Issue No. 1

Implications of principal, risk, and returns sharing across savings vehicles (1–19)
DOWNLOAD FULL-TEXT ARTICLE
William Reichenstein

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 distinguis 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. (19–40)
DOWNLOAD FULL-TEXT ARTICLE
Alistair Byrne, C.F.A.

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 (41-54)
DOWNLOAD FULL-TEXT ARTICLE
Terrance Jalbert, Justin Clayton, Eric Rask

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 (55-71)
DOWNLOAD FULL-TEXT ARTICLE
Kathryn A. Holmes, Robert W. Faff

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 performace, 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 (73-87)
DOWNLOAD FULL-TEXT ARTICLE
Jinkook Lee, Ph.D., Fahzy Abdul-Rahman, M.S., Hyungsoo Kim, Ph.D.

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 ude 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 thos without a revolving debt tendency. We conclude that debit card usage discourages the accumulation of househol 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

Issue No. 2

Economic Derivatives Markets - New Opportunities for Individual Investors (89-104)
Robert Dubil
DOWNLOAD FULL-TEXT ARTICLE

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 (105-116)
Lewis Mandell and Linda Schmid Klein
DOWNLOAD FULL-TEXT ARTICLE

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 (117-133)
Richard Deaves, E. Theodore Veit, Gokul Bhandari, and John Cheney
DOWNLOAD FULL-TEXT ARTICLE

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 sucha 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 thosw 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 (135-153)
David A. Glazer
DOWNLOAD FULL-TEXT ARTICLE

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 (155-165)
John L. Teall
DOWNLOAD FULL-TEXT ARTICLE

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

Issue No. 3

An alternative approach to after-tax valuations (pp. 167-182)
Stephen M. Horan
DOWNLOAD FULL-TEXT ARTICLE

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 accomodate 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 (183-195)
Adam Y.C. Lei and Huihua Li
DOWNLOAD FULL-TEXT ARTICLE

We compare the realized returns and shortfall probablities of automativ 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 relized returns from these two strategies are statistically identical for investment horixons from 1 year to 40 years, regardless of whether we take return autocorrelations or business cycles into account. Automatic investment plans, neverthelessm 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 (197-209)
Rich Fortin, Stuart Michelson, Stanley D. Smith, and William Weaver
DOWNLOAD FULL-TEXT ARTICLE

This paper develops a refinance model that provides pertinent information for investors about refinancing their mortgage. We discuss the imput 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 (211-228)
Beverley Jackling and Colin Sullivan
DOWNLOAD FULL-TEXT ARTICLE

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 (229-243)
Harold J. Schleef and Robert M. Eisinger
DOWNLOAD FULL-TEXT ARTICLE

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

Issue No. 4

How analytical is your financial advisor? (245-260)
John R. Nofsinger and Abhishek Varma
DOWNLOAD FULL-TEXT ARTICLE

© 2007 Academy of Financial Services. All rights reserved.

Real estate mutual funds: a style analysis (261-273)
Crystal Yan Lin and Kenneth Yung
DOWNLOAD FULL-TEXT ARTICLE

© 2007 Academy of Financial Services. All rights reserved.

Optimal savings liquidation for income replacement in the presence of income uncertainty (275-292)
Christopher L. Cain and Justin Benefield
DOWNLOAD FULL-TEXT ARTICLE

© 2007 Academy of Financial Services. All rights reserved.

Exploitable cross autocorrelations among iShares (293-308)
Ting-Heng Chu, M. Imtiaz Mazmuder, Edward M. Miller, and Larry J. Prather
DOWNLOAD FULL-TEXT ARTICLE

© 2007 Academy of Financial Services. All rights reserved.

Supermarket distribution and brand recognition of open-end mutual funds (309-326)
Conrad S. Ciccotello, Jason T. Greene, and Lori S. Walsh
DOWNLOAD FULL-TEXT ARTICLE

© 2007 Academy of Financial Services. All rights reserved.

From the Editor—Vol. 16, No. 4 (pp. v-vi)
DOWNLOAD FULL-TEXT ARTICLE