those of us who may be most interested in the technically-oriented side of financial planning—can be quick to write-off the “theater” of financial planning. After all, if we can serve our clients well and give them really good advice (far better than that slick salesman down the street, no doubt!), then why worry about the suit we wear, the car we drive, or the aesthetic of our office? These factors are all superficial and do not influence the actual quality of the advice we deliver to clients – which is what our clients are paying us for, isn’t it?

However, psychological research gives us good reason to question just how superficial the actual “theater” of financial planning is. From the costumes we wear, to the props we use, and even the way we arrange our financial planning “stage”… the performances we put on can and do influence our clients – including the emotions they feel, the perceptions they form, and the eventual decisions they make.

As a result, those of us who truly do want to help our clients make the best possible decisions should not ignore both the conscious and unconscious influences of financial planning theater.

Our Highly Suggestible Minds

Suggestible You by Erik VanceIn his 2016 book, Suggestible You, Erik Vance examines the science behind our highly suggestible minds, and finds that at all sorts of human behaviors that seem to have no scientific basis—from voodoo and shamanism, to magic healing crystals and miracle vitamin pills—surprisingly seem to actually have some real-world effects.

What’s most interesting about Vance’s approach, is that rather than just write these things off as mere pseudoscience, Vance examines whether there could be other mechanisms that might help explain why such behaviors could have effects, even though the actual treatments themselves are not scientifically supported. And in his investigation, Vance identifies a potential explanation: the power of our highly suggestible minds.

Vance explores a wide range of case studies and scientific literature which suggests that not only do our experiences influence our perceptions and beliefs, but that our experiences alone can actually improve our health and well-being. In other words, it’s not just that our minds are capable of making us think we are better when we are not, but that our brains can actually enhance (or worsen) our physical and mental well-being.

At the heart of this powerful phenomena is storytelling—which has a long history of being deeply integrated into healing and medicine. In particular, storytelling is powerful in influencing our beliefs and expectations, which researchers have been discovering are far more powerful than we realized.

For instance, most people are familiar with the concept of a placebo effect: A participant in a study receives a sham treatment (e.g., a sugar pill) and yet experiences positive medical effects which cannot be attributed to the sugar pill itself. But only recently have medical researchers begun to really gain a better understanding of how these complex effects work.

At first, researchers were naturally skeptical of what placebos actually were. Many felt placebos were likely just a form of response bias (e.g., participants were trying to provide responses researchers wanted to hear),confirmation bias (e.g., researchers were seeing the effects they wanted to see), or publication bias (e.g., studies with interesting findings get published even though the results were just the result of chance). But the research so far suggests that, at least for some placebos, the science behind them is actually much more interesting.

For instance, Vance notes a 2004 fMRI study that provided some of the first evidence of how our brains can actually self-medicate against pain by engaging our “internal pharmacy”—i.e., neurotransmitters and hormones such as opioids, dopamine, and endocannabinoids, which our brains can release to self-medicate ourselves. In summarizing the findings of the 2004 fMRI study in which participants were conditioned to believe a non-pain relieving cream could actually relieve the pain of an electric shock, Vance writes (emphasis mine):

The most interesting part was what the brain scans showed. Normal pain sensations begin at an injury and travel in a split second up through the spine to a network of brain areas that recognize the sensation as pain. A placebo response travels in the opposite direction, beginning in the brain. An expectation of healing in the prefrontal cortex sends signals to parts of the brain stem, which creates opioids and releases them down to the spinal cord.We don’t imagine we’re not in pain. We self-medicate, literally, by expecting the relief we’ve been conditioned to receive.

In other words, it’s not just that placebos can make us think we are feeling better, but that the right experiences and expectations can actually cause our minds to induce a genuine healing process, independent of any actual medical treatment provided. And the placebo effect works at least in part because our expectation that it will work literally triggers our own internal neurochemistry to help make it so.


In addition to actually being a good storyteller in the first place (financial advisors may want to note Scott West and Mitch Anthony’s book,Storyselling for Financial Advisors), another key element of storytelling is the broader “theater” in which that storytelling takes place, which can ultimately have the effect of diminishing or enhancing the power and believability of a story being told. Which is important, as ultimately it is our genuine beliefs and expectations which influence the surprisingly good (or bad!) outcomes which Vance examines.

Given Vance’s book’s focus on the physical healing process, he places a particular emphasis on the ways in which the “theater of medicine” has been found to influence our health. Simply put, the theater of medicine refers to the many factors of the environment around us which all tell our brains that it is time to get better when we enter a medical facility. From the uniforms that people wear (e.g., the authority invoked by an EMT’s uniform, the sterility invoked by crisp and clean nurse’s scrubs, and the expertise invoked by a doctor’s white lab coat), to the props that are used (e.g., stethoscope, thermometers, and other medical equipment), and even the general arrangement of a medical “stage” around us (e.g., anatomical charts, the scent of disinfectant, and degrees and other credentials prominently displayed), we are constantly reminded that it is time to get better.

