Well, first of all, it’s good to be back; I missed opining at everyone for a whole two weeks! Now down to business: I promised that I would share with you what I learned in the two-week Personal Financial Planning summer intensive as part of my Ph.D. program. Simply put, it’s this question: “What have we learned?” You see, Personal Financial Planning is a very new field of academics and even applied science. Within the United States, there are only one hundred and twenty Personal Financial Planning educational programs between the four thousand two hundred and ninety-eight colleges in the country. Moreover, it’s not just one hundred and twenty schools that have programs; instead, it’s one hundred and twenty programs. Meaning a school like Kansas State University, which has a certificate, bachelor’s, masters, and Ph.D. program in Personal Financial Planning, counts as four of those one hundred and twenty. In short, unlike an associate’s degree or bachelor’s in business administration, which you can get at almost every college in the country, financial planning education is rare (1.3% of colleges).
What have we learned? The cost of rarified learning
It turns out it’s not just Personal Financial Planning programs that are rare. In fact, in a “Who’s Who” review I conducted as part of the summer program, I determined that nationally there are less than 100 people in the United States performing research for free application (meaning research available for everyone, not just internal and private institutional research). In contrast, over 12,200 scientists work on projects for CERN related to the Large Hadron Collider in Switzerland, and that’s just one specific group of researchers working in one incredibly narrow subset of the field of physics. How does this then come as a cost? Well, simply put, financial planning is an incredibly powerful profession with not enough practitioners and dramatically not enough researchers enabling the practice of financial planning. Primarily up to this point, financial planning has been informed by borrowing research from other fields. Portfolio construction and risk management from finance and economists, client and behavioral psychology from clinical and family therapy, budgeting and resource management from family management, and so on. In fact, financial planning is still such a new field of practice and research that there isn’t even a unified “theory of financial planning.”
How this affects the public
Primarily, because financial planning’s body of knowledge is borrowed, the lack of unified theory and research-based practices leaves the public exposed mainly to “what works.” That is to say, most financial planning practices are enabled simply because they work, not because we know they are the best for what we’re attempting to accomplish. An appropriate metaphor would be that we’ve mastered the use of fire to provide heat, and we know fire provides warmth, but we’re yet to discover gas, electricity, or other forms of fuel to do the same. As a result, of the hundreds of thousands of practicing financial advisors (and other synonymous titles et al.), the majority are using academic research that’s been condensed into a 30-minute seminar, a series of classes at a conference, or PDF one-pager summaries to inform everything they do for clients, with their guardrails being the loosely defined and subjective opinions of their supervisors and compliance departments. Yet, despite the “ignorance” of the larger practitioner field, financial planners are professionally and statistically established to be some of the smartest people in the population with regard to financial knowledge. Just by being a graduate of a Personal Financial Planning program or for having obtained the CERTIFIED FINANCIAL PLANNER™ Certification, they comfortably sit in the top one percent of Americans where financial knowledge is concerned. Yet, once again, our appropriate metaphor holds: having mastered fire does not mean that practitioners are doing it as well as they could be, and therein lies the cost to the public. It’s not that the public isn’t getting what they’re paying for; the outcome of financial planning almost universally pays for itself several times over (annually and for a lifetime); it’s that they could potentially be getting much more.
So what are you going to do about it?
Well, that’s the golden question, isn’t it? What have we learned from merely becoming involved in the more extensive study of Personal Financial Planning and attempting to move the ball forward? How will it benefit you as a client or a member of the community if the path to a Ph.D. in Personal Financial Planning is completed? Well, a couple of ways:
- First, the process of obtaining a Ph.D. in anything is fundamentally learning about the existing primary peer-reviewed research in that field and how it applies to the current understanding of the subject, then learning how to research in the field in order to add to it. The benefit to our clients and the public is that we will be applying the best-in-class research from the direct source to our financial planning process, rather than relying on distilled educational courses or white papers, thus removing a layer of communication and potential for misunderstanding and honing our process more directly for clients.
- Second, my research interest in Personal Financial Planning for my Ph.D. is fee model efficacy: How does the way you pay your financial planner impact the outcome of your financial plan? At present, financial planners create their fee models based on a business case (profit target or covering costs), on what everyone else does (the benchmark or what the market for financial planning will allow), or simply on rationalization of their own reasons. Because of this, the cost of financial planning varies wildly from firm to firm, often with people in similar circumstances paying dramatically different fees for the same service and despite the same situation. All of this to say, the profession itself needs a clearer understanding of how we charge affects our clients, and the application of that research to fee models will enhance outcomes for the public both directly and allow the public to assess better the value they receive.
- Finally, qualifications to bring more people into the field. Estimates vary significantly, but there are at least 80,000 CFP® Professionals in the United States and an estimated 300,000 “financial advisors” of some variety. However, the average age of a financial planner is in their late 50s, and it’s anticipated that over 100,000 financial advisors will retire over the next decade. It is critical that qualified faculty support universities in the mission of certifying financial planners and granting degrees in the field to those students who wish to pursue the educational path. If this doesn’t happen, financial planning will likely polarize, with the majority of the public stuck with a “call center” model of financial planning where they can get limited advice from an overworked financial planner who has to read their file before helping them, and an elite collection of small practices catering to the ultra-affluent and offering highly specialized and high-quality services to that limited premium-paying clientele.
Okay wrap it up
Fair enough. I don’t want your takeaway from this to be doom and gloom. Despite the small headcount of financial planning researchers in the field, the passion and expertise on display within that limited group is enormous. Members of my doctoral cohort are looking to solve pressing problems, from lack of retirement savings in immigrant communities, the impact of financial stress on veterans with traumatic brain injuries and post-traumatic stress disorder, and how to set a national educational standard for financial literacy that doesn’t just check the box, but equips future generations to experience financial wellbeing truly. What have we learned? That the future is bright, so look forward to it!