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Spreading (mis)Information

Everybody in the personal finance industry (myself included) has a business interest in getting you to believe one thing or another.

  • Mutual fund companies have a vested interest in convincing you that mutual funds in general (and their funds specifically) can beat the market.
  • Discount brokerage firms have an interest in convincing you that it’s profitable to pick stocks and trade them frequently.
  • Major financial magazines receive their advertising revenue from fund companies and brokerage firms, so they need to cater to the interests of those two groups.

So who can we turn to for unbiased information?

Professors and Academics

In contrast to the parties mentioned above, the academic community’s primary interest is simply in making new, verifiable findings and getting them published in reputable trade journals.

This is terrific. It makes them (mostly) unbiased.

The flip side: They have little to gain from making their work accessible to the public. So, for the most part, they don’t. Their work is intended to be read by people who know the meaning of terms like kurtosis, autocorrelation, and mean-variance analysis.

This is almost the precise opposite of the financial services industry, which is all too happy to spread easy-to-understand, profit-generating, though factually dubious ideas. (“Index funds only earn average returns. You’re not just average, are you?”)

Evaluating Information

If you’re the type who doesn’t mind technical jargon, I’d suggest spending some time on the Social Science Resource Network. You’ll find studies there on everything from the performance of investment newsletters, to persistence of mutual fund performance, to sorting out luck vs. skill in mutual fund returns.

If, however, you don’t particularly relish the idea of reading academic papers, I suggest the following plan of action:

  1. Assume that the primary goal of everybody in the financial services industry is to take your money. (Yes, that includes the financial advisor you know from Church as well as the one who coaches your daughter’s softball team.)
  2. Determine how that goal influences the information they’re providing you.

Is it bordering on paranoid? Yes. Will it be untrue in many cases? Of course. But it’s a heck of a lot closer to reality than, “Assume that everybody has your best interests in mind.”

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  1. Your final advice seems a bit pessimistic. I guess the financial industry deserves that since there are so many bad apples earning this reputation for the industry. When you have a big bucket full of mostly bad apples it becomes all that more difficult to sort through, find and utilize the good ones. Are people just too trustworthy?

  2. Hi EOW.

    It absolutely is pessimistic.

    As a matter of pragmatism, it seems to me that when initially interacting with a person or a company you have to initially decide to trust them or not trust them. I don’t see much middle ground. (What’s the functional difference between “I kinda sorta trust you” and “I don’t trust you”?)

    In a social setting, I start with trust (with the potential to lose that trust). In most cases, people don’t have anything to gain from misleading or taking advantage of social contacts.

    When dealing with the financial services industry, I start with mistrust (with the potential to gain trust). These groups–or rather, most of them–do have something to gain from misleading or taking advantage of people.

  3. Pessimism about the economy, Wall Street billionaire bonuses, encroaching retirement, greater longevity, insecurity about Social Security, and job loss all feed into the need for people to want or need “financial planners” and to want to trust somebody. If we all died just two years after starting retirement as used to be the case in the earlier 20th century, no one would care.

    But having lived through 30 years of investing already and being given lots of bad advice in the past, I think the only solution is to keep educating yourself. My eyes were finally opened when someone I know in the financial services industry admitted to me that the whole game was designed to screw the public, and that there were other solutions – especially low-cost index funds – that were in investors’ best interests.

    The Internet has been a huge help in people’s ability to educate themselves.

    Yet you still get the Jims (Cramer, Jubak) with their stock picks, the Suze Ormans, the Dave Ramseys, the Robert Kayasokis (sp? – who cares), the Ed Slotts, etc., all peddling their dubious advice to a gullible public.

  4. @Mike

    Pessimistic yes, but probably not unwarranted… I have a slightly less cynical twist on things: Advisors are generally not trying to con you, but their biases produce bad advice.

    A person’s job tends to influence their beliefs, and few bother to check the academic results to validate their beliefs.

    For example the insurance agents I’ve talked with really seem to believe whole life insurance is a good long term investment. This bias makes perfect sense; could they continue to do their job unless they had some belief in their product? Also, all of their co-workers share that belief that is a lot of social pressure.

    I suspect that the writers of newsletters or mutual fund managers believe it isn’t that difficult to beat the market.

    -Rick Francis

  5. Rick: I absolutely agree that most financial advisors really do believe in what they’re promoting. (I sure did.)

    I suppose it would have been more accurate to say that they “aren’t serving your best interests” rather than that they “don’t have your best interests in mind.”

  6. Thanks Mike. Nice to see that I’m not the only one on the advisor side of the desk who is telling people this. So many folks assume that the person giving them advice can/should be trusted to act in the client’s best interests. In 95%+ of the cases, that simply is not the way it works.