Of course, these elements all serve a genuine purpose as well, but the reality is that at a well-staged medical environment can actually make a physician more effective. In most modern medical facilities, we both consciously and unconsciously receive the message that we are in a safe environment and being taken care of by qualified professionals. Certainly doctors could stage their “performance” much differently—perhaps ditching the formality of the white lab coat, storing equipment in a manner that is much less conspicuous, or eliminating the anatomical charts (which I assume are almost never actually referenced)—but this would likely be counterproductive, as it may impair the way that patients experience the medical environment.

In a medical context, theater and storytelling can be really powerful tools (though, admittedly, for both good and bad). In a famous 1955 paper in The Journal of the American Medical Association, Henry Beecher noted:

Placebos have doubtless been used for centuries by wise physicians as well as by quacks, but it is only recently that recognition of an enquiring kind has been given the clinical circumstance where the use of this tool is essential.

Beecher goes on to suggest that as many as 30% of patients will have placebo responses to a particular drug. However, Vance notes that subsequent estimates have been even higher (as high as 80% – 100%), particularly for ailments that are highly susceptible to placebo responses, such as pain and depression.

Placebos themselves may be more or less prevalent based on how they are presented. For instance, place responses are more common when the pills used are larger, made of certain colors, or are more expensive. Fascinatingly, placebos effects—supported by the broader theater in which makes such effects are possible—can even occur when people have beentold they are taking a placebo! Of course, as financial advisors, we don’t prescribe drugs to our clients or address their physical health, but the key point is that is that if our minds (both consciously and unconsciously) are so heavily influenced by belief and perception that we can literally self-medicate ourselves, it would be unlikely that storytelling (and theater in which those stories are told) wasn’t highly important in a financial context as well.

The Surprising Details Our Office Can Reveal About Us

Though laboratory research in financial planning is still very young and scholars are only beginning to delve into how the offices of financial advisors can optimally be designed, we can look to other fields for insights to consider when designing a financial advisor’s office to invoke similar “theater” effects that may help clients put themselves into the frame of mind that they’re about to change their financial behaviors for the better.

Snoop by Sam GoslingOne such line of research comes from Sam Gosling, a professor of psychology at the University of Texas at Austin. In his book, Snoop, Gosling examines what our physical spaces—including our offices—can reveal about us.

Gosling’s field research, which involved “snooping” in the actual bedrooms and offices of research participants to see what he and his colleagues could determine about the individuals who occupy those spaces, found that our physical environments actually reveal a lot about our personality. In fact, Gosling and his colleagues found that sometimes our physical environments say even more about us than tools such as self-assessments. The reason for this is that while we might bias a self-assessment in a direction that we aspire towards or think others will be more approving of, our physical environment includes many unconscious manifestations of our personality in our everyday life.

Gosling refers to these manifestations as “behavioral residue”, as it is quite literally the evidence that accumulates based on our personality-driven tendencies to engage (or not) in certain behaviors. This type of evidence can be particularly revealing, as it is often the hardest to fake.

In a 2002 paper in the Journal of Personality and Social Psychology, Gosling and his coauthors identify four specific mechanisms through which such behavioral residue can emerge: self-directed identity claims (things we display for ourselves), other-directed identity claims (things we display for others), interior behavioral residue (residue which accumulates based on behavior inside or homes and offices), and exterior behavioral residue (residue which accumulates as the result of behavior that we engage in outside of our homes and offices).

In each case, an individual possesses some underlying personality-driven disposition, which leads to a particular behavior, which then leaves some evidence of that behavior. For instance, a financial advisor may be sentimental (personality-driven disposition), which leads them to collect memorabilia (behavior), and that results in an old baseball that sits amongst some other items on their bookshelf (behavioral residue). Or a financial advisor may be sensation-seeking (personality-driven disposition), which leads them to drive a motorcycle (behavior), which results in them needing to carry a motorcycle helmet around with them (behavioral residue).

The Process Through Which Personality Driven Tendencies Manifest In Our Physical Environment

Of course, the reality is that behavior (and its resulting residue) can be highly nuanced, which can lead to a lack of clarity regarding what some behavioral residue actually says about an individual. For instance, an advisor may have a baseball in their office as a way to signal that the advisor likes to watch baseball (an other-directed identity claim which could encourage a prospect or client to start a conversation on a topic of mutual interest), as a piece of memorabilia solely with personal significance (a self-directed identity claim which may help regulate an advisor’s emotions or motivation), or simply because a colleague dropped the ball on their way out of the office and the advisor is holding onto it until it can be returned to its owner (a form of residue which, at best, just tells us a bit about the advisor’s personality). But as an outsider looking in, it isn’t immediately clear why the baseball is in the environment.

However, we may sometimes be able to gain some clues

from how things in an environment are positioned. Gosling notes that there are some interesting differences between self-directed and other-directed identity claims. Because the intended audience of self-directed and other-directed identity claims are different, individuals will tend to position such claims differently within their office. For instance, other-directed identity claims would be more visible from places where clients would sit (since clients are the intended audience), whereas self-directed identity claims may be more (or even exclusively) visible from an advisor’s perspective.

