Categories
Wealth Volatililty

Fantastic Morningstar Paper Just Published

A very important strategic planning article was just published in Morningstar Magazine. It is worth reading. The paper’s author—Hal Ratner—lays out what he and Morningstar are calling Total Wealth, which is a move to quantify a household’s total assets and liabilities. With this information, Morningstar hopes to develop strategies that will provide financial planners (and consumers) with tools to help clients maximize the “probability of meeting a set of consumption goals at some level of risk preference and futurity preference” (p. 52).

Essentially, Morningstar is advocating a position long held by faculty teaching financial planning at the University of Georgia; namely, financial planners add value by helping clients manage their entire “portfolio” rather than a single aspect of wealth. Total wealth—using Morningstar’s definition—includes financial capital, human capital, housing wealth, and pension wealth.

Those working in the Financial Planning Performance Lab would add other forms of wealth to the equation, including business wealth, collectibles, hobby assets, and use assets. All of this may sound familiar to those following the development of zeta. Zeta is a measurement of financial planner value. Zeta can be used to assess how well a financial planner helps his or her clients manage the volatility of total household wealth.

It is quite exciting to see how quickly the financial planning landscape is changing and evolving. If you get a chance, read: “A New Chapter in Investing: The Total Wealth Framework Considers an Investor’s Financial Life” in Morningstar Magazine, February/March 2015, pp. 52-54.

Categories
Behavioral Financial Planning

Stress and Financial Planning Intention

The latest clinical study from the University of Georgia’s Financial Planning Performance Lab has been published in the Journal of Financial Therapy: http://newprairiepress.org/jft/vol5/iss2/2/

This paper shows a clear link between client arousal and planning intention and client financial anxiety and planning intention.

Categories
Wealth Volatililty

Latest Zeta Paper Posted

The latest paper on zeta from the Financial Planning Performance Lab is now posted on SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2549730

The intention of this study was to document how closely households follow normative descriptions of financial behavior in relation to their financial planning horizon. Modern Portfolio Theory predicts that households, in general, exhibit risk aversion. Aversion to wealth volatility should correspondingly be highest among those households with the shortest planning horizons. This study estimated percentage changes in wealth and wealth volatility over time categorized by financial planning horizon using data from the 2002 through 2010 waves of Health and Retirement Study. Modigliani ratios were computed for the entire population and by planning horizon. Zeta estimates were made by calculating the difference between the Modigliani ratios for each planning horizon and the ratio for the short-term horizon. Contrary to the conceptualized relationship between planning horizon and financial wealth volatility, results from this study show that respondents with the shortest financial planning horizons experienced lower risk-adjusted returns and greater wealth volatility. The findings of this study underscore an unmet and perhaps unrealized need for professionally provided financial planning.