Journal of Personal Finance Tools, Techniques, Strategies, and Research to Aid Consumers and Professional Financial Advisors Volume 7, Issue 2 The Official Journal of the International Association of Registered Financial Consultants
2 Journal of Personal Finance CONTENTS EDITOR’S NOTES .....................................................................................10 PRACTICE MANAGEMENT Identifying and Developing High Potential Leadership Talent ............13 John A. Ruggiero, RFC, CSA, Director of Operations Benson Botsford, LLC As a planner, you have choices to make as you approach retirement- an internal succession plan or a sale to a third party? The question we ask our clients should be the same question we should ask ourselves: Do you get better value selling to a partner or employee as part of your succession plan, or from a pool of qualified, competing peers who want what you have, as part of your transition plan? This article explains that succession planning is not a short-term strategy; it needs to start at least 5 years before the execution of the plan. This shouldn’t be a problem for an industry of professional planners, but ironically, it requires planning that too often doesn’t occur. This failure to plan is more an issue of the lack of planning tools than negligence. The tools provided in this article are applicable to your own transition plan and that of your clients. Equity Index Annuities .........................................................................34 ® ® Dr. Geoffrey A. VanderPal DBA, MBA, CFP , CLU, CFS, RFC , CTP President, Elite Financial Planning Group of America, Inc. The popularity of Equity Index Annuities (EIAs) during the past 5 years has provided an alternative to investors seeking a market-linked return without market risk. EIAs have various dynamic features that an advisor needs to fully understand to assure that it is the correct savings vehicle for a client. This article discusses the various features of an EIA and how to analyze them. Survivorship Life Insurance May Cost, Not Save a Family Money ......44 ® Benjamin A. Geber, CFP The Benjamin Financial Group, Inc. For high net worth clients, survivorship life insurance is often recommended as an estate planning tool. This article challenges that assumption by offering several other scenarios supported by alternative earnings and cost projec- tions. Survivorship life actually may not be the least expensive solution for meeting multiple estate planning issues. ©2008, IARFC All rights of reproduction in any form reserved.
Volume 7, Issue 2 3 RESEARCH & THEORY An Inter-fund Analysis of Bank Loan Mutual Funds ........................... 49 Kam C. Chan, Ph.D., CFA, Page Professor of Finance Department of Finance Gordon Ford College of Business Western Kentucky University Leo Chan, Ph.D., Assistant Professor of Finance College of Business Delaware State University William J. Trainor Jr., Ph.D., CFA, Associate Professor of Finance Department of Finance College of Business and Technology East Tennessee State University Although the issuance of bank loans has exceeded new high yield debt issues for the past 10 years, it is only within the last 5 years that the mutual fund industry has dramatically expanded into this sector. This study calculates the risk-adjusted performance of these mutual funds. Findings suggest there are major performance differences across funds as well as significant performance persistence among bank loan funds. For individual investors, results suggest investors should look for no-load funds in this category that have low expense ratios, high turnover, larger than average asset size, and a history of excess performance relative to the category average. Will a Deflating Housing Bubble Derail the Financial Plan? .............62 Michael Devaney Ph.D., MAI, CFA, Professor of Finance Donald Harrison College of Business The increase in house prices appears to have been accommodated by easy credit, a relaxation in underwriting standards and an increase in regulatory costs that has limited development in the least affordable metropolitan markets. Some economists predict that housing prices will continue to decline with the largest corrections occurring in markets that experienced the greatest appreciation. Declining prices could have serious implications for the financial plans of those nearing retirement.
