Volume 17 Issue 1 2018 www.journalofpersonalfinance.com
Journal of Personal Finance Techniques, Strategies and Research for Consumers, Educators and Professional Financial Consultants
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IARFC INTERNATIONAL ASSOCIATION OF REGISTERED FINANCIAL CONSULTANTS
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Journal of Personal Finance
Volume 17, Issue 1 2018 The Official Journal of the International Association of Registered Financial Consultants Š2018, IARFC. All rights of reproduction in any form reserved.
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Contents Editors’ Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Recognizing Conflicts of Interest in Financial Planning: A Sequential Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Frank C. Bearden, Ph.D., ManBging Member, Frank C. Bearden LLC. Conflicts of interest (COI) are an important issue for financial planners. This study is sequential to a prior study, providing improved sample uniformity and focus. The emphasis is upon measuring the recognition of COI by CFP® certificants in financial planning practice. Recognition was measured in six pending financial planning engagements. Participants were 134 CFP® certificants in financial planning practice. To measure recognition of COI in each engagement, participants were asked the likelihood the financial planner would encounter a COI by accepting each engagement. Participant recognition of COI aligned with expectations in 4 of the 6 engagements, but did not align when considering a family member or business associate as a client. Time in financial planning practice and number of professional designations were measured as possible influence factors on the planner’s recognition of COI, and found to have insignificant influence. Do Interest-Only Mortgages Really Make Sense for Investors?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 William T. Chittenden, Associate Dean for Graduate Programs, McCoy College of Business Administration, Texas State University Vance P. Lesseig, Associate Professor of Finance, McCoy College of Business Administration, Texas State University Kenneth P. Moon, Associate Professor of Finance, McCoy College of Business Administration, Texas State University Interest-only mortgages began as a way for well-qualified borrowers to reduce their monthly mortgage payment and increase their available funds for investment. However, during the financial crisis, these loans were viewed as one of the factors precipitating the mortgage problems as borrowers had instead used them as a way to qualify for larger loans. While this paper will not debate the merits of how interest-only mortgages are used, we will try to determine if their original intent is reasonable. This paper attempts to analyze how easily an investor can earn returns that “beat” mortgage rates. Specifically, we use portfolio return simulations with the historical return characteristics of various assets and mortgage rates to determine the probability of various “typical” investment portfolios earning returns that exceed mortgage interest rates. Not surprisingly, our results show that the probability of successfully employing this strategy is often less than 15 percent, and increasing the probability of success requires large increases in risk. Why Financial Advisors Have Yet to Leave the Professionalism Bar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Jeffrey M. Camarda, PhD, CFA, EA, Camarda Wealth Advisory Group The Charitable Bequest Gap Among African-Americans: Exploring Charitable, Religious, and Family Estate Planning Attitudes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Jennifer Lehman, J.D., Ph.D. Candidate, Texas Tech University Russell N. James III, J.D., Ph.D., CFP®, Professor, Texas Tech University. Previous research reports that African-Americans are significantly less likely than Whites to have a charitable estate plan, even when controlling for other socio-economic characteristics. Two possible explanations are a documentation barrier or lack of charitable intent. Evidence for a documentation barrier includes relatively lower engagement with the formal financial system in general. The evidence further indicates that, among those who have estate planning documents, African-Americans are not less likely to include a charitable component. Using nationally representative data from the 2007 Panel Study of Income Dynamics (n=8,289), we present direct evidence of attitudes regarding charitable, religious, and family estate planning. In absolute terms, African-Americans rated the importance of charitable and religious bequest gifts higher than others did. This suggests a documentation barrier—a barrier that advisors can actively address–rather than a lack of charitable intent. Additionally, consistent with theories and findings in current charitable giving, African-Americans were also more likely to give religious bequests greater importance relative to other charitable or family bequests.
©2018, IARFC. All rights of reproduction in any form reserved.
Volume 17, Issue 1
Personal Finance Bloggers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 David Donovan, David Donovan Consulting, Upper Coomera, Queensland, Australia. ‘Personal finance bloggers’ give personal, and in some cases blended small business and personal, financial advice of varying types. Much of the content on these sites is written by individuals who are not financial professionals. This article reviews a selection of ‘Personal finance bloggers’ and assesses the background and motivation of the operators, the size of the operation, the quality of investment and retirement planning advice when compared to generally accepted financial planning approaches, and assesses the threat these sources of financial advice pose to traditional financial advice providers. The Behaviorally-Enlightened Fiduciary: Addressing Moral Dilemmas through a Decision-Theoretic Model of Moral Value Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Derek Tharp, Ph.D., Kansas State University A fiduciary has an ethical obligation to act in the best interests of her client. In this paper, I argue that this obligation demands that a fiduciary advise her client from a behaviorally-informed perspective. However, this obligation creates new moral dilemmas, complicating ex-ante determination and ex-post evaluation of the fulfillment of fiduciary duties. I argue that a prima facie duty of disclosure may only be overridden when the potential upside of the non-disclosed option to the beneficiary is small, the potential downside of the non-disclosed option to the beneficiary is large, and the fiduciary is epistemically justified in her beliefs regarding the potential outcomes. I present a decision-theoretic model for evaluating these dilemmas, as well as practical guidance for fiduciaries facing these trade-offs.
