The First Longitudinal Study of Financial Planning

Financial planning has a curious chicken and egg problem. You see, most of the major studies about financial health in the United States are cross-sectional. Studies such as the Survey of Consumer Finances or the National Financial Capability Study are often used to assess everything from financial literacy to the impact of parental education on their children’s financial wellbeing. But even the longitudinal studies, such as the National Longitudinal Surveys by the Bureau of Labor Statistics, being as old as they are, fail to ask some of the right questions to really help us dig at a seemingly obvious question: Does financial planning actually do anything?

You see, the chicken and the egg problem of financial planning is that while many financial studies ask questions about the use of financial planners, stock brokers, lawyers, accountants, and other professionals, they do so cross-sectionally. That is to say, they take a slice of the population at a given interval and see what and how they’re doing right now, rather than asking the same people how they’re doing every few years and assessing changes over time. The consequence of this is that, while every major dataset and study on the subject shows that the higher your income, the higher your financial literacy, the higher your financial assets, the more likely you are to have a financial planner, that doesn’t answer the obvious question; because the datasets are cross-sectional, we only know that these financially smart and financially successful people have financial planners, not whether they had them and that’s what made them successful and smart or whether they were successful and smart first and went and hired a financial planner as a result.

So today, we’re talking about the chicken and the egg problem, what’s being done to solve it, and what some of the initial findings tell us about the benefits of working with a financial planner.

What’s Being Done About It

I’m not the first person to notice this problem, and that’s a good thing, because as much as I’d like to solve it, I haven’t the time or means! Enter the CFP Board, which commissioned the first longitudinal study of financial planning in 2022, aiming to dig at the questions of “Does having a financial advisor help? More importantly, does having a CFP® Professional help?” The study engaged the University of Chicago’s NORC “Amerispeak” Panel, which provides a robust and representative sample of the United States population for major studies such as the study being performed by the CFP Board. Importantly, it also means that while the CFP Board is funding the study, the actual data gathering is being handled by a reputable third party.

The board also gathered some top researchers in the field of financial planning, including Dr.’s Michael Collins, Stuart Heckman, Emily Koochel, and Sonya Lutter, to run the analyses. While those names probably mean nothing to most readers, let me succinctly describe it as “the study is in good hands, and I’d trust the results.” I say this with a particular eye toward the keen and hawkish nature of Dr. Heckman, who put me through quite the ringer on my Statistics Comps oral exam for my own PhD studies!

So, with that in mind, let’s take a look at some of the preliminary results.

The Sample

As mentioned, the sample is taken from 4,027 americans representing the general US population. They were restricted down from the entire population to those with financial means that might actually engage a financial planner, including a limitation of having at least $50,000 in annual income and investment assets of at least $30,000. Now, we work with clients who violate these norms whether because they’re retired or because they’re high earning but not-rich-yet, but I understand why the study didn’t include folks with little to no income or no assets because it’s hard to measure your financial quality of life when your quality of life is objectively challenging.

Of those in the study, 33% reported working with a financial planner or financial advisor. 51% of those 33% had a CFP® Professional, and the remainder either affirmed their advisor wasn’t a CFP® Professional or otherwise couldn’t confirm.

Initial Results of the Study

The initial results of any longitudinal study will look an awful lot like a cross-sectional study. However, because this study was commissioned with a focus on financial planning, it provides much more direct and clear information about financial planning specifically, rather than having to tease information out of questions and datapoints not actually tailored to the research questions at hand. As the study continues over the coming years, we’ll begin to see how much divergence in the general population, the advisor-assisted population, and the CFP® Professional-assisted populations they are, and will be able to see just how much of a difference financial planning really makes for clients.

That said, even the preliminary results are illuminating, at least insofar as they echo the findings of most other studies on the subject of personal finance, and whether those doing it themselves fare any better than those with professional help. TLDR? Those working with a financial professional are faring heads and shoulders better than others, at least for the moment.