4 Journal of Personal Finance Money Market Funds: Gross Returns, Net Returns And Expenses .... 71 ® Richard Kjetsaa, Ph.D., CFP , Professor of Economics and Finance Fairleigh Dickinson University Maureen Kieff, M.A., M.B.A., Assistant Professor of Quantitative Analysis Fairleigh Dickinson University Securities law regulations and the efficiency of money markets combine to render money market mutual funds as commodities, resulting in similar rates of return. Costs are the dominant factor explaining variation in returns. Inves- tors have a high probability of foretelling the best-performing money market funds by being alert to a critical signpost of identifying winners—funds that levy below-average financial intermediation expenses. Are Financial Education Programs Meeting the Needs of Financially Disadvantaged Consumers? .............................................. 84 Yunhee Chang, Ph.D., Assistant Professor University of Mississippi Angela C. Lyons, Ph.D., Associate Professor University of Illinois at Urbana-Champaign This paper uses data collected from a retrospective pre-test to investigate how participants’ initial levels of financial competency are related to the impact that financial education has on their level of financial competency following the program. Specifically, we compare program impact across participants with varying levels of financial competency prior to the program and examine whether the program is meeting the educational needs of those it was designed to target – namely, financially disadvantaged consumers. The findings show that the program benefited all of the participants and the greatest improvement in financial behavior was observed for those who reported lower levels of financial competency prior to the program. The findings offer important practical information to financial professionals and educators. BOOK REVIEW Credit Cards And The Law, 3rd Ed. .................................................... 110 Publisher: Oxford University Press, 2007 Author: Margaret C. Jasper Reviewer: John D. Cross, JD, MSFS, CPCU, CLU, Chfc Faculty—California State University, Fullerton University Of Phoenix— Online And Southern California Campuses ©2008, IARFC All rights of reproduction in any form reserved.
Volume 7, Issue 2 5 Financial Success For Young Adults And Recent Graduates—Managing Money, Credit, And Your Future .................. 114 Publisher: Rowman & Littlefield Education, 2006 Author: Janet C. Arrowood Reviewer: John D. Cross, JD, MSFS, CPCU, CLU, ChFC Faculty—California State University, Fullerton University Of Phoenix— Online And Southern California Campuses It’s Not About The Money: Unlock Your Money Type To Achieve Spiritual And Financial Abundance ................................................... 118 Publisher: Harpercollins, 2008 Author: Brent Kessel Reviewer: John D. Cross, JD, MSFS, CPCU, CLU, ChFC Faculty—California State University, Fullerton University Of Phoenix— Online And Southern California Campuses Retire Retirement: Career Strategies For The Boomer Generation ........................................................................... 122 Publisher: Harvard Business School Press, 2008 Author: Tamara J. Erickson Reviewer: John D. Cross, JD, MSFS, CPCU, CLU, ChFC; Faculty—California State University, Fullerton University Of Phoenix— Online And Southern California Campuses Journal of Personal Finance Guidelines for Authors ...................................................................... 126
6 Journal of Personal Finance SUBMIT AN ARTICLE TODAY! Practitioners, this is your opportunity to contribute to the profession by sharing your ideas and insights with others. Academicians, this is your opportunity to add to the body of literature in personal financial planning through a rigorous peer reviewed process. Our goal is to give every researcher, consultant/coach or practitioner the opportunity to share their expertise with others committed to financial planning! The Journal of Personal Finance is always accepting manuscripts and columns for publication in future issues. The Journal of Personal Finance is a unique, practitioner-oriented publica- tion– articles must have real-life implications to inform those practicing financial planning as well as those who are studying financial planning through research or in the classroom. Each issue features practice manage- ment articles as well as empirically-based academic research articles. Articles based on both qualitative and quantitative research methods are welcome. A blind peer review process is used to evaluate each manuscript. The Journal’s Research Policy Board is committed to publishing timely original contributions that offer readers personal financial planning tools, techniques, and strategies. Contributors are encouraged to submit papers corresponding to the following topic areas: 9 Client Relationship Management 9 Financial Planning Trends 9 Technology Issues 9 Planning for Special Needs 9 Regulation and Compliance 9 Ethics of Financial Planning 9 Practice Management Techniques 9 Planning Tools and Techniques 9 Financial Products, Features, Selection and Decision Management 9 Marketing Methods 9 Attitude and Behavioral Measurement 9 Book Reviews and Professional Opinions and Tips 9 Financial Planning Client Profiles/Cases for Instructional Use The audience for the Journal consists primarily of practicing financial planners, insurance advisors, other securities industry professionals, consultants, academicians, and students. Empirically-based research ©2008, IARFC All rights of reproduction in any form reserved.
