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The Value of a Real Financial Planner and Retirement Planning

"Results from this study demonstrate the importance of differentiating between financial planners whose primary objective is to sell financial products versus financial planners who create a retirement plan by first quantifying retirement goals and objectives." This is the very last sentence in a study that was recently published in the Journal of Financial Planning.

The research drew on data from the 2004 and 2008 administrations of the National Longitudinal Survey of Youth to evaluate the intersection of retirement savings and the use of financial planners. The study began in 1979 and now consists of participants in their late 40s and early 50s. The results of the study are quite interesting:

* 70% of the households had not even evaluated where they stood for retirement, nor did they use an advisor

* 13% were deemed 'self-directed'

* 11% used a comprehensive financial planner

* 6% used a non-comprehensive advisor who had not done any retirement needs analysis for the client

When segmented this way, the households that used a comprehensive financial planner had significantly more income, net worth, and retirement assets than the other groups. In addition, those who used a comprehensive financial planner had consistently grown their wealth at a faster rate than the other groups. Even after controlling for socioeconomic status, those that used a financial planner and calculated their needs had higher retirement wealth accumulation.

As an example, those within the 90th percentile who had a financial planner and had calculated their retirement needs saved $233,617 more than those that did not have a plan! From 2004 to 2008 (a time when the market was generally positive), those at the 90th percentile accumulated $152,787 more compared to those without a plan. Interestingly to note: those who were considered self-directed did better than those who used an advisor who had not calculated retirement needs!

What is the lesson from this study? First, few academic studies have been done to quantify in any meaningful the value of using a comprehensive financial planner and calculating one's long-term retirement needs. (Along with other objectives and goals in life.) This study is meaningful in that it followed a group of people for many decades and shows that for those who use a professional financial planner, there is significant value. Second, the onus is on the client to understand the difference between a comprehensive financial planner and an 'advisor' who is merely trying to sell products.

When I meet with prospective clients I attempt to explain the difference between a 'real financial planner' (someone who has fiduciary responsibility to their clients) and an advisor or broker whose primary responsibility is to their employer. Even if someone chooses not to use our services I always let them know that they should find someone who is fee-only, a 'real financial planner', and someone who will accept fiduciary responsibility. Anything less, and they are doing a disservice to themselves and their family.

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