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Michael Finke, Financial Planning’s Professor: The 2014 IA 25 Profile

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As professor and coordinator of the doctoral program in personal financial planning at Texas Tech University, Michael Finke is helping drive the university’s goal of serving “as an educational home” for the financial planning community.

“Our hope is to build a set of research-based best practices through our own research,” Finke told IA.

Indeed, Finke said that he’s most proud of a series of articles that he wrote last year along with American College professor Wade Pfau and David Blanchett, head of retirement research at Morningstar, that looked at the impact of low asset yields on the sustainability of retirement portfolios. “We tried to make a number of points,” Finke said. First, that “the traditional way that advisors think about building retirement income, the 4% rule, may not be as safe as many advisors are led to believe if we have a low return environment.”

Finke said he and his colleagues’ main goal is “trying to introduce a different way of thinking about building a retirement income plan” as well as helping advisors think about retirement risk—which includes the importance of considering “partial annuitization,” responding to changes in the marketplace, considering what amount should be withdrawn from retirement accounts and how much retirees should spend.

Retirement income is “increasingly important” as boomers rely on their savings to fund their retirement, he said, so it becomes crucial to develop strategies to turn their money into income. “I’m hoping that more advisors are open to different types of products,” specifically annuitization products. 

Along with Pfau and Blanchett, Finke hopes to look “more closely” at incorporating strategies such as “longevity hedge products” into portfolios. “These products’ availability is somewhat limited now, but I’m hoping to see more product innovation in the future.”

Finke also prepared a comment letter to send to the Securities and Exchange Commission last year on behalf of the Investment Management Consultants Association (IMA) regarding the agency’s fiduciary rulemaking.

Finke’s letter reviewed academic literature, which laid out the history of the fiduciary standard.

He said that if the SEC decides to move forward with a rulemaking that just requires brokers to increase disclosures, “that’s probably the worst thing that could happen,” and “may even be counterproductive.”

Why? “Basically, conflict of interest disclosure may even create an environment where a client feels they either have to follow the advice or admit that they don’t trust the advisor. Since advisors are often acquaintances, this is very difficult to do,” Finke said.

In his paper, Finke also noted that “among the most important possible determinants of high-quality advice is advisor competence,” but “unfortunately, there appears to be far more variation in advisor knowledge than exists in professions with more established mechanisms for ensuring minimum quality standards.” Also, “quality standards vary significantly among registered representatives and investment advisor representatives.”

He argued that “relying on advisors to decide how much knowledge to obtain, however, may be an inefficient way to ensure minimum capability within the advising industry and may also lead to poor outcomes for retail investors who are often unable to discern an advisor’s capability, even after receiving a recommendation.”

Advisors, Finke said, “may also be motivated to obtain a voluntary certification mark as a signaling mechanism to increase demand for their services.”

He argued that “increasing the incentive to invest in knowledge and ensuring that certifications provide useful information about an advisor’s capability” should be a policy objective.

While the number of credentialing programs in financial services is “overwhelming,” third-party accreditors that “assess the quality, objectivity and credibility of personnel certifications exist for this reason.”

He recommended the SEC consider the two “predominant bodies” that accredit certification programs in the U.S.: the National Commission of Certifying Agencies and the American National Standards Institute.