2020 Academic Research Colloquium for Financial Planning and Related Disciplines

List of Accepted Paper Presentations

Does working with a financial advisor reduce financial anxiety and increase investment confidence

Matthew Sommer – Kansas State University
HanNa Lim – Kansas State University
Maurice MacDonald – Kansas State University

The purpose of this paper is to investigate whether working with an advisor decreases financial anxiety and increases investment confidence. Using data collected from 1,005 U.S. households, we found no evidence that working with an advisor impacts anxiety; however, strong evidence was found that investor confidence increases. Further, couples that make decisions jointly were found to have significantly more investment confidence than couples where one partner makes decisions alone. These findings highlight an additional benefit advisors provide to their clients, and a compelling reason for couples to consider making financial decisions jointly.

Rating a Robo-Rater
David Nanigian – California State University, Fullerton

Since 2011, Morningstar has issued Morningstar Analyst Ratings on many of the largest mutual funds in the USA. In June 2017, Morningstar launched the Morningstar Quantitative Rating™ to provide a forward-looking rating on all mutual funds. Morningstar uses a “robo-rater” machine learning model to assign Morningstar Quantitative Ratings. However, the “robo-rater” cannot utilize the complete set of information available to Morningstar’s analyst as it cannot process “soft information”. The purpose of this study is to evaluate if and how this “robo-rater” is conducive to mutual fund selection. I find that the only value of the “robo-rater” is in its assessment of mutual fund expenses and that its inability to process “soft information” makes the Morningstar Quantitative Rating™ much less useful than the Morningstar Analyst Rating™.

Removing the Fine Print: Standardization, Disclosure, and Consumer Loan Outcomes
Sheisha Kulkarni – University of California – Berkeley
Santiago Truffa – Tulane University
Gonzalo Iberti – SBIF

Consumers face a choice when evaluating financial contracts: study the fine print and incur a cognitive cost or ignore it and risk costly surprises in future. We use a pair of policy changes in Chile to contrast two measures to protect consumers from fine print: the first improves disclosure and the second standardizes and regulates contract features. With administrative data from the banking regulator on consumer loans, we use a regression discontinuity design to estimate the casual effects of these regimes. Consumers offered standardized contracts experienced 40% (14.4 percentage points) less delinquency. Using a difference-differences design, we find that sophisticated borrowers are helped most by increased disclosure, while unsophisticated borrowers benefits more from product standardization. Additionally, we show that only sophisticated borrowers—who benefit from the informational disclosure treatment—leave less “money on the table.” We contextualize these results in a stylized model that predicts that financially sophisticated will benefit from disclosure while unsophisticated borrowers will benefit from standardization based on differentials in the cost of studying.

A Structural Model of Mental Accounting
Nick Pretnar – Carnegie Mellon University

We construct and estimate a formal economic model of mental accounting where utility maximizing consumers facing rationality constraints infrequently update their desired expenditure budgets for different categories of consumption. We use latent Bayesian inference to estimate the model on a unique dataset of consumer-level weekly consumption expenditure in order to infer mental accounting decision variables. Our formulation reconciles the variability of observed high-frequency consumption expenditure patterns. We find that consumers optimally re-evaluate only about 25% to 50% of their expenditure budgets each period, providing empirical evidence that consumers regulate their expenditure behavior with mental accounting heuristics. Compared to two separate models where consumers face no cognition frictions or engage in full, sticky mental accounting, the model with both consumer- and time-dependent heterogeneous rationality constraints fits the data best. Counterfactually, we find that implementing policies which encourage consumers to stick with weekly expenditure budgets leads to, on average, higher savings rates and welfare improvements.