As a result, when trying to learn about an individual by viewing their office, it is helpful to view the office from multiple perspectives. While an office may look neat and tidy from the client’s chair (an example of behavioral residue which would indicate high conscientiousness), the pile of papers and an overflowing waste bin hurriedly stashed out of the client’s sight may tell a different story.

But the reality simply is that what we display in our physical spaces (both intentionally and unintentionally) can say a lot about us. Which means it’s important to carefully consider what our environment is saying about us, and whether that aligns with the message we intend (or desire) to convey!

How We Can Better Manage The Theater Of Financial Planning

When it comes to better managing the “theater” of financial planning, the first thing to do is acknowledge that it exists.

Again, particularly for those of us who are most strongly drawn to the technical side of financial planning, this can be a challenge. While the quality of our services does matter, our ability to communicate our findings to clients (storytelling) and the broader environment in which we do that storytelling (theater) may matter just as much, if not more, than our technical skills. And this may be particularly true when it comes to influencing whether our clients actually follow-through and implement the strategies we recommend.


Depending on a particular advisor’s office arrangements, they may have more or less control over how an office is set up, but there are always ways in which we can craft our environment to send better or worse signals to others.

At the most obvious level, are the signals that we intend to send to clients. While many of these signals will be common to many advisory firm offices—signaling characteristics such as competence, professionalism, trustworthiness, etc.—they are still important boxes to check. Though the doctor who wears a lab coat isn’t “unique”, the doctor who doesn’t may not put his or her clients in the best frame of mind to increase the client’s odds of healing. In the context of advisory firms, awards or degrees displayed around an office, the magazines available to customers in the reception area, and the way we dress, are all signals to consumers who have relatively little information use when assessing our intangible services.

Ideally, we are signaling information that aligns with our true goals, skills, interests, values, and personality to others. For instance, if an advisor takes pride in their professional accomplishment and proudly displays a credential worthy of admiration, Gosling notes that their inner and outer selves would be in alignment.

However, our inner and outer selves are not always aligned. In particular, our environment also contains “deceptions” that we may sometimes use to try and mask our actual traits. For instance, most people would generally like to be thought of as organized, as it’s a trait that is generally respected and rewarded in our society. As a result, regardless of how truly organized we are, most people will try and tidy up to at least give the impression they are organized. But, unfortunately for those of us who may not be naturally inclined to alphabetize bookshelves, deceptions are often fairly easy to spot. Of course, that doesn’t mean we shouldn’t still try our best to be organized, but we should be careful how we portray ourselves to others, because claiming to be organized when we are not is likely to perceived worse than being just being genuine selves.

Unfortunately, when it comes to areas where consumers lack the information needed to provide a meaningful assessment (e.g., assessing the quality of investment recommendations), deception can be harder to detect. Consider the famous CFP Board commercial in which a DJ was transformed into a financial advisor who appeared to come off as reputable to consumers based on how he was dressed and the professionalism of his (staged) office setting. The “experiment” was set up in a manner which took advantage of the “theater” of financial planning. Illustrating that since most consumers aren’t financial advisors themselves, they struggle to assess the true quality of a financial advisor. As a result, by simply being confident, looking the part, and using some industry buzzwords (e.g., asset allocation, 401k, etc.) the DJ was able to come off as knowledgeable and trustworthy.

Had the CFP Board put the same DJ in a rundown office, dressed casually, and had him perform without confidence, it’s doubtful consumers would have had the same response. In fact, you could likely put a highly qualified advisor delivering excellent advice in the same rundown/casual setting and consumers would still doubt whether the advisor was knowledgeable, because they can’t actually assess competence in the first place, though the wide range of contextual clues they can assess would be indicating something was not right. (This is also why credentials like the CFP marks help, as it provides a meaningful signal of competence in an area where consumers would struggle to make that assessment themselves. Because, as the DJ commercial notes, anyone can put on a suit and tie, but not everyone can get the CFP marks!)

Of course, financial advisors should never fake credentials or expertise that they do not have for both ethical and legal reasons, but the point remains that the “theater” of financial planning is so powerful, that it can even mask otherwise unqualified individuals. Which means it is crucial for those whoare competent and ethical to leverage all the tools at their disposal!


Gosling uses the terms “seepage” or “leakage” to refer to behavioral cues about our personality (positive or negative) that are revealed without our being aware of them. One particularly powerful way in which this can happen is through our clothing.

For instance, conscientiousness is one of the personality traits that is often found to be the most desirable in a professional context. Based on the findings of some prior studies, Gosling put together a “Snooping Field Guide” which includes both the items that snoopers most often used to assess a particular personality trait, as well as the items that were found to actually predict those traits best. In both cases, formal dress was found to be the strongest indicator of conscientiousness.

As a result, this is one more reason advisors may want to be very careful before dressing down. Particularly when we don’t like to dress up, we’re likely to engage in all sorts of motivated reasoning to convince ourselves it is okay to dress down. However, the formality of our clothing is perhaps the single greatest visual signal of high conscientiousness that we can send.

