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Economic Benefits From Financial Planning

By Joel Redmond, CFP®

A recent article in Investment News highlighted financial planning as one of the five most desirable professions, citing high pay, low stress, and job security as three of the top reasons. The article can be found here. What the article didn’t stress is the most important aspect of financial planning: the satisfaction planners have in helping their clients.

Countless reports in the financial and even in the popular press have discussed this satisfaction, whether quantitatively or qualitatively: emotional relief at helping a client navigate a job loss, a situation in which a family member needed nursing home care, or a need to retire from a 40-year career without having to worry about the future. Successful financial planners are replete with these vignettes, and the best of them will say they were merely doing their jobs in such situations.

It is undeniable that a competent financial planner can greatly improve a client’s financial life. What about the ripple effects of financial planning, though? Does the planner’s work with such a client have any lasting effect on the nation as a whole? Let’s examine this question, using some analysis crude enough to make most economists uncomfortable, but sound enough to help us look at the facts.

The Value of Financial Planners

Without using a great deal of number-crunching, let’s look at a common sub-sector of financial planning: retirement planning. The basic goal of retirement planning is to help someone retire at a given age, for an unknown but estimated period of time, on a steady income. We look at two workers: Worker A and Worker B.

Worker A and Worker B are alike in age, salary, and assets. The only difference between the two is that A has a financial planner and has been encouraged to save more, and B hasn’t. Let’s assume that because of this, at retirement, A has $100,000 more than B does in retirement savings. Now, most people would look at this situation and realize the obvious benefit: A is wealthier than B. But what impact does this have on the entire economy as a whole?

Economists tell us that there are four main components that go into GDP – Gross Domestic Product. They are:

C – consumption

I – investment

G – government costs

X – M – exports minus imports.

So we get: GDP = C + I + G + (X – M).*

How does Worker A’s extra $100,000 impact each of these variables? We can’t know for certain, but we can make some educated guesses. The extra $100,000 means, first of all, that A will be able to have a higher standard of living than B will, all else equal. This means that A will be able to spend more money, and thus A will add more to “C” than B will – she will consume more. So we see that the extra $100,000 is likely to impact GDP positively – raising C means raising GDP, the other variables held constant. What about I? I is made up of private savings, government savings, and foreign borrowing: all of these finance investment. The extra $100,000 for A here increases private savings, which increases I, which increases GDP. Finally, the “G” may even increase: A will have $100,000 more in her retirement account for the government to tax! Thus the “G” is more likely to go up as well – again increasing GDP. (We won’t look at X – M for this analysis: it could go either way. But it is to be doubted that this variable would be negatively impacted by A’s extra $100,000.)**

From this, then, we can see that A’s extra $100,000 has added to the C, the I, and the G – three out of the four main components that determine GDP. It is not inaccurate to say that, if we could actually measure the amount that C, I, and G increased because of this $100,000 each year, we could estimate the true value of the planner’s advice, and the precise amount by which it increases not only the GDP, but the “intrinsic value” of the entire nation!

How could we do this? Let’s say the annual benefit of the planner’s advice to the client is $5,000. If we assumed this value grew at 3% a year, and the client expected an investment return of 8% a year, we would find that the value of the advice would be $103,000.*** This is (very roughly!) the direct positive impact that this advice has on GDP – the number one metric of what a country produces in a given year.

Economic Benefits for the Entire Nation

One final note. Let’s assume that there are 100,000 CFP® professionals in the US, and that each of them offers advice worth this $103,000. If we do this, the total value of the advice given is (100,000 x $103,000) = $10.3 billion. If we divide this by the $14 trillion GDP of the US, we get ($10.3 billion/ $14 trillion) = .07% of the value of GDP. This is about one-fourteenth of one percent of the value of everything produced in a year in the country!****

Financial planning can indeed have an immediate and dramatic impact on the lives of clients. But from perspectives like the one just described, we can also see that the effects of sound financial planning reverberate throughout the entire economy, not just now but for generations to come. What implications does this have for us? There are three: a set for planners, a set for clients, and a set for those undecided about the value of financial planning.

The implication for planners is that they should approach their work – especially their recommendations – with something akin to reverence. The implication for clients is that they should appreciate the value of a sound financial planner, and work diligently to find one that they respect, like, and trust. The implication for the undecided is an invitation: do some analysis on your own. If you can find solid empirical or historical evidence that financial planning draws more value out of an economy than it injects into that economy, please tell me! I would like very much to see it.

*Source: Economics, Michel Parkin, 2008.

**If the effect were negative, it would probably be because of travel: a common retirement goal for many clients. Travel is the import (M) of services. Travel does reduce GDP: it means money spent in other nations (M goes up, so X-M goes down, and GDP with it). But this improves the foreign country’s GDP. So at worst, X – M will benefit another country outside the client’s home country.

***The model used for this is the dividend discount model, which investment analysts use extensively.

****There are arguments supporting the fact that $5,000 a year for the value of the planner’s advice is much too low a number, as well. But we won’t go into those here.

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