Financial Services Review Volume 16
Abstracts:

Implications of principal, risk, and returns sharing across savings vehicles
(pp. 1–17) Download Full Text Article
William Reichenstein

ABSTRACT
This study illustrates that the choice of savings vehicles [e.g., taxable account, Roth IRA, or tax-deferred accounts such as 401(k)] affects the portions of principal effectively owned by, returns received by, and risk borne by individual investors. This study examines the implications of this analysis for (1) the calculation of an individual's assets allocation, (2) mean-variance optimizations, and (3) asset location. For example, it illustrates problems when traditional mean-variance optimization is applied to an individual's portfolio. Separately, there is broad agreement among scholars that we should distinguish between pretax funds and after-tax funds when calculating an individual's asset allocation. This study suggests an approach to measuring an individual's asset allocation. © 2007 Academy of Financial Services. All rights reserved.

Employee saving and investment decisions in defined contribution pension plans: survey evidence from the U.K.
(pp. 19–40) Download Full Text Article
Alistair Byrne, C.F.A.

ABSTRACT
This paper uses data from a survey to the members of a U.K. defined contribution pension plan to explore the attitudes and knowledge of employees faced with pension saving and investment decisions. The results are consistent with behavioral economics in that many employees show limited interest in the pension arrangements. Not all members have received advice about their pension, but those who have are more likely to have calculated their savings needs, to have higher levels of investment knowledge, and to actively review their investments than those who have not. The members' investment preferences appear broadly consistent with traditional finance theory, although the popularity of property may reflect familiarity bias. © 2007 Academy of Financial Services. All rights reserved.

The effect of credits on optimal tax-deferral strategies
(pp. 41-54) Download Full Text Article
Terrance Jalbert, Justin Clayton, Eric Rask

ABSTRACT
This paper examines how the Saver's Tax Credit changes optimal tax-deferral choices of individuals. We identify optimal tax-deferral strategies in the presence of tax-deferral credits and changing tax regimes. We also develop equations for the rate of return at which investors will be indifferent between tax and tax-deferred investment. The results indicate that tax credits and the timing of future tax changes have a large impact on optimal tax-deferral choices. Individuals can use the results presented here to make more informed tax-deferral choices. The results also provide insight into optimal individual behavior when employers match pension contributions. © 2007 Academy of Financial Services. All rights reserved.

Style drift, fund flow and fund performance: new cross-sectional evidence
(pp. 55-71) Download Full Text Article
Kathryn A. Holmes, Robert W. Faff

ABSTRACT
The linkages between style change, fund flows, fund size, and resulting fund performance are complex and not clearly understood. In this paper, we investigate these relationships using a sample of Australian multisector trusts over the sample period 1990 to 1999. We employ a range of fund performance measures of stock selectivity. We find that levels of style drift are positively related to selectivity performance, but are not related to fund flows. We also find that fund size is positively related to fund performance and negatively related to expense ratios. Implications of our findings for investors are identified in the paper. © 2007 Academy of Financial Services. All rights reserved.

Debit card usage: an examination of its impact on household debt
(pp. 73-87) Download Full Text Article
Jinkook Lee, Ph.D., Fahzy Abdul-Rahman, M.S., Hyungsoo Kim, Ph.D.

ABSTRACT
This paper investigates debit card usage and its impact on household debts, using the 2004 Survey of Consumer Finances. By conducting simultaneous equation modeling, we examine how debit card users are different from non-users, and whether debit card usage influences household debt. We find that, after controlling for selection bias, the use of debit card is negatively associated with household debt. We also find that those with revolving debt tendencies (i.e., carrying outstanding balances on credit cards) are more likely to use debit cards than those without a revolving debt tendency. We conclude that debit card usage discourages the accumulation of household debt rather than debit card users tend to be financially conscientious. © 2007 Academy of Financial Services. All rights reserved.

From the Editor—Vol. 16, No. 1
(pp. v-vi) Download Full Text Article

Volume 16 Number 2, 2007
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Economic Derivatives Markets - New Opportunities for Individual Investors
(pp. 89-104) Download Full Text Article
Robert Dubil

ABSTRACT
Economic derivatives markets offer exciting new risk diversification opportunities for individual investors. Mostly in the form of small denomination binary options, these markets trade contracts on consumer inflation, currencies, median real estate prices, gas at the pump, and retail-oriented indicators. The research into the role of these markets for individual investors is in its infancy. This paper provides a review of the current state of knowledge and sketch out three broad avenues of further worthwhile inquiry: economic derivatives as alternatives to traditional stock indexing, the viability of the markets in light of limited trading motives and small probabilities, and modeling difficulties inherent in pricing unhedgeable underlying events. © 2007 Academy of Financial Services. All rights reserved.

Motivation and financial literacy
(pp. 105-116) Download Full Text Article
Lewis Mandell and Linda Schmid Klein

ABSTRACT
This paper examines the hypothesis that low financial literacy scores among young adults, even after they have taken a course in personal finance, is related to a lack of motivation to learn or retain these skills. The research is based upon the latest national Jump$tart survey of high school seniors and uses financial literacy scores after controlling for socioeconomic, demographic, and aspirational characteristics that have historically predicted these scores. We analyze the relation of financial literacy scores to responses to three questions designed to measure motivation to be financially literate. We found that the motivational variables significantly increased out ability to explain differences in financial literacy. © 2007 Academy of Financial Services. All rights reserved.