In terms of other clothing-related traits that have been found in prior research, observers have previously relied on:

  • Fashionable dress as an indicator of openness
  • Make-up as an indicator of openness and extraversion
  • Showy dress as an indicator of extraversion
  • Non-showy dress as an indicator of conscientiousness

Notably, past research indicated these weren’t actually reliable indicators, but the key point here is that those evaluating the personalities of othersthought they were. Interestingly, dark clothing was an indicator of neuroticism, though it was not picked up on by those doing the evaluations (it was identified by researchers evaluating data after the fact).


Not only does the way we communicate affect the quality of our storytelling, but it is also a way in which people tend to try and pick up clues about the personalities of others.

Again noting that conscientiousness is among the most desirable traits when making hiring decisions in a professional context, advisors may want to be aware that the following were used by reviewers to assess one’s level of conscientiousness:

  • Controlled sitting posture
  • Touches one’s own body infrequently
  • Fluent speech
  • Calm speech
  • Easy to understand

Notably, again, these weren’t actually found to be meaningful predictors of conscientiousness, but they were cues that people relied on when making assessments. In other words, right or wrong, those who exhibit these queues may be more likely to be perceived as conscientious, which can make a difference when prospects are interviewing prospective financial advisors.

While we don’t know enough about what clients look for in an advisor to have much confidence in how one might signal other traits (and preferences likely vary based on a client’s own personality), some other notable indicators included (*indicates cues that were actually found to be predictive of the underlying personality traits):

  • Openness: friendly expression, self-assured expression, extensive smiling, pleasant voice, fluent speech, easy to understand, and calm speaking
  • Extraversion: Friendly expression*, self-assured expression*, extensive smiling*, relaxed walking*, swings arms when walking*, loud and powerful voice*
  • Agreeableness: Friendly expression*, extensive smiling, pleasant voice
  • Neuroticism: Grumpy expression, timid expression, little smiling, lack of arm swinging when walking, stiffness when walking, weak voice, unpleasant voice, halting speech, difficult to understand, hectic speech


As discussed above, signaling competence is particularly tricky since the prospect or client is presumably less knowledgeable than the financial advisor. Which means, ironically, most consumers don’t even know how to determine whether a financial advisor is competent or not, and aren’t even able to judge the quality of their answers to demonstrate competency. Which means it becomes all the more important to properly “signal” competence by any means possible (especially for those who really arecompetent!).

The first is through professional designations. When consumers believe that a designation is credible (and unfortunately, it’s the belief here that actually matters), the credibility of the designation conveys credibility to the advisor who has it. Which means the CFP may be meaningless to a consumer who is unaware of the CFP or under the impression it is not a meaningful designation, whereas a meaningless designation can sway a consumer if they believe it sounds important. Fortunately, the CFP marks have become a more credible signal as consumer awareness continues to rise with the CFP Board’s public awareness campaign.

A more general way in which we signal competence/intelligence is often through college degrees. While economists continue to debate over whether college actually makes us any smarter, it is at least generally accepted that, all else equal, more intelligence makes it easier to get into more prestigious schools, and that college itself serves as a means for individuals to signal some combination of intelligence and work ethic. Given that most people know it is very hard to get into Harvard and earn a Ph.D., there is a major competency signal conveyed by having a Ph.D. from Harvard. Of course, it’s entirely possible to have a Ph.D. from Harvard and still be clueless about financial planning. But for a consumer trying to findsome meaningful signal of competence, “he/she was smart enough to get a Ph.D. from Harvard” is better than nothing.

As a result, advisors may want to think carefully about how they display professional credentials and degrees in their office. This doesn’t mean such signals need to be in front of clients at all times (nor does it mean advisors need to go out and acquire advanced degrees, as there is certainly considerable diminishing marginal returns in highly personal business like financial planning), but much like the theater of medicine is often elevated by having a doctor’s credentials visible, financial advisors may want to do the same.


As boring as it may sound, there’s a certain degree of “fitting in” that is likely helpful in managing the theater of financial planning.

While it would be nice to have some actual research to back it up, there are likely some items clients just generally associate with “finance” that would be helpful for setting the stage of financial planning. Items like tickers, charts, spreadsheets, and maybe even CNBC running in the background could be items which fall into this category.

The irony, of course, is that many advisors like to steer their clients awayfrom CNBC and a lot of these financially-related items. Nonetheless, to the extent that clients might subconsciously associate them with the theater of financial planning, hiding them from clients could actually make the advisor seem less credible. Which means that while advisors may not want to place such TVs in a waiting room where clients would actually watch it, a strategically positioned TV a client might see walking back to an advisor’s office could still help set the stage (without encouraging the potentially harmful client behavior). If anything, it may help to convey “we keep an eye on CNBC, so you don’t have to!”

Beyond those types of props, there is the general professional nature of an office. The idea here is to (accurately) create the sense that the client is here to talk about something important with a qualified professional. What that means likely varies a lot from one market and target clientele to another, but, to the extent possible, advisors should probably strive to ensure they at least match the general quality of offices that clients may be meeting with competitors in. Because while having a professional-looking office like everyone else may not ensure you get the prospective client, not having an office on par with competitors could genuinely lose the prospect.


