J. Michael Collins is faculty director of the Center for Financial Security at the University of Wisconsin, Madison.
He teaches personal finance and is a faculty affiliate of the Institute for Research on Poverty, the La Follette School of Public Affairs and Wisconsin Cooperative Extension. Collins studies consumer decision-making in the financial marketplace, including the role of public policy in influencing credit, savings and investment choices. His work includes the study of financial literacy and counseling with a focus on low-income families. He is the project leader of the Social Security Administration Financial Literacy Research Consortium site at Wisconsin, a 5 year multi-disciplinary project focused on financial literacy for vulnerable populations.
Collins brings nearly a decade of applied experience to his research. He founded PolicyLab Consulting Group, a research consulting firm working with national foundations, and co-founded MortgageKeeper Referral Services, an online database for mortgage servicers and counselors. He also worked for NeighborWorks America (Neighborhood Reinvestment Corporation) and the Millennial Housing Commission.
He holds a Masters from the John F. Kennedy School of Government, a PhD from Cornell University, and a BS from Miami University (OH).
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PROspective J. Michael Collins - Taking Advice
PROspective Vol II No V June 2011
Finding good financial advice isn't hard... taking the advice is.
Dr. J. Michael Collins, Director of the Center for Financial Security at the University of Wisconsin, has done considerable research on financial advice and advisors, and his expert "advice" on advice follows.
Chuck Miller: You've done considerable academic work on financial advice... what works, what doesn't... and why.
My first question is: what does someone need to know before any advice can be meaningful... effective?
J. Michael Collins: The most important factor to understand is that financial planners or advisors are usually compensated based at least in part on the investment or insurance choices that you make. Essentially you are paying someone else to do something you don't have the time or interest in doing—that is, make financial decisions. This is fine, but be clear with yourself and your advisor what you are paying for and how you are paying for it.
It is important to note: most studies do not show that advisors lead people to choices that are strictly self-serving. In part this is because advisors want a long term fee-based relationship rather than just a single fee today. But there certainly are cases of advisors offering misguided information that made investors worse off. Be careful.
CM: If you were to design a financial advice service, what content would it include and form would it take?
JMC: There are several problems with the advice market. First, there are not services available for basic financial management, credit choices and many basic insurance products. Instead the market is focused on investment products. Second, the compensation scheme has the potential to skew choices to products that offer higher levels of compensation to advisors rather than maximize return for the client. Third, people who need sophisticated advice generally have the means to be able to afford such services, but people with lower assets levels do not have accessible advising services. There is a need for a low-cost basic fee-only advice/counseling service that includes basic issues such as managing income and spending, selecting and managing credit and also aid investors in finding and managing low-cost investment vehicles.
CM: What are some of the current problems with financial advice content and financial advice access?
JMC: Some may argue that financial literacy problems or deficiencies can be overcome by offering financial advice. In fact, it turns out use of advice increases as education, income and correct answers to financial knowledge questions on surveys increase. So advice and financial capability tend to be complements, not substitutes.
The other issue is that people can receive good, accurate unbiased advice, yet still not act on it. We have basic failings in self control and procrastination that are important to acknowledge.
CM: Have you used any online financial advice services or tools? What did you think... could they be helpful?
JMC: I have explored a few such tools – although I do not use any of them regularly. These certainly can be helpful in terms of organizing information and/or comparing current assets/debt metrics to common rules of thumb. Some tools help consolidate multiple accounts into one platform which can be convenient. A few of the newer tools have goal setting modules which allow you to build in reminders and nudges which may also help boost implementation.
CM: If I was looking for good financial advice, what should I do... where should I go?
JMC: First, get organized. Organize your current documents in terms of any investments, real estate or insurance policies you own, as well as any debt or mortgages. Develop a basic annual and monthly budget and compare your actual income and outlays to these projections.
Second, think about what goals you have—and be specific. Do you have specific technical needs to achieve these goals? Are these technical issues financial or legal? More tax related or more investments? This will help guide what kind of advisors you need. Third, try and do as much yourself as possible. Understand what options you have that might be free—such as through an employer or community-based service.
Finally, do some research on advisors. See if a fee-only advisor might be an option that fits your needs. If not, just be sure you are clear on how your advisor is paid and what is included/not included before you sign any services contract. Beyond obvious background checks, see who else uses that advisor and if they are people like you. If possible get a sense of the experience of other clients.
And of course, make sure you use the advice!
READER RESPONSE: In our February newsletter, Chuck Miller interviewed Jim Danaher of Northern Trust on its study titled Designing the Ideal Defined Contribution Plan. One of the favored plan design changes was the elimination of plan loans, due to the "leakage" of retirement savings.
Actuary Howard Phillips sent us a response to this proposed change:
"I recently came across Mr. Miller's interview with Jim Danaher of Northern Trust re: the ideal DC plan. Mr. Danaher's views, as well as the views of those included in Mr. Danaher's study, are flawed with respect to plan loans.
"All studies have shown that plans that allow for loans experience significantly higher rates of retirement savings than plans that do not allow for loans. Participants enjoy the comfort of knowing they have limited access to their account pre-retirement, without tax and without penalty. "Leakage" does not evolve from loans; it does evolve from hardship withdrawals.
"We cannot ignore the statements of Professor Franco Modigliani (1985 Nobel Prize winner in Economics) and the results obtained by the two economists who did an extensive plan loan study recently for the Federal Reserve. See my published article on the subject attached.
"Mr. Danaher reports that 2/3rds of plan sponsors and 100% of consultants included in his study opined that loans should not be allowed. I submit that the most probable reason for such opinions was the loan administrative burdens experienced by the respondents. With about 85% of DC plans allowing for loans, I would say the provision is well entrenched.
"We must educate the loan haters about how retirement savings is enhanced by plan loan provisions, and how, with an efficient system for the initiation, processing and administration of loans extinguishes 'leakage'."
Howard M. Phillips, F.S.A., F.C.A., M.A.A.A., M.S.P.A. Enrolled Actuary
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