Abstract
The previous chapter described the socio-demographic and socioeconomic attributes of the five investor types, shed light on the FP perspectives and finally compared the actual FP actions to the behavioral benchmarks derived in the normative part of this study.
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References
See Frick 2005, p. 16.
Term used in Frick 2005 and Bernet 2005a to describe a generation that has “the time, money and energy needed to make old and new dreams come true.” Frick 2005, p. 16.
Börsch-Supan/Essig 2002 analyze the saving behavior of Germans and find that the impact of age on the saving rate does not display the characteristics predicted by the classical economic theory: The life-cycle hypothesis predicts individuals to dissave in retirement. Rather, the results indicate that in Germany individuals keep saving even in their old days. See Börsch-Supan/Essig 2002, p. 12ff.
As termed in Bernet 2005a, p. 27.
This point is specifically relevant for women. See Dehm et al. 2000, p. 24ff and Höllger/Sobull 2001, p. 5ff.
This is in contrast to Börsch-Supan/Essig 2002 who found that individuals with a riskier job situation tend to assume less risk with their investments and save more. See Börsch-Supan/Essig 2002, p. 89f.
According to the DIA 2005c 44% of the Germans know their future pension income, but only 22% of the Americans, 21% of the British, 16% of the Japanese, 12% of the French and the Italian and 9% of the Spanish. Another supporting evidence for this advanced level of understanding was surveyed by Boeri et al. 2001 who find that in Germany 54% of all interviewees know that the income from contributions falls short of the amount required to finance the sum of all pensions. See Boeri et al. 2001, p. 24.
In a forecast for the household saving rates in Europe for 2006, Germany ranks third behind Italy (∼12%) and France (∼11.5%) with ∼10.5%. It is closely followed by Belgium, Sweden, Austria and Switzerland, all of which have saving rates above 8%. The Netherlands and Spain are expected to save between 6 and 7% and in the UK, the saving rate is anticipated to amount to just over 5%. See N.N. 2006b, p. 89. or refer to Peape 2004, p. 5 for a comparison of 2002 data.
Mitchell/ Utkus 2004a, p. 35.
See Börsch-Supan et al. 2005, p. 19. Indication relates to the years 1999 and 2001.
See for example Schnabel 2003b and Börsch-Supan et al. 2005.
Weber 2004, p. 64.
Scott/ Stein 2004, p. 207.
Sethi-Jyengar et al. 2004, p. 88.
Choi et al. 2002, p. 104.
See Boeri et al. 2002, p. 397f.
See Börsch-Supan/Wilke 2004, p. 41f. Similarly to this idea of the “state-reliant free rider”, Hurd/Panis 2006 are concerned regarding the high cash-out rates of individuals with small plan values and low wealth holdings. The authors fear that the ability to cash out pension rights results in greater public safety net outlays, such as Supplemental Security Income later in life. See Hurd/Panis 2006, p. 2226.
See Selnow 2004, p. 44f.
Boeri et al. 2001, p. 10.
See Boeri et al. 2002, p. 400f.
Schott/ Arbeiter 1998, p. 56.
Kemp et al. 2005, for example, find that different financial, personal or familial circumstances can act as catalysts or also constraints of individual financial planning for later life. See Kemp et al. 2005, p. 273ff.
According to Walter 1993 the Singaporean Central Provident Fund (CPF), the administrator of Singapore’s compulsory savings and social insurance scheme has a two tiered structure. In the Basic Investment scheme, 80% of all gross savings above S$34,600 can be allocated to the investment vehicles selected by the CPF. In the Enhanced Investment scheme, individuals with larger savings may place 80% of them (above the minimum of S$50,000) in the same vehicles. See Walter 1993, p. 95f.
Most advisers in the real world have a clear incentive to push certain products and therefore convince an individual to buy them. See Klöckner 1995, p. 236ff for different tactics used by financial advisors. However, regulations like MiFID should contribute to an increased transparency on retrocession arrangements and could ultimately lead to more competition and less incentive-biased advice.
An example of such regulations for an increased product pricing transparency has been proposed by the Swiss fund association in collaboration with the EBK. According to these transparency regulations total fees need to be split into the fees for asset management, distribution (marketing and sales fees) and administration (publication, account keeping). See Zulauf 2006, p. 64. In order to align regulations in Switzerland with European laws these regulations will be put into effect when transparency is given about the European laws.
The curbs on the administrative costs in the Swedish private accounts system (e.g., administrative fee of maximal 30bp) or the recommendation of the Pensions Commission in the UK to provide retirement saving products with low costs (i.e., a total expense ratio of 30bp at the maximum) point in this direction. See Cronqvist/Thaler 2004, p. 424ff and PC 2005, p. 396.
“Overvaluing the near term and undervaluing the future increases people’s probability of taking their pension accruals as a lump sum instead of buying a life annuity, and may explain why some argue that ‘locking up’ one’s assets in annuities boosts rather than reduces risk. To meet such concerns, as well as to reduce the fear of ‘losing it all’ due to premature death, some insurers have begun to combine annuity offerings with [term] life-insurance, long-term care or disability benefits.” Mitchell/Utkus 2006, p. 91. Since annuitization is an irreversible decision, individuals might also favor products allowing them to maintain the option of starting an annuity income stream later. With such a product, they would only decide on part of their pension value to be paid out as a lump sum today and defer the decision about the use of the remainder.
