Should You Help Your Clients Manage Their Human Capital?

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[From FPA Retreat 2010, our on-the-ground reporter highlights one of Friday’s sessions moderated by Robert Powell with panelists Paula Hogan, CFP®, CFA; Frederick Miller, CFP®; and Zvi Bodie, Ph.D.]

A spirited discussion took place Friday at Retreat as to whether including human capital management as a central feature of financial planning is a frontier for financial planners. It began with Powell, reviewing the state of the literature on the topic, citing studies in the Journal of Financial Planning and other places (e.g., Paula Hogan’s 2007 article — member login required), that have begun to explore human capital management as a financial planning issue. Powell wondered whether we couldn’t begin to see potential liability issues for failing to incorporate human capital in financial plans.

From there, Paula Hogan took the stage, answering the title question with an emphatic yes. She defined human capital according to the reference materials, “the near present value of lifetime earnings,” and according to her personal understanding, “what we choose to do with our God-given gifts for which we get paid.” It is her contention that career asset management (so named by conference task force member Mike Haubrich) is woven into everything we do. She drew a parallel between the life planning movement and the coming career asset management movement, contending that traditional financial planning and life planning are like two ice floes, drifting apart. She believes that human capital management will follow a similar trajectory, as traditional financial planners are reluctant to invest significant resources into something they feel is outside their area of expertise and for which they are uncertain how to get paid, but that advocates are so passionate about how integral the issue is to the big picture of financial planning that it will, over time, seem impossible to talk about finances without taking into account human capital management.

Frederick Miller presented the contrarian view, asserting that people who were advocating for human capital management don’t appreciate what they’re getting themselves into. While it seems intuitive that building earning power is a stronger strategy than managing income and investments, and that financial planners could add a lot of value by managing human capital, there is no science of human capital management, and even if there were, “financial planners don’t know anything about it, anyway.” Given that “there are a lot of things planners could already do better,” he asserted that the difficulty in measuring human capital, measuring the cost of investment, the cost of management, it isn’t a realistic near-term frontier for planners. He used the example of a student finishing medical school, and wondering whether to go into a private practice or work in education. He explained that the factors in helping to make a client decide which career would ultimately be more lucrative or worthwhile would be nearly impossible to factor, because of the number of variables. At a general level, Miller asserted that it makes sense for planners to help assess financial aspects of career management decisions.

Finally, Zvi Bodie (a recent 10Q with him here — member login required) spoke about the underlying theory, from when Paul Samuelson and Bill Merton published their exploration of optimal consumption over the life cycle in 1969, and citing a gap between economic theorists and the advice planners are offering to clients. He explored the reasons that “the idea of time diversification is just flat-out wrong,” and demonstrated how to incorporate consideration of human capital into portfolio management, referring to Moshe Milevsky’s recent book Are You A Stock or a Bond? (A recent Milevsky 10Q here — member login required.)

Watch this area—human capital management and lifecycle investing are getting a lot of buzz at Retreat, along with many conversations about the roles of women in financial planning. 

Mary Corbin
Managing Editor, FPA Press; Senior Editor, Journal of Financial Planning
Financial Planning Association

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