The savings and investment decisions of planners: a cross-sectional study of college employees
(pp. 117-133) Download Full Text Article
Richard Deaves, E. Theodore Veit, Gokul Bhandari, and John Cheney

ABSTRACT
We report the results of a survey of college employees who are eligible for their institution's 403(b) plan. We evaluate each employee's "propensity to plan," which is found to be driven by a single psychological factor. Pension contributions are positively correlated with the propensity to plan. Other demographic attributes such as gender, marital status, age, and salary also matter. Surprisingly, men saved less than women did. We also created a subjective risk-tolerance score for each participant, and conclude that those with a higher propensity to plan are more risk tolerant. Risk taking is positively associated with income, and (surprisingly) negatively associated with age. © 2007 Academy of Financial Services. All rights reserved.

The effect of commission versus non-commission benefits on customer value: the case of life insurance policy performance
(pp. 135-153) Download Full Text Article
David A. Glazer

ABSTRACT
In selling life insurance, some degree of negotiation of commission between sales person and consumer takes place in the form of mixing permanent with term insurance in one policy, the term coverage carrying no commission to the agent, allowing the agent to trade off compensation in favor of enhanced cash value performance. looking only at cash-on-cash return -- premium contributions versus cash surrender value -- this article finds that this form of commission negotiation does enhance client value in life insurance to varying degrees, but not in a predictable, consistent or statistically significant fashion. © 2007 Academy of Financial Services. All rights reserved.

Family limited partnerships and control discounts
(pp. 155-165) Download Full Text Article
John L. Teall

ABSTRACT
Distributing assets to Family Limited Partnerships (FLPs) is an estate planning technique designed to reduce assets subject to estate taxation. This paper discusses power index models as measures of power along with extensions of indices to value minority discounts. Power indices and valuation models proposed here are directly applicable to valuing other business entities, particularly where control might be contested. Key among factors affecting control valuation is that voting power among FLP partners is not proportional to ownership. This point is especially important to FLP creation because tax-driven value reductions are directly tied to minority voter discounts. © 2007 Academy of Financial Services. All rights reserved.

From the Editor—Vol. 16, No. 2
(pp. v-vi) Download Full Text Article

Volume 16 Number 3, 2007
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An alternative approach to after-tax valuations
(pp. 167-182) Download Full Text Article
Stephen M. Horan

ABSTRACT
Reichensten (2001,2007) argues that the type of savings account in which an asset is held affects the after-tax return received by and after-tax risk borne by investors. He uses this powerful insight to develop the notion of after-tax asset values that are predicated on an asset's current after-tax consumption value. This paper builds on the risk-sharing insight and approaches after-tax asset valuation from an investment perspective based on future benefits. It also extends the model to accommodate a broader array of more realistic taxation environments. Examples of after-tax optimization indicate that the recommended asset disposition depends heavily on the model chosen.
© 2007 Academy of Financial Services. All rights reserved.

Automatic investment plans: realized returns and shortfall probabilities
(pp. 183-195) Download Full Text Article
Adam Y.C. Lei and Huihua Li

ABSTRACT
We compare the realized returns and shortfall probabilities of automat iv investment plans with those of lump sum investments. We do not assume a cash position and we use bootstrapping techniques to assess the performance differenced. Our results indicate that the levels of realized returns from these two strategies are statistically identical for investment horixons from 1 year to 40 years, regardless of whether we take return auto correlations or business cycles into account. Automatic investment plans, nevertheless have higher shortfall probabilities for intermediate horizons. Investors relying on automatic investment plans should consider these probabilities and adjust their asset allocations accordingly. © 2007 Academy of Financial Services. All rights reserved.

Mortgage refinancing: the interaction of break even period, taxes, NPV, and IRR
(pp. 197-209) Download Full Text Article
Rich Fortin, Stuart Michelson, Stanley D. Smith, and William Weaver

ABSTRACT
This paper develops a refinance model that provides pertinent information for investors about refinancing their mortgage. We discuss the input variables and how to compute the breakeven number of months when deciding to refinance a mortgage. We incorporate the interest rate tax effects that are normally ignored by investors when making their refinancing decision. We also compute the net present value and internal rate of return to allow one to analyze refinancing as an investment decision. Additionally we have developed an Excel model, complete with automated macros, to perform this analysis. © 2007 Academy of Financial Services. All rights reserved.

Financial planners in Australia: an evaluation of gaps in technical and behavioral skills
(pp. 211-228) Download Full Text Article
Beverley Jackling and Colin Sullivan

ABSTRACT
Industry based studies in Australia have highlighted the gap that exists between client expectation and skills of financial planners. The objective of this study is to investigate the importance of technical and behavioral skills required of financial planners and the level of perceived skill gaps exhibited by recently qualified planners. The results suggest that there is a need to more effectively incorporate specific behavioral skills such as listening and questioning skills in financial planning educational programs. Overall, the findings have implications for curriculum development, monitoring of professional standards and provision of continuing professional development programs to maximize the quality of financial planning advice. © 2007 Academy of Financial Services. All rights reserved.