Examples for products that assume such a strategy are the target funds from Fidelity or the life-cycle funds from Swisscanto. See Fidelity 2006b and Swisscanto 2006. Since they take the view of a balanced portfolio however, assuming such a strategy would imply investing all financial assets into this product and correspondingly not have additional fixed income or equity funds. An explanation for the low penetration of customers with these funds is the fear of advisors to become obsolete and thus the lack of pushing these products to the end-customers.
A survey by Bortz 2005 found out that many individuals seem to be repelled from closing Riester contracts due to the high level of complexity and bureaucracy. Even after the latest simplification effort, a quarter of individuals surveyed think that the Riester system is still too complicated, and about 30% did not perceive any difference after the changes. See Bortz 2005, p. 625.
Clark et al. 2004, p. 188.
According to Dehm et al. 2000 a majority of women acknowledge that state pension provision will probably not be enough to cover the expenses during retirement, but only a minority also acts on this knowledge. However, this impression does not reflect the female potential in financial matters, since the study also revealed that women are mostly handling the day to day operational banking tasks (e.g., transfers, withdrawal of money, account overviews, etc). See also Höllger/Sobull 2001, p. 77f. The results of these studies need to be considered with caution since they investigate the behavior of women without taking into consideration the age and wealth bracket chosen for this study. This is even more relevant as the studies have also shown that the behavior of women who tend to have more responsibility in their work-life, who are dealing with financial matters on their job and can also have a higher propensity to be affluent show a more educated and active behavior.
Clark et al. 2004, p. 201.
In this context it is noteworthy that Glass/Kilpatrick 1998 emphasize specifically the need to adapt educational programs to the specific life circumstances and „psychosocial and attitudinal composition“ of women. Glass/Kilpatrick 1998, p. 611.
Boeri et al. 2002 also showed that such information logic contributes to the acceptance rate of reforms. See Boeri et al. 2002, p. 52. Building on the research by Borgmann 2005 who identified the German adjustment factor for early retirement not to be actuarially fair, the reforms would ideally also be accompanied by an revision of the adjustment factor.
Shleifer 2000, p. 128.
Shefrin 2002, p. 29.
Pompian/ Longo 2005, p. 59.
Opiela 2005, p. 42.
See Shefrin 2002, p. 26f.
Scott/Stein 2004 show that sending an email with a link to an online tool is one of the most effective ways to encourage individuals to utilize support for individual financial planning. Due to the concept of taking the path of least resistance and the fact that individuals tend not to devote a lot of time to retirement financial planning, they already perceive it as too much of a hassle to type an URL from a printed letter into their Internet browser. See Scott/Stein 2004, p. 211ff.
Regret of commission is stronger than regret of omission. See Kahneman/Riepe 1998, p. 63 and sub-section 4.2.4.4.
Financial Engines is a company co-founded by William Sharpe. It gives 401(k) investors access to the same mean-variance algorithms that Sharpe developed for institutional money managers. But it is not the mean or variance that is interesting for the people, rather the chance by which they can reach their aspiration level. By adjusting risk, contribution level and retirement age, a user can see how different combinations affect the chance of succeeding to reach his retirement goal. See Shefrin 2002, p. 126f and Scott/Stein 2004, p. 209.
With regard to the changes in the share of equity and the required saving rate, the financial planer needs to consider the effect that framing and anchoring have on the individual. Correspondingly, adaptations need to be made relative to an individual’s reference point. Furthermore, the financial planner should also leverage his interaction with the individual to overcome the phenomenon of home bias that has been observed often in retirement savings in other research efforts (e.g., Mitchell/Utkus 2006, p. 88 or French/Poterba 1991, p. 223ff; see also sub-section 4.2.4.3.).
The idea behind this concept is to link services and products in order to support the individual with the financial planning and the financial realization of his retirement. It encompasses education, tools and advice and allows management of the retirement economics from one integrated platform (e.g., including the possibility to calculate amounts of monthly withdrawals). See Fidelity 2007.
See Bernet 2005a, p. 28, who states that the positioning of financial institutions will depend more on emotional factors and social competences of the advisors than just product characteristics.
See Staib 2005, p. 5.
Madrian/ Shea 2001, for example, highlight the fact that simplifications help individuals to take the right kind of asset allocation and saving decisions.
Scott/Stein 2004 examined the reasons why individuals do not use employerprovided advice services for corporate pensions. They found that a lack of time is the reason most often cited: “Between one quarter and one half of the nonadopters surveyed indicated they did not know the benefit existed. An additional one-third to one half indicated they just had not found the time to try the advisor. Averaging across all surveys, lack of time is reported as the single largest barrier. Interestingly, fewer than 5 percent listed the reason as not needing financial advice and a small similar number indicated they were unwilling to use the internet”. Scott/Stein 2004, p. 213.
See Angeletos et al. 2001, p. 52.
Börsch-Supan/Essig 2002 for example state that more than every sixth households keeps a household-book (Haushaltsbuch). See Börsch-Supan/Essig 2002, p. 80.
Eisenberg 2006, p. 250.
See BMAS 2006a. This initiative’s aim is to enable individuals to work longer, ideally until their regular retirement age, by providing them with support for educational measures or by according different incentives to their employers (e.g., through subsidizing part of the salary or allowing specific projects). This effort is supported by cutting back on options that employers had previously to send their employees into early retirement.
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(2008). Review of empirical research and identification of suggestions for policy-makers, financial planners and the individual. In: Individual Financial Planning for Retirement. Contributions to Economics. Physica-Verlag HD. https://doi.org/10.1007/978-3-7908-1998-4_7
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