Perhaps the most effective way to “customize” an advisor’s office is to signal to a niche. Whereas the hope for much of the setting is that it invokes the theater of financial planning without actually drawing overt attention, when signaling to a niche, advisors should be looking for key “other-directed” identity claims they can send.

Of course, these specific signals will vary based on an advisor’s target niche, but the key is to be able to send some type of signal that displays a commonality that the client is unlikely to find with other advisors (at least in their immediate market).

Additionally, as a general principle, the more “costly” a signal is to send, the more meaningful it will be to those who receive it. This could mean something like cost in terms of time (e.g., a photo/award/etc. associated with donating considerable time to a nonprofit of shared interest versus a mug with the nonprofit’s logo on it). Or, while riskier, it could also be a cost in terms of signaling a shared identity that would actually be harmful for an advisor to send to someone outside of that niche. For instance, an advisor who works with many members of a particular union could display something that signals solidarity with that union. Not only is the signal of solidarity useful on its own, but the fact that it may mean fewer business prospects for an advisor (e.g., management or business owners who may not appreciate the signal of solidarity with employee unions) makes the signal more impactful than one that is “cheap” and would be universally or nearly universally agreeable anyway.

The bottom line, though, is simply to recognize that consumers are influenced by factors which have no rational basis for evaluating a financial advisor (e.g., wearing a suit, quality of the office, etc.). But advisors should be careful assuming they can convince clients that this behavior is “irrational”. For many, the story they hear, and the broader aspects of the “theater” that it takes place in, will be influential. Further, the inherent conflict of interest between any financial planner and a potential client they are prospecting makes consumers reasonably suspicious of any attempts rationalize less desirable aspects of a particular advisor’s theater, so advisors trying to persuade clients to ignore these factors may struggle more than those who simply acquiesce to reality and leverage them instead.

Of course, the power of storytelling and staging the theater of financial planning can be used to both further and harm client interests—so advisors have to be careful to use it for good—but ultimately the theater of financial planning should not be overlooked. Whether it’s in the process of trying to get new prospects or convincing existing clients to implement an advisor’s recommendations, managing the theater of financial planning plays an important role.

So what do you think? Do you have any strategies for managing the theater of financial planning? Can it be easy to overlook this aspect of the financial planning process? What do you feel are the most important traits to signal to clients? Please share your thoughts in the comments below!


CFP Board To Proposed New Revisions To Conduct Standards With Second Comment Period

CFP Board To Proposed New Revisions To Conduct Standards With Second Comment Period

After taking in feedback from more than 1,300 public comments, plus 8 public forums with CFP certificants, the CFP Board has announced that it will be releasing a second draft version of its proposed changes with a second comment period. The decision to issue a second draft proposal isn’t entirely surprising, as both advocacy organizations like the FPA, as well as the comment letter submitted by yours truly, suggested that there were enough substantive changes needed in the first draft to merit a revised proposal with a second comment period. The second draft itself is anticipated to be released before December 25th, with the second comment period to open for 30 days running from January 2nd to February 2nd; the CFP Board has indicated that it aims to complete the process and publish the final conduct rules by the end of the 1st quarter of 2018, with the new standards to take effect at the beginning of 2019. Thus far, the CFP Board has not indicated which areas in particular will be modified, beyond noting that “the board really looked hard at the practicalities of how the proposed standards would apply to different business models”, an apparent nod to the challenges of how the CFP Board’s fiduciary requirements – including new notification and disclosure documents – might apply in the broker-dealer community in particular. Though in public comments at this week’s Schwab IMPACT conference, CFP Board CEO Blaine Aikin maintained that the second draft will have “meaningful” changes but won’t dilute the principles-based fiduciary focus of the rules.

Financial Planning Research Highlights From The 2017 Academy of Financial Services Annual Meeting

Financial Planning Research Highlights From The 2017 Academy of Financial Services Annual Meeting


From October 1st through October 3rd, the Academy of Financial Services’ annual meeting was  in Nashville, TN – partially overlapping with the FPA’s BE Annual Conference. The event brought together many academics and practitioners to share and discuss research, with the intention of increasing academic-practitioner engagement by holding two of the largest conferences for both researchers and practitioners in conjunction.

In this guest post, Derek Tharp – our Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – provides a recap of the 2017 Academy of Financial Services Annual Meeting, and highlights a few particularly studies with practical takeaways for financial planners.

The 2017 Academy of Financial Services (AFS) Annual Meeting showcased research from scholars at a wide range of institutions – with first author affiliation on paper and poster sessions representing roughly 40 institutions. As expected, the core financial planning programs had a strong presence, with scholars from just seven of those institutions serving as lead authors for more than 50% of all research presentations and poster sessions.

The AFS annual meeting featured research on a number of different topics. Some notable sessions for practitioners ranged from topics such as whether having resources from friends and family reduces a household’s willingness to establish an emergency fund (not as much as you might expect!), how bull and bear markets impact the subjective assessments of portfolio risk, the links between certain types of personality traits and likelihood of financial stress, and quantifying the financial advisor’s value when it comes to making efficient investment decisions (and how that value varies depending on the investor’s existing capabilities in the first place).