Hitting or missing the retirement target: comparing contribution and asset allocation schemes of simulated portfolios
(pp. 229-243) Download Full Text Article
Harold J. Schleef and Robert M. Eisinger

ABSTRACT
Personal financial planning entails establishing retirement portfolio goals, which may be identified as specific portfolio target values. The problem of investing to build a retirement portfolio that achieves a specified value at retirement can be modeled as a dynamic multiperiod portfolio problem. Although theoretically robust, the dynamic programming approach to multiperiod portfolio analysis is computationally intractable. In contrast, this paper uses Monte Carlo simulation to analyze specific asset allocations in the context of multiperiod planning. We consider achieving a target portfolio value at a specific point in time. We conclude that the 'life-cycle funds' that reduce equity allocations over time fail to increase the likelihood of reaching a targeted portfolio value compared with fixed asset allocation models (e.g., 80% equity/20% bond). © 2007 Academy of Financial Services. All rights reserved.

From the Editor—Vol. 16, No. 3
(pp. v-vi) Download Full Text Article

Volume 16 Number 4, 2007
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How analytical is your financial advisor?
(pp. 245-260) Download Full Text Article
John R. Nofsinger and Abhishek Varma

ABSTRACT
We survey over 100 financial planners to assess their reasoning mode, intertemporal choices, risk
aversion and preferences, and framing focus. Using the Cognitive Reflection Test, we find that
financial planners are more analytical than the general population. Further tests show that the
analytical planners are more financially patient and perform better in intertemporal choice problems.
These attributes seem important to successful financial planning. Intuitive thinkers were more risk
averse and behave more according to the axioms of prospect theory. One-third of our planners were
fooled by the framing of a question. © 2007 Academy of Financial Services. All rights reserved.

Real estate mutual funds: a style analysis
(pp. 261-273) Download Full Text Article
Crystal Yan Lin and Kenneth Yung

ABSTRACT
We find that the characteristics of real estate related securities are different from those of the
general common equities. To help investors understand better the products offered by real estate
mutual funds, we develop style descriptors that are specifically created for real estate related securities.
Among the universe of real estate securities, we find real estate funds tilt toward large stocks and favor
growth moderately over value. Growth managers outperform value mangers in this sector by 1.51%
to 2.30% per year. However, there is evidence of shifts in the investment style among the funds. Our
results help investors in evaluating real estate fund performance and making better asset allocation
decisions. © 2007 Academy of Financial Services. All rights reserved.

Optimal savings liquidation for income replacement in the presence of income uncertainty
(pp. 275-292) Download Full Text Article
Christopher L. Cain and Justin Benefield

ABSTRACT
The decision to liquidate savings for debt repayment is an important one that most consumers face
at some time. Traditional financial analysis of this liquidation decision merely compares the interest
paid on the debt to the interest earned on the savings, resulting in an almost universal recommendation
to liquidate. This paper proposes that savings valuation should include a financial asset that has not
previously been explicitly valued: an income replacement option. Applying an option valuation
framework to the savings liquidation decision dramatically reduces the number of situations where
liquidation is a proper strategy, particularly as income volatility increases. © 2007 Academy of Financial Services. All rights reserved.

Exploitable cross autocorrelations among iShares
(pp. 293-308) Download Full Text Article
Ting-Heng Chu, M. Imtiaz Mazmuder, Edward M. Miller, and Larry J. Prather

ABSTRACT
We extend the evidence on exploitable cross autocorrelations in equity returns by examining
whether individual investors can exploit cross autocorrelations in Standard and Poor’s Depository
Receipts and iShares international index funds of 17 countries. Empirical testing reveals that iShares
exhibit predictable elements that could be exploited by investors on a before transaction cost basis. We then compute bid-ask spreads and liquidity spreads to determine their affect on the risk-adjusted
returns of the trading strategies. We find that transactions costs are generally high and that investors
would need to be very cautious in placing trades to exploit returns patterns. © 2007 Academy of Financial Services. All rights reserved.

Supermarket distribution and brand recognition of open-end mutual funds
(pp. 309-326) Download Full Text Article
Conrad S. Ciccotello, Jason T. Greene, and Lori S. Walsh

ABSTRACT
Although supermarkets for groceries have existed for nearly a century, financial supermarkets are
a much more recent innovation. We find that investors rely on mutual fund supermarkets to buy highly
differentiable funds from small, specialized fund families. Investors’ use of supermarkets is consistent
with efforts to reduce search costs while obtaining the benefits of product focus at the fund origination
level. The results thus demonstrate the growing importance of distribution in the context of intangible
goods. Consistent with arguments by Black, Ciccotello, and Skipper (2002), the findings suggest that
brand in financial services is increasingly driven by closeness to the customer. © 2007 Academy of Financial Services. All rights reserved.

From the Editor—Vol. 16, No. 4
(pp. v-vi) Download Full Text Article