For those interested in reading the initial study findings, you can see the results here. The study examined the behavior and status of those doing their own finances (“DIY”), those working with a non-CFP® Professional (“financial advisor”), and those working with a CFP® Professional. For those interested in the summary, the key preliminary findings included:

• 53% of the DIYers in the sample had a 3-month emergency fund, while 68% of those with a financial advisor had a 3-month emergency fund and 78% of those with a CFP® Professional had a 3-month emergency fund.
• 25% of the DIYers had a will, while 49% of those with a financial advisor had a will, and 57% of those with a CFP® Professional had a will. We could all work on this a bit more, apparently, but bear in mind that the difference between those DIYing their finances and those working with a CFP® Professional is more than double.
• 51% of those working with a CFP® Professional said they were living comfortably while only 28% of those not working with a CFP® Professional said they were living comfortably. In turn, 18% of the DIYers had money anxiety while only 8% of those working with CFP® Professionals had money anxiety.
• Among those working with a financial advisor or CFP® Professional, there were standout differences in trust and relationships:
  • 69% of those working with a CFP® Professional trust them, only 52% of those with a financial advisor trust their advisor.
  • 61% of those working with a CFP® Professional are satisfied with the role the advisor plays, while only 38% of those with a financial advisor are.
  • 49% of those with a CFP® Professional felt that the CFP® Professional reduced their financial anxiety, while only 31% of those with a financial advisor felt the same.
  • 44% of those with a CFP® Professional felt motivated to achieve financial planning goals, while only 26% of those with a financial advisor felt the same.*
  • 32% of those with a CFP® Professional referred others to their professional, while only 19% of those with a financial advisor did the same.
  • 53% and 49% of those with a CFP® Professional felt that their professional made an effort to learn about their family and values and about their spouse’s relationship with money respectively, while only 33% and 30% of those with financial advisors felt the same.
• And, to no-one’s surprise, there were even differences in the actual professional work that financial planners do:
  • 44% of those with a CFP® Professional reported that their financial plan is reviewed more often than annually while only 23% of those with a financial advisor did.
  • 55% of those with a CFP® Professional reported that they had a detailed retirement plan while only 38% of those with a financial advisor did.
  • 52% of those with a CFP® Professional reported having a detailed investment plan while only 30% of those with a financial advisor did.
  • 35% of those with a CFP® Professional reported having a detailed risk management plan while only 19% of those without a CFP® Professional did.
  • 31% of those with a CFP® Professional reported having a detailed estate plan while only 17% of those with a financial advisor did.
  • 27% of those with a CFP® Professional reported having a detailed tax plan while only 14% of those with a financial advisor did.

Now, while my ardent belief as a practicing financial planner is that the CFP® Professional clients should be 100% in all of these dimensions, it’s telling that there are such stark differences between CFP® Professionals and non-CFP® Professional financial advisors. There same cross-sectional study issues also exist here: Do all these clients of CFP® Professionals, financial advisors, and DIYers have these self-reported feelings and understandings of their financial situation regardless of whether they work with the professionals in question or not? While this particular iteration still maintains the “chicken and egg” problem from other cross-sectional studies, the good news is because it’s a longitudinal study, we’ll learn more over time about how some of these figures improve or decline, but it’s an interesting observation nonetheless that, at the present time, the respondents in the study who work with CFP® Professionals feel better about their finances across the board than those who work with financial advisors, and those who DIY are feeling worse about their finances and situation universally.

*My personal take on this particular datapoint is that almost all financial advisors without a CFP® Certification are likely in the sales channels of the industry, e.g. selling annuities and life insurance, or otherwise investing on commission. Because of the more transactional nature of this relationship, it wouldn’t be surprising to find that “achieving goals” wouldn’t even come into the sales conversation these financial advisors are having. The still relatively low figure of 44% for CFP® Professionals does, however, suggest that a number of the CFP® Professionals examined in the study (or rather, their clients) are those who have obtained the CFP® Certification but otherwise still work in more sales-oriented firms, e.g., big wire-house firms like Wells Fargo, Merrill, Edward Jones, etc.