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The Use and Value of Financial Advice for Retirement Planning

Offering professional advice around the retirement planning process represents an important component of the financial services industry. The authors examine the demographic, investment, and behavioral characteristics of individuals who obtain this advice as well as the economic value that it ultimately adds. Using a survey of more than 4,000 working households, they find that wealth and income levels are positively correlated with the decision to engage a professional advisor, as are factors such as marital status, age, and education level. To assess the value added by this advice, the authors develop a unique metric of retirement income replacement that incorporates health-based life expectancy and household-specific financial circumstances. The approach estimates the percentage of annual pre-retirement income that a household will be able to spend each year in retirement. The authors establish the unconditional finding that advised households generate significantly larger proportions of post-employment spending (both gross and net of Social Security benefits) than do nonadvised households. Controlling for additional explanatory factors, we find that an advisor adds more than 15 percentage points of income replacement in retirement. These findings support the conclusion that obtaining and implementing financial advice in the retirement planning process leads to a demonstrable increase in the level of sustainable retirement spending. TOPICS: Retirement, quantitative methods, portfolio construction Key Findings • Households using financial advisors, on average have higher incomes, and are wealthier, married, more highly educated, more confident in their retirement planning, and more disciplined in their financial process. • A new metric to quantify the value of financial advice is developed focusing on retirement income replacement and incorporating health-based life expectancy and household-specific financial circumstances. • Regression and nearest-neighbor matching methods to control for confounding variables both indicate a significant lift of approximately 15 percentage points in the retirement income replacement score resulting from the use of a financial advisor.