Generous to a Fault: The Effect of Generosity of Employers Retirement Plan Contributions on Leakage from Cashing Out at Job Separation
Muxin Zhai – Texas State University

Pre-retirement leakage is any form of withdrawal from 401(k) balances before the age of 59.5. The US government imposes a 10% tax penalty on leakage to discourage it. We investigate the impact of employer matching contributions on leakage at job termination. Adding a matching contribution or increasing the generosity of the match is aimed to incentivize participation and increase employees’ contribution rates. However, the matching scheme may also induce people to frame retirement assets differently according to the contribution proportion between themselves and their employers. We suggest that people are likely to view assets with a larger proportion contributed by themselves as “untouchable” retirement savings and those with a larger proportion contributed by employers as “fungible rainy day” fund. As a result, a generous matching plan aimed at increasing participation and contribution rates may induce unintended consequences of a higher leakage rate at job termination. Using a unique data set with 597,980 employees covered by 29 retirement plans, we find that 38% employees engaged in leakage at job termination and that those who leak a part of their retirement savings out at the time of job separation eventually drain the entire account. The likelihood of this cashout path is affected by the proportion of 401(k) assets contributed by an employer through the employer match. A 50% increase in matching rate would be associated with 14.5% (or 4.9 percentage points) increase in leakage probability at job termination. However, there would be 3.5% (or 1.2 percentage points) reduction in leakage probability if employees ignore the extra incentive for leakage generated by the composition effect.

Estimating Willingness-to-Pay for Financial Planning Services
Wookjae Heo -South Dakota State University

The purpose of this study is to use a survey to estimate consumers’ willingness to pay (WTP) for financial planning services. The WTP was measured using Double Bounded Dichotomous Choice (DBDC) that presumes how much a consumer is willing to pay based on the contingent valuation provided. The findings of this study show whether or not a consumer’s WTP is well-matched with the market price of financial planning services. By estimating the WTP, this study contributes to the literature. These findings suggest a different level of perceived importance and a need for financial planning services between the total sample and the subsample. Thus, financial planners can note the factors related to the marginal effects of the WTP to identify the underserved segments of their clients and then serve them better. These findings may have implications about the need for financial planning services at more diverse price levels if a price gap between the markets and consumers is found.

Bigger is Better: Defined Contribution Menu Choices with Plan Defaults
Michael Finke – The American College

Prior studies of core menu size find that fewer available core menu investments improve employee participation rates by reducing choice overload. Today’s plans often opt employees into high-quality investment defaults. Increasing the number of investments on a core menu may encourage less experienced investors to remain in the default, and may benefit participants who prefer to customize their own portfolio. Using data from over 500 defined contribution (DC) plans with over half a million participants where core menus vary between approximately 10 and 30 investment options, we find that acceptance of the default investment option increases by approximately 1% for each additional fund in the core menu. Portfolio efficiency increases among participants self-directing their accounts in plans with larger core menus because the number of average holdings increases with plan size, resulting in more diversified portfolios. Our results provide evidence that small plan menus encourage participants to move away from the default, and fewer investment options result in less efficient portfolios for self-directed participants.

The Relationship Between the Ownership of Insurance Products And Retirement Satisfaction
Hossein Salehi – California Lutheran University

Millennials’ Adoption of PFM Technology and Subsequent Financial Behavior
Brian Walsh – Kansas State University

This paper leverages the Technology Acceptance Model to analyze the factors that influence personal financial management technology (PFM) adoption among millennials and extends the analysis to understand how PFM adoption influences subsequent financial behavior. Data from the 2018 National Financial Capability Study was used for this analysis. Evidence suggests that millennials engaging in digital side hustles, such as Uber or Lyft, are significantly more likely to adopt PFM technology. Individuals experiencing higher financial pressure or exhibiting higher financial confidence are more likely to adopt PFM technology. After extending the analysis to include subsequent financial behavior, heavy adopters of PFM technology are more likely to own an emergency fund, payoff their credit card in full every month, own a retirement account, own an investment account, save for retirement, and own a will. Surprisingly, heavy adopters of PFM are also more likely to spend more than they earn and experience overdrafts.

