Financial Planners Versus Financial Advisers: Are Households better off?

There’s an expectation that households with access to financial advice would make better investment-based decisions compared to similar households without access to financial advice. These decisions are generally related to when they want to retire, how much they save for retirement and how they invest their retirement savings.

However, there’s research1 that calls this into question. It shows the potential value added by financial advisers to such households is limited or that households with financial advisers do not fare any better. The findings appear mixed; while financial advisers can add significant value for clients, the research suggests investors using financial advisers are no better off – or even worse off when taking fees into account – than those without financial advisers.

There appears to be a dearth in empirical evidence on decision-making for households with financial advisers. This is possibly because most of the empirical evidence is investment focused and ignores issues like savings rates and life insurance. Financial planners are also not acknowledged for the role they play in a customer’s retirement journey and get lumped with “financial advisers” in general empirical research.

The research, which is based on the survey of consumer finances (between 2001 and 2016), explores how household decision making in five categories (saving habits, emergency savings, life insurance coverage, portfolio risk level and revolving credit balances) compares across transactional financial advisers, financial planners, friends and the internet as sources of information.

Households working with financial planners were found to be making the “best” financial decisions overall as well as from four of the five categories considered; households working with a transactional adviser were said to make the “worst” financial decisions. It should be noted that selection bias is a potential issue with the results, as the decision to work with a financial planner is a positive indicator of financial decision-making and potentially endogenous to the variables considered. The research findings appear to suggest financial planners add the most value among the information sources considered, especially compared to transactional advisers.

When considering financial soundness, households using financial planners came in first, followed by those using the internet. This is despite the fact the internet has grown as the primary source of information for households (3% in 2001 to 40% in 2016) as well as its low cost. Better outcomes among households using the internet have however been declining (between 2001 and 2016) so it’s hard to tell if this will be sustained in the future.

Financial advice and financial advisers differ, so the expectation that the value of advice would be the same is not necessarily true. Also, because the research doesn’t control for the type of advice given, the results could be potentially biased. Financial advisers do have the potential to add value. From an investment perspective, investors could be worse off by the disposition effect. This effect can be mitigated by financial advisers, by making their clients aware of its existence or by the adviser taking discretion of the account.

Households with financial advisers tend to have higher incomes, be older, more educated and more financially literate. They also have a higher tolerance for risk. Being financially savvy is also seen as a determinant for very good financial planning. So, from an empirical perspective, controlling for the demographics of the household played an important part in the research. The empirical benefit associated with working with a financial adviser was hard to identify, because it’s not random and is potentially endogenous to the outcome variable being considered. For example, a financially savvy individual decides to hire a financial adviser to help make better financial decisions. How do we then distinguish what the impact would have been had the adviser not been hired? (Correlation does not imply causation).

Apart from investment areas, there’s also empirical evidence and theoretical research that has explored the benefits of financial advice in areas such as life insurance, debt management, tax assessment and emergency fund management. This empirical research suggests financial planners could help clients focus on long-term goals by reducing the concern in the short-term about volatile markets. Working with financial planners also helps to improve savings and financial habits.

It should be noted that most of this research doesn’t control for selection bias. Some of the research which controlled for simultaneity bias and reverse causation found no statistically significant difference in self-reported retirement savings or short-term growth in retirement account asset values for those using a financial adviser. Meeting with a financial adviser is however associated with calculating retirement needs, setting long-term goals, retirement account diversification, retirement confidence and higher levels of savings in emergency funds. (However, the empirical evidence on the value of working with a financial adviser is weak for many reasons – e.g., identification, misaligned incentives and lack of general ability).

If we consider incentives as an example, depending on the areas explored, some of the research has suggested that fee sharing alters the incentives of brokers and could be harmful to investors when their incentives are not aligned with those of their clients.

In determining households’ sources of financial information in the research, the Survey of Consumer Finances (SCF) was used. It asks the respondent the specific question about the source of financial information (newspapers, magazines, material in the mail, internet, radio, television, friend, lawyer, accountant, financial planner). The response to this question was used to determine the household’s source of financial information. Where multiple sources were provided, the first response was assumed to be the primary information source.

Figure 1

From the chart, the internet appears to be overtaking the “friends” and “other” sources of financial information since 2001. The suggestion is that households who may have asked a (relatively unsophisticated) friend a financial question previously are increasingly going online to find answers to their financial questions. Internet usage growth has been relatively the same across age groups in this dataset.