Overall, holding the AFS Annual Conference and FPA BE Conference in conjunction appeared to be successful in creating greater engagement between practitioners and researchers (with some research presentations filling large rooms at standing room only capacity!). As both the AFS Annual Conference and CFP Board’s Academic Research Colloquium strive to create more robust platforms for sharing and engaging in academic research, the future appears bright for financial planning researchers (and research that can really be used by financial planning practitioners)!

2017 Academy of Financial Services Annual Meeting

Though perhaps lesser known among many financial planning practitioners, the Academy of Financial Services has a long history of promoting academic research within the area of financial services. Dating back to 1985, the AFS has aimed to promote interaction between practitioners and academics. One way the AFS pursues this objective is by publishing an academic journal, the Financial Services Review (FSR). In recent years, AFS began to publish FSR in collaboration with the Financial Planning Association, and as a result, FPA members receive digital access to the current volume/issue of the journal.

Another way the AFS encourages interaction between practitioners and academics is through holding their annual meeting. This objective was given even greater focus in 2017 as the AFS held its Annual Meeting in conjunction with the FPA BE Annual Conference, conducted as a “pre-conference” event of its own but with one day of overlap to the main FPA conference agenda (which allows practitioners to come early and participate in the AFS event, and for academic researchers to stay beyond the AFS meeting and participate in the FPA annual conference as well).

Academic Representation At The 2017 AFS Annual Meeting

The 2017 AFS Annual Meeting drew researchers from a number of academic and professional institutions. In total, roughly 40 institutions were represented as first authors on research presented in either poster or oral sessions.

For those who haven’t attended an academic conference before, academics generally present their research at conferences in one of two ways. The first is the poster session, which is a more informal presentation where a researcher stands in front of a large poster summarizing their findings. The second are oral sessions, where researchers deliver a more formal research presentation to an audience. Researchers must submit their sessions in advance for consideration to be selected for presentation.

Several of the well-known financial planning programs had a strong showing at the 2017 AFS Annual Meeting. Texas Tech led the way with scholars serving as first author on 9 oral session and 2 poster sessions. Kansas State ranked second with scholars serving as first author on 5 oral sessions and 2 poster sessions. Other schools with a strong presence included The American College, University of New Orleans, University of Georgia, Ohio State University, and the University of Alabama. In total, these 7 schools accounted for 54% of the first authors of research selected for oral or poster sessions.

Portfolio Gamma Framework By Investor Type

As is indicated in the chart above, Blanchett and Kaplan conclude that different levels of financial advisor value are experienced by different types of investors. And of course, different levels of value are delivered by different types of advisors, as not all financial advisors are going to fully deliver gamma in each category.

Specifically, their results suggest that when consumers receive average or high levels of benefit from working with a financial advisor (and when the advisor can actually deliver the value), the gamma that can be added from efficient investment strategy selection is significant enough to justify a typical AUM fee. However, when consumers receive low levels of benefit from working with an advisor (e.g., because they are already capable of self-implementing a long-term diversified portfolio), it may be hard to justify a typical AUM fee based on investment gamma alone.

And while this insight may seem somewhat self-evident, Blanchett and Kaplan provide some concrete estimates of the value that may actually be received by various types of consumers. Further, evaluating the different categories can help advisors see where they can generally add the most relative value. For instance, while asset class selection is important, helping clients to decide to save and invest in the first place is relatively more important for each type of consumer.

Blanchett and Kaplan’s study is a big step forward in terms of addressing the “compared to what” problem and many of the limitations of prior studies attempting to quantify the value of advice. By providing a framework that spans multiple dimensions of potential value-add, their quantification of value becomes much more meaningful. If a particular investor is “low” on questions 1-3, “average” on 4-6, and “low” on 7, a customized value-add unique to their circumstances can be calculated. While it may not be perfect, the benchmark in this study is beginning to look much more like a real person.

Example 1. John is a consumer who has a very good understanding of the importance of investing, appropriate risk levels, asset allocation considerations, and how the risk of his retirement goal affects a portfolio allocation, but he only has an average knowledge of what types of accounts to use, what investments to implement with, and when he should revisit his portfolio. Therefore, assuming John’s prospective financial advisor is of high competence in all areas, John’s benefit of working with an advisor (or developing the skills and knowledge on his own) could be estimated as 1.4% per year.

 Of course, this study doesn’t even attempt to quantify the value of financial planning gamma(meaning the true potential value-add would be even higher), but Blanchett and Kaplan have provided a solid foundation for beginning to more precisely quantify the value-add of an efficient portfolio.


While the importance of maintaining an emergency fund is no secret amongst financial planners, understanding the relationships between household characteristics and emergency fund preparedness can help financial planners identify situations in which extra precaution should be taken to ensure client households are prepared to face financial adversity.