Volume 7, Issue 2 7 submissions should provide a clear and useful description of the methodol- ogy and analysis, as well as a detailed discussion of findings that are directly related to practitioner implications and implementation. For a publication to survive, it takes the concerted efforts of those who are willing to write and to review. There are no paid journalists on staff!! Will you contribute? Volunteer to write a book review that would enable others to benefit from the author’s wisdom, even for those time-starved individuals too busy to read the entire book? Agree to write a short column on a practice management or client relationship “tip” that you could share with new or old practitioners or with students learning the craft? What research findings have implications for practitioners and the clients they serve? And, to every reader – what do you have to share? What have you personally been studying or observing that you would like to write about and share with others? To advance the profession of financial planning, it is important to promote successful practices both among seasoned professionals and newcomers. If you are a new author, or just thinking about the idea of writing for the first time, please feel free to contact Ruth H. Lytton, Editor [email protected] or 540- 231-6678 about your manuscript ideas. More information is available at http:/ /www.jpf.agecon.vt.edu/Index.htm.
8 Journal of Personal Finance JOURNAL OF PERSONAL FINANCE VOLUME SEVEN, ISSUE TWO EDITOR Ruth H. Lytton, Ph.D. RFC EDITORIAL COORDINATOR Jennifer King EDITORIAL ADVISORY BOARD Steve Bailey, RFC, LUTCF, CEBA Jerry Mason, Ph.D., CFP®, RFC HB Financial Resources Edelman Financial Services Christopher M. Becks, RFC Mike Massrock Strategic Financial Consultants, Inc. Western Reserve Life and ISI Joyce Cantrell Robert Moreschi, Ph.D., RFC Kansas State University Virginia Military Institute Michael S. Finke, Ph.D. Edwin P. Morrow, RFC, CFP®, CLU, Texas Tech University ChFC Charles Hatcher, Ph.D. Financial Planning Consultants University of Wisconsin Barbara O’Neill, Ph.D., CFP®, AFC, So-Hyun Joo, Ph.D. CHC, CFCS Financial Planning Standards Board, Rutgers Cooperative Extension Korea David Pankiw, AIF, RFC Karen Eilers Lahey, Ph.D. Spire Investment Partners, LLC University of Akron Anthony Sorrentino, RFC Rich Landsberg, RFC, J.D., LLM National Financial Services Nationwide Financial Services Philip J. Statz, RFC Mike Lemieux, RFC Insight Financial Group, Inc. U.S. Worldwide Financial Services, Inc. Patrick A. Strubbe, ChFC, CSA, RFC Jean Lown, Ph.D. Preservation Specialists, LLC Utah State University William J. Trainor, Jr., Ph.D. Burnett Marus, RFC East Tennessee State University Burnett Marus Associates Jing Xiao, Ph.D. University of Rhode Island Mailing Address: IARFC Journal of Personal Finance The Financial Planning Building 2507 N Verity Parkway Middletown, OH 45042 Web Site: http://jpf.agecon.vt.edu/Index.htm. © Copyright 2008. International Association of Registered Financial Consultants. (ISSN 1540-6717) ©2008, IARFC All rights of reproduction in any form reserved.