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Call for Papers Journal of Personal Finance (www.JournalofPersonalFinance.com) Overview The Journal of Personal Finance is seeking high quality submissions that add to the growing literature in personal finance. The editors are looking for original research that uncovers new insights—research that will have an impact on advice provided to individuals. The Journal of Personal Finance is committed to providing high quality article reviews in a single-reviewer format within 60 days of submission. Potential topics include: •
Household portfolio choice
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Retirement planning and income distribution
Investment research relevant to individual portfolios
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Household credit use
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Individual financial decision-making
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Household risk management
Professional financial advice and its regulation
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Life-cycle consumption and asset allocation
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Behavioral factors related to financial decisions
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Financial education and literacy
Please check the “Submission Guidelines” on the Journal’s website (www.JournalofPersonalFinance. com) for more details about submitting manuscripts for consideration.
Contact Wade Pfau and Walt Woerheide, Co-Editors Email: jpfeditor@gmail.com www.JournalofPersonalFinance.com
©2018, IARFC. All rights of reproduction in any form reserved.
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Journal of Personal Finance Volume 17, Issue 1 2018 Co-Editors Wade Pfau, Ph.D., The American College Walt Woerheide, Ph.D., ChFC, CFP®, RFC®, The American College
Editorial Board Sarah Asebedo, Ph.D., CFP®, Texas Tech University
Karen Eilers Lahey, Ph.D., The University of Akron
H. Steve Bailey,MRFC, HB Financial Resources, Ltd.
Douglas Lamdin, Ph.D., University of Maryland Baltimore County
David Blanchett, Ph.D., CFA®, CFP®, Morningstar Investment Management, LLC
Jean M. Lown, Ph.D., Utah State University
Benjamin F. Cummings, PhD., CFP®, The American College
Carolyn McClanahan, MD, CFP®, Life Planning Partners
Dale L. Domian, Ph.D., CFA, CFP®, York University
Yoko Mimura, Ph.D., California State University, Northridge
Ric Edelman, RFC©, Edelman Financial Services
Robert W. Moreschi, Ph.D., RFC®, Virginia Military Institute
Michael S. Finke, Ph.D., CFP®, The American College
David Nanigian, Ph.D., Mihaylo College at Cal State Fullerton
Joseph W. Goetz, Ph.D., University of Georgia
Barbara M. O’Neill, Ph.D., CFP®, CRPC, CHC, CFCS, AFCPE, Rutgers
John Grable, Ph.D., CFP®, University of Georgia
Jeff Rattiner, CPA, CFP®, JR Financial Group
Michael A. Guillemette, Ph.D., University of Missouri
Cliff Robb, Ph.D., Kansas State
Clinton Gudmunson, Ph.D., Iowa State University
Sandra Timmerman, Ed.D., The American College
Tao Guo, Ph.D., William Patterson University
Jing Jian Xioa, Ph.D., University of Rhode Island
Sherman Hanna, Ph.D., The Ohio State University
Rui Yao, Ph.D., CFP®, University of Missouri
Douglas A. Hershey, Ph.D., Oklahoma State University
Lew Mandell, Ph.D., University of Washington
Yoonkyung Yuh, Ewha Womans University Seoul, Korea
Michael Kitces, CFP®, CLU®, ChFC®, RHU®, REBC®, CASL®, Pinnacle Advisory Group Mailing Address:
Disclaimer: The Journal of Personal Finance
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is intended to present timely, accurate, and authoritative information. The editorial staff of the Journal is not engaged in providing investment, legal, accounting, financial, retirement, or other financial planning advice or service. Before implementing any recommendation presented in this Journal readers are encouraged to consult with a competent professional. While the information, data analysis methodology, and author recommendations have been reviewed through a peer evaluation process, some material presented in the Journal may be affected by changes in tax laws, court findings, or future interpretations of rules and regulations. As such, the accuracy and completeness of information, data, and opinions provided in the Journal are in no way guaranteed. The Editor, Editorial Advisory Board, the Institute of Personal Financial Planning, and the Board of the International Association of Registered Financial Consultants specifically disclaim any personal, joint, or corporate (profit or nonprofit) liability for loss or risk incurred as a consequence of the content of the Journal.
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General Editorial Policy: It is the editorial policy of this Journal to only publish content that is original, exclusive, and not previously copyrighted. Subscription requests should be addressed to: IARFC Journal of Personal Finance 1046 Summit Drive, P.O. Box 506 Middletown, OH 45042 editor@iarfc.org 1-800-532-9060 Subscription Rates, 1yr, 2 issues, add $15 for delivery outside the U.S. Individual Subscription: Member $45, NonMember $65 Institutional: $120, 3 copies, ea. issue Single Copies: Member $25, Non-Members $35 The Journal of Personal Finance (ISSN 15406717) is published in the U.S. in the months of March and October by the International Association of Registered Financial Consultants (IARFC).