Unmarried parents with children—i.e., “fragile families”—are one group that is particularly at risk of needing to rely on an emergency fund. Because non-married households are more prone to breaking apart than married households—a process which can create a shock to income while simultaneously increasing expenses (e.g., needing to make two rent/mortgage payments instead of one)—an emergency fund is even more important for fragile families.

The Two-Income Trap by Elizabeth Warren and Amelia Warren TyagiAs Elizabeth Warren and Amelia Warren Tyagi have noted in their book, The Two-Income Trap, these dynamics are not unique to low-income households. In fact, in some respects, fragility can be even higher for young, affluent, dual-income households, as an unexpected drop in income may result in larger month-to-month deficits with fewer options to offset that decline (e.g., public support or a non-working spouse entering the labor force).

In an effort to examine emergency fund preparedness among fragile families, Abed Rabbani, an Assistant Professor at the University of Missouri, and Zheying Yao, a Ph.D. student at the University of Missouri, analyzed data from the Fragile Families and Child Wellbeing Study.

In an SSRN article, Rabbani and Yao report their findings. While not all of their findings are particularly surprising—e.g., higher income, saving behavior, and homeownership were all found to increase the likelihood of having an emergency fund (defined as two months’ income in savings)—the authors also examined whether the likelihood of having an emergency fund was impacted by the gender of the individual who controls household spending, or whether the family could obtain financial support from other friends or family members.

The authors expected that financial reliance would be negatively associated with having an emergency fund (as having an emergency fund may be less crucial when households can access resources elsewhere) and that households where a female has financial control would be more likely to have emergency funds. However, the authors found that neither exhibited a statistically significant relationship with the likelihood of having an emergency fund after controlling for factors such as debt, saving, income, employment, and homeownership.

In a practical context, this study can provide a few different insights—particularly for advisors who may specialize in working with younger, non-traditional families. First, some objective factors that we would expect to be correlated with the likelihood of having an emergency fund were found to be. While this finding isn’t groundbreaking, it is good to check that professional intuitions align with empirical findings. Second, the findings suggest that neither gender of the financial decision maker, nor the availability of family/friend financial support, were significant predictors of the likelihood of having an emergency fund.

In the case of the latter, this may suggest that merely having access to funds through friends and family does not sufficiently disincentivize creating an emergency fund for one’s own household. This is actually an encouraging finding, as it may suggest that households are looking to be self-sufficient even when other friends-and-family resources may be available as a last resort. This may be particularly relevant for financial planners given that our clientele—even in the case of non-traditional clientele served through retainers and other business models—does tend to be more affluent, and likely has more affluent social networks as well. Additionally, this finding may lessen the concern of parents that serving as a financial backstop could undermine their children’s willingness to develop their own emergency funds and fiscal responsibility.


Misalignment between perceived and actual risk is a genuine threat to sticking with a financial plan, as it means that even if a client does have the “right” portfolio consistent with their risk tolerance, if they misperceive the risk of their own portfolio, they may try to make inappropriate portfolio changes anyway.

Xianwu Zhang, a Ph.D. student at Texas Tech University, explores whether subjective risk perceptions influence portfolio choices, in his paper, Do Investors’ Subjective Risk Perceptions Influence Their Portfolio Choices? A Household Bargaining Perspective.

In general, Zhang finds that investors perceive the stock market to be riskier than objective measures suggest it is. However, what is particularly interesting about Zhang’s research is his examination of the role that household bargaining plays in portfolio selection.

Traditional models of households assumed that all members of a household act as a team—altruistically putting the interests of the family ahead of their own. However, household bargaining models acknowledge various individuals within a group have different preferences, and, as a result, conflicts of interest arise within the household. Thus, households can act either cooperatively or competitively as individual members seek to maximize their own satisfaction.

When analyzing the different ways in which families can act cooperatively or competitively, bargaining power is an important concept to acknowledge. In the context of household portfolio selection, disproportionate bargaining power can mean that one spouse dominates decision making.

Zhang utilizes several proxies of bargaining power—such as gender, education, income, and hours worked—to see how risk perceptions (measured as perceived likelihood that a mutual fund invested in blue-chip stocks would experience a 20% decline over the next 12-months) of a spouse with more bargaining power may influence the percentage of risky assets in a household’s portfolio. Utilizing data from the HRS, Zhang finds that, all else equal, the subjective risk assessments of females, spouses with more education, and spouses with lower income have a greater influence on risky asset investment.

One interesting aspect of Zhang’s findings is that it is not always the household member who is assumed to have more bargaining power whose subjective risk assessment seems to influence portfolio holdings. For instance, spouses with more income are assumed to have greater bargaining power, though Zhang finds it is those with less income whose subjective risk perceptions have a greater influence on portfolio allocation. Zhang notes that this may be because the higher earning spouses may have higher opportunity costs, and thus delegate this decision making to a lower earning spouse.

Zhang does note some important limitations to this study (e.g., it is only based on one point in time rather than evaluating behavior over time), but it is certainly a fascinating and important topic.