Volume 7, Issue 2 9 Postmaster: Send address changes to IARFC, Journal of Personal Finance, The Financial Planning Building, 2507 N Verity Parkway, Middletown, OH 45042 Permissions: Requests for permission to make copies or to obtain copyright permissions should be directed to the Editor. Certification Inquiries: Inquiries about or requests for information pertaining to the Registered Financial Consultant or Registered Financial Associate certifications should be made to IARFC, Financial Planning Building, 2507 North Verity Parkway, Middletown, Ohio 45042. Disclaimer: The Journal of Personal Finance is intended to present timely, accurate, and authoritative information. The editorial staff of the Journal is not engaged in providing investment, legal, accounting, financial, retirement, or other financial planning advice or service. Before implementing any recommendation presented in this Journal readers are encouraged to consult with a competent professional. While the information, data analysis method- ology, and author recommendations have been reviewed through a peer evaluation process, some material presented in the Journal may be affected by changes in tax laws, court findings, or future interpretations of rules and regulations. As such, the accuracy and completeness of information, data, and opinions provided in the Journal are in no way guaranteed. The Editor, Editorial Advisory Board, the Institute of Personal Financial Planning, and the Board of the International Association of Registered Financial Consultants specifically disclaim any personal, joint, or corporate (profit or nonprofit) liability for loss or risk incurred as a consequence of the content of the Journal. General Editorial Policy: It is the editorial policy of this Journal to only publish content that is original, exclusive, and not previously copyrighted. Subscriptions: The Journal of Personal Finance is mailed automatically to every U.S. member of the IARFC. Single Copies are available for $15 for non U. S. members, including postage. U.S. members, who wish to distribute additional copies for professional associates may purchase multiple copies for $10 each. Annual Subscriptions, for issues, are $55 U.S. and $68 non U.S. Send subscription requests and payment to: IARFC Journal of Personal Finance The Financial Planning Building 2507 N Verity Parkway Middletown, OH 45042
10 Journal of Personal Finance EDITOR’S NOTES Whether you are a seasoned professional or recent graduate seeking your first job, you may be asked to complete a psychometric test. Or, if you are considering growth within your firm, you may want to consider the costs and benefits of a more extensive assessment beyond your current hiring protocols. Psychometric tests include a variety of assessments that measure knowledge, abilities, attitudes, and personality traits. As background, consider the Big Five constructs that are common to nearly all personality and psychological tests. They include openness, conscientiousness, extraversion, agreeableness, and emotional stability (or neuroticism). Regardless of the perceived success of the interview process or the applicant’s credentials, those who adhere to the benefit of these assessments rarely proceed against the results. The assessments described below are commonly used by financial professionals, although the wirehouses and broker-dealers may prefer others, and frankly, an analysis of your handwriting is not out of the question! What follows is a very brief description and some insight into what the potential employer may be hoping to discover about your personality, typical behav- ioral responses, or competencies. Caliper. The Caliper approach is based on the principle of “job matching,” with the applicant’s personality profile of strengths, limitations, motivations and potential compared to a “standardized” profile of success for the position. The latter profile is generated from the Caliper Profile database of needed qualities for position success as well as firm-specific data on the culture, management style and job responsibilities. The Profile assesses 25 personality traits, and results may be used for hiring selection, individual and team performance coaching, and team building. The assessment takes about 90 minutes to complete on paper on on-line. Globally, over 2 million assess- ments have been conducted. The Caliper Predictor assesses an applicant’s personality relative to a successful profile associated with nine Job Families. The employer, in conjunction with Caliper consultants, develops a job profile that is matched to one of the nine, which is then used for applicant comparisons. Results from the 30-minute assessment are interpreted on a Position Fit index, which compares the applicant to a profile for position success. The Caliper First Step for Sales or First Step for Service assessments are used to screen applicants for the basic personality traits required for success in sales (particularly the insurance or auto industries) or service, respectively. To learn more, visit http://www.caliperonline.com/aboutus.asp. DiSC. Reportedly influenced by the work of Carl Jung and originally developed by William M. Marston and most recently interpreted by Dr. John Geier, this behavioral assessment profiles an individual on the dimensions of Dominance, influence, Steadiness and Conscientiousness. Based on four recognized dimensions of behavior, Dominance relates to control, power and assertiveness, while influence explains behavioral styles related to social situations or communication. Steadiness, originally denoted by submission, ©2008, IARFC All rights of reproduction in any form reserved.