Husbands Remain the More Financially Knowledgeable Spouse in Wealthy Households
Sherman Hanna – The Ohio State University

This study examines the question of who is considered the financially more knowledgeable spouse among mixed-sex married couple households, using being the respondent as the indicator of being more financially knowledgeable. The husband was the respondent in 56% of mixed-sex married couple households in 2016, which was a higher proportion than in 1992. In 90% of households in the top 1% of net worth, the husband was the respondent, a striking result given the progress women have made in education and other aspects of society. Our logistic regression on whether the husband or wife was the respondent showed a strong effect of the spouse with more education being the respondent, consistent with respondent status indicating greater financial knowledge. The likelihood of the husband being more knowledgeable increased with net worth and with husband’s education. We explore issues related to this extreme disparity in assessment of relative financial knowledge for wealthy households.

Revisiting Gender and Investor Overconfidence
Dominik Piehlmaier – University of Wisconsin

This paper assesses the impact of gender on investor overconfidence by considering the constituents of decision-making within this process. It differentiates between consumers who make their investment decisions independent of others and those who seek outside advice. Within the group of isolated decision-makers, women appear to be at least as overconfident in their financial knowledge as men. This implication holds across four independent datasets with more than 9,000 consumers. The causality of this claim is supported by a simple randomized controlled trial. The finding can consolidate previously reported conflicting evidence regarding the impact of gender on the cognitive bias. In addition, the paper provides a coherent and detailed account of one of the most commonly used demographic variables in empirical marketing research and its impact on consumer financial decision-making. It encourages community discussion about the role of femininity and masculinity in excessive confidence in consumer behavior. Lastly, the paper offers a feasible alternative to gender as a proxy for investor overconfidence and holds important implications for employment brand managers and marketers in finance.

Using Behavioral Prompts to Improve Saving and Investing Decisions
Vickie Bajtelsmit – Colorado State University

The objective of this research is to enhance understanding of the behavioral biases that may adversely impact younger generations’ financial outcomes.  Research based on national survey data suggests that differences in overconfidence, financial literacy, risk preferences, and present bias all impact saving and investment decisions.  In an incentivized laboratory experiment, subjects make investment and asset allocation decisions over a meaningful time horizon.  We test the efficacy of alternative behavioral prompts to motivate optimal saving decisions. Specifically, we consider the effects of invoking the future self, setting goals in advance, and provision of advice.  A major contribution of this research is that we assess the impact of various interventions while controlling for idiosyncratic time preferences, risk tolerance, overconfidence and financial literacy.

Development and Validation of a Scale to Measure Consumer Banking Competence
Ivo Gyurovski – Hampden-Sydney College

Americans are struggling with personal finance management. This manuscript documents the development and validation of a Consumer Banking Competence Scale (CBC), conceptualized as exercising self-control in the management of personal finance. Lower scores indicate poor finance management, and high scores indicate prudent finance management. Indices of internal consistency, test-retest reliability, construct, and criterion validity demonstrate that the CBC scale performs well as a trait measure. Analyses distinguished the CBC from related constructs. Significant and positive correlations were established among the CBC measure, FICO credit scores, general income, income from investments, and income from capital gains. Focusing on two applications, the CBC fully mediated the relationships between financial literacy with income and creditworthiness. Second, being a more competent consumer of banking products was associated with unique contributions to better physical health, lower BMI, more sleep per night, better healthcare practices, and less perceived stress, above and beyond what we may expect from predicting these variables with socio-economic status, self-control, and time discounting. The findings are discussed in the context of efforts for financial education and the benefits of personal finance management on health.

Left Behind: Partisan Identity and Wealth Inequality
Da Ke – University of South Carolina

Using longitudinal household data, I document that Democrats are less likely than Republicans to invest in the stock market under Democratic presidencies, precisely when stock market return is substantially higher. This pattern contains even for college-educated and financially sophisticated individuals, and is best explained by their partisan identity. Moreover, the gap in stock market participation between Democrats and Republicans accounts for about half of their discrepancy in wealth accumulation over presidential cycles. A profound implication of these findings is that rising political polarization in the U.S. may be fueling wealth inequality.