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Editors’ Notes Welcome to the Spring 2018 issue of the Journal of Personal Finance. We are excited to bring you another six articles representing cutting edge research and current thinking in the field of personal finance. We also wish to announce that this is the last issue of the Journal of Personal Finance that we will be editing. The journal will be left in good hands, though, as we are happy to announce that Benjamin Cummings, Ph.D., CFP®, will serve as the journal’s next editor. Dr. Cummings serves as an Associate Professor of Behavioral Finance at The American College of Financial Services. He earned his Ph.D. from the Personal Financial Planning program at Texas Tech University, and his areas of focus include charitable giving, education planning, estate and tax planning, life insurance, portfolio management, and retirement planning. We have enjoyed our time at the journal and are grateful for the opportunity to be actively involved in guiding one of the key journals in the field of financial planning and personal finance. In our first article, Frank C. Bearden, Ph.D., seeks to measure the recognition of conflicts of interest by CFP® certificants within financial planning practices. To measure this recognition in each of six engagements, participants were asked the likelihood the financial planner would encounter a conflict of interest by accepting each engagement. Participant recognition of conflicts aligned with expectations in four of the six engagements, but did not align when considering a family member or business associate as a client. Time within a financial planning practice and the number of professional designations were measured as possible influence factors on the planner’s recognition of conflicts, and these factors were found to have insignificant influence. Next, Vance P. Lesseig, Ph.D., investigates the potential value of interest-only mortgages. They began as a way for well-qualified borrowers to reduce their monthly mortgage payment and increase their available funds for investment. However, during the financial crisis, these loans were viewed as one of the factors precipitating the mortgage problems as borrowers had instead used them as a way to qualify for larger loans. His paper attempts to analyze how easily an investor can earn returns that “beat” mortgage rates. Specifically, he uses portfolio return simulations with the historical return characteristics of various assets and mortgage rates to determine the probability of various “typical” investment portfolios earning returns that exceed mortgage interest rates. Not surprisingly, the results show that the probability of successfully employing this strategy is often less than 15 percent, and that increasing the probability of success requires large increases in risk. Our third article is by Jeffrey M. Camarda, PhD. He explores a number of themes around the issue of why financial advisors have yet to leap the professionalism bar. Questions asked within the article include what makes for professionalism? Do advisors generally conform to accepted tenets of professionalism? Does a homogeneous advisory profession exist analogous to medicine, accountancy, law, academia, and other professions? Or should financial advisory in the aggregate be viewed as pseudo-profession comprised of wide spectrum of industries with different duties, training, functions and regulations, with practitioners ranging from voluntary quasi-professionals to conflicted, self-serving salespeople? If this is so, he asks, how can consumers tell “real professionals” from other advisors? Next, Jennifer Lehman and Russell N. James III, Ph.D., examine the charitable bequest gap among African-Americans. Previous research reports that African-Americans are significantly less likely to have a charitable estate plan, even when controlling for other socio-economic characteristics. Two possible explanations are a documentation barrier or lack of charitable intent. Evidence
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for a documentation barrier includes relatively lower engagement with the formal financial system in general and that, among those who have estate planning documents, African-Americans are not less likely to include a charitable component. Using nationally representative data, the authors present direct evidence of attitudes regarding charitable, religious, and family estate planning. In absolute terms, African-Americans rated the importance of charitable and religious bequest gifts higher than did others. This suggests a documentation barrier – a barrier that advisors can actively address – rather than a lack of charitable intent. In our fifth article, David Donovan looks at the Personal Finance Blog, which has emerged as a format for providing and obtaining financial advice. However, as a source of financial information, there is no apparent regulation of this form of advice. The traditional financial advice industry has both extensive regulation and high levels of provider education. Meanwhile, he internet allows consumers to access advice on many subjects from sources that may be biased or inaccurate. His article reviews ten popular personal finance blogs with the goal of providing some clarity about the role they play in personal financial management and their potential to disrupt traditional financial advice providers. Finally, Derek Tharp, Ph.D., argues that the ethical obligation of a fiduciary to act in the best interests of her client demands that a fiduciary advise her client from a behaviorally-informed perspective. However, this obligation creates new moral dilemmas, complicating the ex-ante determination and ex-post evaluation of the fulfillment of fiduciary duties. Tharp argues that a prima facie duty of disclosure may only be overridden when the potential upside of the non-disclosed option to the beneficiary is small, the potential downside of the non-disclosed option to the beneficiary is large, and the fiduciary is epistemically justified in her beliefs regarding the potential outcomes. He presents a decision-theoretic model for evaluating these dilemmas, as well as practical guidance for fiduciaries facing these trade-offs. We hope you enjoy the current issue of the Journal of Personal Finance. — Wade Pfau — Walt Woerheide
©2018, IARFC. All rights of reproduction in any form reserved.