The percentage of households using a financial planner increased over the study period – from 10% in 2001 to 18% in 2016, while the percentage of users of transactional advisers remained relatively unchanged. Approximately 34% of households used either type of financial adviser—a financial planner or a transactional adviser—over the entire period.

Establishing if households make sound financial decisions is subjective. The analysis in the research focused more on the decisions of households (the process), versus more outcome-oriented variables (such as wealth/savings levels). By focusing on household decisions, the potential issues associated with reverse causality were reduced. This is because clients with more wealth become appealing to financial advisers and it then becomes difficult to determine the financial adviser’s role regarding wealth creation. Also, having more wealth doesn’t inevitably mean the household makes optimal financial planning decisions.

The survey was limited to households that were assumed to be interested in considering financial advice, as well as those that would consider guidance among the five areas under consideration. For inclusion, respondents must have been between ages 25 and 55, the household must have had at least $5,000 in financial assets and retirement assets (these assets are not mutually exclusive), the household had to have wage income and normal wage income above $25,000 annually (again, these definitions are not mutually exclusive). These filters created a dataset not representative of the entire U.S. population, but reflected a group of investors who would potentially be interested in working with a financial adviser.

Let’s revisit the five categories considered for the analysis earlier: portfolio risk appropriateness, savings habits, life insurance coverage, revolving credit card debt, emergency savings.

For portfolio risk appropriateness, the analysis considered if the household’s retirement assets were invested in a portfolio with a risk level that would be considered prudent, considering the respondent’s age. The equity level of retirement assets (DC pension account (401k), Individual Retirement Account (IRA) was determined and compared with an index based on the respondent’s age, while assuming a retirement age of 65.

On savings, the analysis was focused on the household having a savings plan in place. For this analysis, once the household had some type of savings plan, it was regarded as having good savings habits. The focus was “savings habits” and not “the amount of savings” in order to simplify the study. The other three areas – insurance, credit card debt and emergency savings – explored having face-value life insurance at least equal to total wage income of household, have revolving credit card debt at the end of the month and having adequate emergency savings respectively.

Each household in the SCF had five observations. Each of the five tests were conducted for each observation resulting in 25 total tests for a household. To get a “pass rate” for each area, the results of the test for each observation were combined. Pass rates ranged from 0% - 100%. Scores at the individual area levels were then averaged to get the total financial soundness score for the household. Control variables (for example total financial assets) were also created using observation weights to make each household have a single set of values.

Most of the tests (except for “savings habits”) had approximately a 50% pass rate. To ensure dispersion in each domain across households (that is, households were not passing or failing for a given domain) was somewhat intentional. That only approximately half of households passed each test suggests there’s a large potential benefit for financial advisers to help households make better financial decisions.

The empirical research shows that working with a financial adviser could result in better outcomes, in addition to research that suggests financial advisers could make some households worse off. But are these two outcomes compatible? Is it possible a financial adviser can help and hurt their clients at the same time? This result is because of the unclear description of the term “Financial Adviser.” Financial advisers provide significantly different services and advisers can be compensated in different ways. This diversity is problematic when researchers have attempted to empirically determine what constitutes “value” in financial advice.

The conclusion from the research is that financial advisers who practice as financial planners have a more useful effect on households, when compared to financial advisers that are more transactional by virtue of their business model. It should not however be implied that financial advisers cannot provide value. The important point to remember is the services offered to the client is what matters and how the client views the nature of the relationship.

Financial planning is much more useful to a client in fulfilling their objectives rather than a focus on selling a financial product. Helping clients accomplish goals typically requires more than just selling a product, such as a mutual fund or annuity—it requires a financial plan with ongoing management. Financial advisers that provide these services are not likely to be described as transactional in nature; rather they are likely be described as financial planners.


  1. Financially Sound Households Use Financial Planners, Not Transactional Advisers - David M. Blanchett, Ph.D., CFA, CFP (A U.S. study).
Toyosi is the Pension & Technical Consultant at Timelineapp. His experience is in Financial Services and consulting (“Big-4”). Toyosi has the IMC qualification and is a member of the CFA Society of the UK and the Chartered Insurance Institute. Toyosi is one of our content contributors and is often writing articles on retirement and the sustainable withdrawal framework.


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