From a practical perspective, these findings reiterate the importance of engaging both spouses in the financial planning process. And this is particularly true in light of our industry’s historical neglect of the female members of households, as even if it is the case that a higher-earning male possesses more bargaining power within a particular household, it may actually be the lower-income female’s risk assessment which is driving portfolio risky asset investment decisions of the household!

Further, this type of analysis raises all sorts of important questions. How do couples delegate portfolio decision making between themselves? How do they delegate portfolio decision making when an advisor is involved? If an advisor is struggling to get buy-in from a couple, who should they try and influence and how should they do so? It’s unlikely that any of these questions have simple answers, but they are the types of research questions that fiduciary advisors who want to help their clients fulfill their goals must consider.


In another paper examining risk preferences, David Blanchett of Morningstar, Michael Finke of The American College, and Michael Guillemette of Texas Tech University examine the effect of advanced age and equity values on risk preferences.

Utilizing a unique data set of risk tolerance questionnaire (RTQ) responses from participants in a defined contribution managed account solution offered by Morningstar Associates, the researchers are able to analyze how RTQ responses from January 2006 to October 2012 were associated with age and equity values after controlling for other factors such as account balance, annual salary, and savings rate.

The researchers find that as the S&P 500 increases, workers become less risk averse, and vice-versa. Additionally, participants who were older, had lower income, and had lower account balances were found to have higher levels of risk aversion.

Blanchett et al. note that the higher levels of risk aversion among older participants provides justification beyond time-horizon considerations for reducing equity allocations with age. Further, these findings suggest that annuitization should be more common than it is, though the authors note that several factors may decrease the attractiveness of annuitization, including mortality salience and framing effects.

The authors also note that an interaction found between age and S&P 500 levels suggests that risk preference assessment of older individuals may be influenced by stock market valuations. Specifically, if risk preferences were assessed when market values are high, respondents exhibited more desire to take on risk. But, of course, investing more in stocks because they’re up only makes investors more at risk of losing money in the next bear market! Fortunately, target date funds and other strategies can take the rebalancing responsibility out of the investors hands, which may help shield the investor form losses due to changes in shifting risk preferences.

From a practical perspective, financial planners should consider that risk tolerance assessment should not just be a one-time occurrence. A growing body of research suggests that investors exhibit time-varying risk aversion. Of course, this too raises questions.

If risk aversion is not stable, then how should it be used in practice? Does behavior change as stated risk preferences change, or are people were changing the way they answer questions related to risk preference (perhaps driven by risk perception instead)? Does a one-dimensional measure of risk aversion even tell us much in the first place? And to what extent should retirement strategies be designed differently if there’s an anticipation up front that retiree risk tolerance will decline in their later years?


As financial planners shift from simply thinking about the quantitative aspects of financial planning to helping clients achieve more holistic financial health, understanding measures of financial stress and well-being will be increasingly important.

In their presentation, Multidimensional Financial Stress: Scale Development and Relationship with Personality TraitsWookjae Heo of South Dakota State University, Soo Hyun Cho of California State University Long Beach, and Phil Seok Lee of South Dakota State University, presented their work in developing a multidimensional measure of financial stress.

In an SSRN paper covering a similar topic, the researchers provide a glimpse into some of the topics which are important in developing a more comprehensive measure of financial stress. The authors note that there are affective (i.e., how people feel), psychological (i.e., cognitive and behavioral), and physiological (i.e., bodily responses) dimensions to stress. As a result, they aim to bring these different dimensions together into a single scale that can be used to assess financial stress.

Further, the researchers used this measure in a survey of 1,162 respondents to examine its potential use and possible relationships between Big Five personality traits and financial stress. Those who exhibited the highest level of financial stress were moderately extraverted, were low in agreeableness, low in conscientiousness, high in neuroticism, and high in openness. Conversely, those who exhibited the lowest levels of financial stress were highly extraverted, highly agreeable, highly conscientious, low in neuroticism, and highly open to experience.

From a practical perspective, gaining a better understanding of what types of clients are more or less likely to experience higher levels of stress can help advisors manage client comfort and look out for various behavioral tendencies. Research in this area still has a long way to go before advisors can use such findings with confidence, but this is one area where the importance of basic research is highlighted—even if the immediate applications are limited. If we don’t even truly understand what financial stress is, we will struggle to effectively help our clients alleviate it (or identify the clients most prone to financial stress in the first place)!

Overall, the 2017 AFS Annual Meeting was successful in bringing together a wide range of scholars to share their research in personal financial planning. And hosting the conference in conjunction with FPA BE provided an excellent opportunity to increase the interaction between practitioners and academics as well.

The AFS Annual Meeting will be held in conjunction with the FPA Annual Conference in 2018—again providing an opportunity for greater engagement between financial planners and researchers. So, if you would like to stay on top of some of the latest ideas in academic research, would like to consider possibly getting involved in research yourself, or simply just want to experience an academic conference first hand, attending the AFS Annual Meeting and FPA Annual Conference in 2018 may be a convenient opportunity to do so!

So what do you think? Did you attend the 2017 AFS Annual Meeting? Do you have plans to attend in the future? What else can be done to help further engagement between practitioners and academics? Please share your thoughts in the comments below!