The Economic Benefits of Personal Financial Planning: An Empirical Analysis

AbstractPrior research has attempted to value the component services that may be included in a personal financial plan on a theoretical level. This research attempts to measure how those component services are actually valued by consumers based upon a national survey of consumers. It clearly shows that the various financial planning services are valued quite differently by consumers as a whole. In addition, these services are valued differently by different consumer groups. The article concludes that these finding could be used to tailor the services planning firms provide and those they emphasize in their marketing efforts. © 2012 Academy of Financial Services. All rights reserved.JEL classification: D12; D14; D90; G20; M31Keywords: Personal financial planning; Household finance; Consumer value; Economic benefits1. IntroductionFinancial planning services are provided by a wide variety of firms ranging from very large financial service companies to one-person boutiques. This range of provider types has an equally wide variety of compensation methods, ranging from commission based-firms to fee-only firms and firms with mixed compensation methods. As Warschauer (2008) notes: "One can only assume that the charge for financial planning services is based upon either a 'cost plus' or 'what the traffic will bear' mental computation. This is so because there has been little attempt to evaluate the economic benefits that an individual or family may receive by completing the financial planning process. " It is apparent that planning firms are only vaguely familiar with consumer attitudes regarding how consumers value a comprehensive plan, let alone the value of the component advice a comprehensive plan offers.The previously cited study divided services provided by financial planners into one of four valuation categories: those that have positive net present value effects, those that have quantifiable and insurable risk-reduction effects, those that have risk-reduction effects that are not insurable, and those that have purely emotional or psychological effects that result in positive utility improvements. Table 1, above, summarized from the 2008 study, lists a number of typical recommendation areas that might be contained in a financial plan.There has been relatively little discussion of the value of financial planning services in the literature. Hanna and Lindamood (2010) determine the primary theoretical model in this area. They divide the benefits planners provide into three areas: increasing wealth, preventing loss, and smoothing consumption. They "discuss and then reject the possibility of using survey data to obtain valid estimates of the benefits of financial planning advice. " Using primarily utility analysis they conclude that risk-averse and high net worth individuals should find financial planning services most valuable.Bae and Sandager (1997) review past surveys on consumer perceptions of value in financial planning services and report the results of their own survey estimates of value. Their study is institutionally based, that is, they divide financial planning services by the primary financial institutions providing consumers with financial advice. They list these services in a format that is consistent with that view of the representative institutions. For example under "insurance" services they list "provide risk management services; sell insurance policies . prepare reports, maintain records . help policyholders settler insurance claims . " In other words, the authors viewed financial planning services through the lens of a composite of services provided by the financial services industries rather than specific financial planning services.There have, in fact, been a number of studies related to the issue of who serves as the preferred providers of financial planning services. The triennial Survey of Consumer Finances (SCF), has asked questions of where consumer participants have sought services. …