Factors Associated with Having Used a Robo-Advisor
Timothy Todd – Liberty University

This study investigates the characteristics of investors that have used an automated investment solution (e.g., a robo-advisor). We use combined data from the 2015 National Financial Capability Survey and the follow-up 2015 Investor Survey to investigate the use of robo-advisors among 1,600 individuals with non-retirement investment accounts. Multivariate results indicate robo-advisor use is associated with being younger, having middle to low incomes, and having lower objective investment knowledge. This study provides important insight for policymakers, financial practitioners, and proprietors of robo-advisors and other fintech products.

Advertising Exposure and Investor Attention: Estimates from Super Bowl Commercials
Gabriel Buchbinder – Princeton University

Product advertising captures the attention not only of consumers but also of investors. Constructing a new measure of local investment interest on stocks from Google searches and using the Super Bowl as an experiment, we study the effects of advertising expenses on investor attention. We find that the post-game Monday attention of investors in areas with high viewership increases significantly for both local and non-local companies that air commercials. Non-local firms with high advertising exposure in a region attract more interest than local firms with low exposure, suggesting that advertising has a stronger impact on investor attention than local bias.

A New Measure of Investor Risk Aversion
John Grable – University of Georgia

This paper introduces a new measure of investor risk aversion. The single-item question combines elements from traditional constant relative risk aversion estimation procedures with aspects from propensity measurement techniques. Based on pilot test data, scores from the new test were found to correlate with others measures of risk aversion. Additionally, in line with the risk-assessment literature, men were found to exhibit less risk aversion than women. The simplicity and intuitive nature of the question make this a potentially valuable addition to an investor’s and/or financial planner’s toolkit. Based on these initial results and conclusions, a larger survey of investors is in process. Results from the data collection process will be presented at the conference.

The Effect of Mortality Salience on Asset Decumulation Decisions
Yi Liu – Texas Tech University

Standard life-cycle economic theory suggests that people should spend down assets during retirement at a rate maximizing their lifetime consumption. However, actual retiree behavior exhibits asset decumulation at much slower rates, not at all, or even continued accumulation. One potential factor is that decumulation requires personal mortality estimations. Previous research finds that personal mortality reminders (1) are aversive and (2) increase focus on impacting those who will survive. Correspondingly, recent research has found that (1) annuity purchases are reduced due to associated personal mortality reminders and (2) mortality reminders increase relative preference for annuities that pay less income but provide a greater bequest provision. This study investigates whether mortality salience will also influence the broader issue of an individual’s asset decumulation decisions in retirement. Using a randomly assigned experimental test, we find that increasing mortality salience increases the desire to retain assets in retirement, reducing the preferred spending rates in retirement. Understanding the role of mortality salience on decisions about asset decumulation in retirement can be beneficial to academic researchers and financial planners

Does subjective cognitive functioning help to describe the financial behavior of older adults?
Su Hyun Shin – University of Utah

This study investigates the impact of subjective cognitive functioning on financial asset holdings and allocation of older adults. The results show that higher subjective cognitive functioning affects the amount and share of some assets held by them, but this effect disappears when objective cognitive functioning is considered. While subjective cognitive functioning cannot predict asset holdings and allocation, higher objective cognitive functioning leads to a greater share in IRAs and a smaller share in cash-equivalent. These results are robust after controlling for risk aversion and a planning horizon and after using a different instrumental variables approach.

Consumer Perceptions of Financial Advisory Titles and Implications for Title Regulation
Derek Tharp – University of Southern Maine

Many professionals in the financial services industry refer to themselves as financial advisers despite tremendous variation in business practices, compensation methods, and duties to act in the best interest of their clients. As a result, both the Securities and Exchange Commission (SEC) and state securities regulators have recently considered title regulation aimed at promoting consumer clarity. However, there is little empirical evidence to inform how consumers actually perceive the use of such titles. This study examines consumer perceptions via a survey of US consumers conducted using Amazon’s Mechanical Turk (n = 665). Findings suggest that consumers perceive common industry titles as different from one another in a manner that is consistent with the differentiation of advice professions (e.g., financial adviser, financial planner, financial consultant, investment consultant, investment adviser) from sales professions (e.g., investment salesperson, stockbroker, life insurance agent). Implications regarding the potential efficacy of proposed regulatory frameworks are discussed.

Racial Demographic Factors Associated with Financial Planner Use
Miranda Reiter – Kansas State University

Financial help-seeking behavior and life satisfaction among the U.S. elderly: The Roles of Personality, Cognitive Ability, and Risk Tolerance
Lu Fan – University of Missouri

This paper used a nationally representative longitudinal dataset to examine the roles of personality, cognitive ability, and risk tolerance when seeking financial advice among the elderly households. Additionally, this paper also examined whether professional financial advice is associated with life satisfaction and quality of life in old age. The results confirm the key research hypotheses of this study and indicate that extroversion is negatively associated with seeking professional financial advice, whereas cognitive ability is positively associated with seeking financial advice. Additionally, receiving professional financial advice is positively associated with life satisfaction among the elderly households. The policy implications that emerged from the key findings of this study have been discussed. Implications for financial planners and counselors are also included.

Financial Aliteracy: Measurement and Connection to Financial Behaviors and Economic Pressure
Isha Chawla – Iowa State University

Based on results from the 2015 National Financial Capability Study (NFCS), an increasing number of families in the United States are experiencing acute economic pressure which has been linked to negative family outcomes. Previous research has identified that overconfident household financial decision makers were more likely to exhibit poor financial decisions, however, the connection between financial self-efficacy, family economic pressure, and financial behavior needs further exploration. The purpose of this study is to add to the work in financial confidence and financial self-efficacy through examination of both over and under estimation of personal financial capability and its link to family economic pressure and financial behavior. This study employs the 2015 National Financial Capability Study (NFCS), a nationally representative sample of 27,564 Americans, to measure household decision-maker confidence levels and identify links to measured family economic pressure and financial behavior. The study falls under the framework of the Family Stress Model (FSM). Overall findings suggest that individuals with less confidence in their own level of financial knowledge, irrespective of their real level of financial literacy, are more likely to exhibit unhealthy financial behaviors and experience higher levels of economic pressure. Findings from this study, especially the role of underconfidence, have implications for financial literacy researchers and practitioners of family financial planning.

Fintech Nudges: Overspending Messages and Personal Finance Management
Sung Lee – New York University

Using large proprietary money management app data from a major commercial bank in Canada, I study how the app users manage their personal finance upon seeing an overspending message on the mobile app. First, I find that the message recipients reduced spending on the following day by C$8.15, which corresponds to 5.4% of their daily average spending, compared to the non-recipients. Second, these fintech nudges had temporary effect on flow spending and resulted in permanent reduction in cumulative spending. Third, the effects are especially pronounced for the users who are older, have higher liquid wealth, are more finance-savvy, are new to the app experience, or reside in a city with a higher fraction of educated population. Fourth, I find suggestive evidence that these effects could spill over from one app user to another in the same household. On the other hand, the message recipients were less likely to monitor their accounts via log-ins afterward, which is selective inattention known as the ostrich effect.

Financial Literacy and the Use of Financial Advice—A Non-monotonic Relationship
Ning Tang – San Diego State University

Professional advice is considered one remedy for financial management inefficiency resulting from financial illiteracy. However, empirical results based on 2015 National Financial Capability Study data suggest that financial advice may not necessarily serve as a substitute for financial literacy. We find that the propensity of individuals to consult financial advisors initially increases and then decreases with financial literacy level (a non-monotonic hump-shaped relationship), while the propensity for delegating investment decisions to financial advisors decreases monotonically with financial literacy. These results are robust to potential endogeneity. We develop a theoretical model in which individuals have incomplete information regarding advisor quality to explain our empirical findings. By simultaneously considering both incentives for and hurdles to investor use of financial advice—both consultation and delegation–the model successfully predicts the non-monotonic effect of financial literacy on the likelihood of consulting a financial advisor. Policy implications of the findings are discussed.