    I think the solution is to (a) acknowledge that there are always conflicts of interests, (b) determine your advisor’s self-interests and (c) focus your energy on advice where both of your bests interests are aligned.

    I must disagree that academics are all that great from an advisory standpoint. They may know academically the things you should do, but most of the time your problem isn’t knowing what is right … it is ACTING on that knowledge and making good choices with your money.

    That is where good advice from a third party professional is worth the money.

  7. Hi John.

    Good advice to “determine your advisor’s self-interests.”

    And just to be clear: While I think academics make great sources for unbiased information, I’m in complete agreement that they aren’t “all that great from an advisory standpoint.”

    Telling an investor that “the market portfolio can have almost maximum variance among feasible portfolios with the same expected value rather than minimum such variance” (as Markowitz does in this fascinating paper) isn’t terribly helpful for most people. 🙂

    Probably more helpful would be something like, “holding a couple other stock funds in addition to your Total Stock Market fund might help to make the ride a little smoother.”

  8. Probably more helpful would be something like, “holding a couple other stock funds in addition to your Total Stock Market fund might help to make the ride a little smoother.”

    But why do I need to pay an advisor 1% of my net worth to tell me that? Seems to me I can buy one of Mike’s books (I just did) and/or the Boglehead books, and keep an eye on this blog and a few others, and I’ve learned all I need to know. The financial services industry is still acting as this is all arcane and difficult knowledge.

  9. Larry – you don’t need to pay an advisor 1 or 2% of your investment assets to do this stuff. Armed with the knowledge in Mike’s books, this website and others, you should be able to assemble a potent strategy that will do you well (for now, I’m ignoring the cost of your time).

    The problem is that most people won’t execute their own strategy but will instead be overtaken by the emotional cycle of investing. As a result they end up buying high and selling low. Dalbar has been doing a study of this for years. The average investor “enjoys” a return on investment of nearly 7% BELOW the average mutual fund return. John Bogle even confirms this among index fund investors.

    For you, the do-it-yourself method might work. I don’t know you and I don’t know how susceptible you are to the human quirks that plague most of us. Many might find their results more consistent if they pay someone a fee to devise a strategy and help them stick to it.

    I do agree that the vast majority of investment “advisors” are nothing of the sort – more happy to collect fees and/or peddle the funds that pay them the best.

  10. Larry: I’m in agreement. I think many investors really should have no difficulty managing their portfolio on their own. (Though I believe that almost everybody would benefit from a financial planner/tax advisor as retirement nears. Simply too many opportunities for tax-planning to pass up!)

    However, that still leaves a very large group of people who don’t want to do it on their own. They don’t want to take the time to read a few books on the topic. For them, a relationship with an advisor can be a great thing. (That said, a relationship with a bad advisor can be worse than no advisor. And if an investor has no knowledge base from which to judge, it can be quite difficult to tell the two apart.)

  11. Great post, Mike, and great discussion among the comments.

    Sadly, regarding financial advice as well as virtually anything else, it is and will likely always be a “buyer beware” world.

    Even advisors like myself and John Buerger, who don’t accept commissions for selling products, are still selling something (our advice) and consumers need to understand and be comfortable with this and the motivations associated with it.

    At the end of the day, people have to decide that if they don’t want to do it themselves, they need to be willing to put the time and energy into finding a trustworthy financial advisor/partner that will put their interests first, regardless of how they’re paid or who they work for.

    And if they do want to do this themselves, they need to understand and get comfortable with the unique challenges this can create.

    Just my 2 cents . . .

  12. I don’t know John Buerger either. Could be he’s competent and on the level. But I do know that for the 20 years I was with Merrill Lynch before I discovered Vanguard, I was given bad advice and treated fraudulently. Fraud? Well, not a biggie perhaps, but my first Account Exec. at ML was fired because she forged signatures of numerous clients (myself included) to pretend she had signed them up for check-cashing accounts that would give her points for vacations. The next guy I was with put me almost entirely into high-load growth funds that eventually lost big time in the bust. What did I know, I thought these guys were professionals. Each time I called to ask for an account review I was told everything was fine, no need to make changes. There’s no doubt in my mind that I’d have twice the investments I have today had I know about Vanguard sooner. So if I sound contemptuous towards the financial planning industry, that’s because I am.

  13. Larry – Sad but true, your experiences are not out of the ordinary … but they were not at the hands of a fiduciary advisor or even a financial planner. There is a serious distinction between the folks you mention (who were nothing but financial salespeople disguised as financial advisors) and true professionals who operate under a written code of ethics and a fiduciary standard.

    What is saddest to me is that it is almost impossible for the average person to tell the difference. The big name, well known firms (who all operate like you experienced) spend big bucks to make you feel that they are trustworthy … but don’t you dare take their word for it. It is pure advertising hype.

    If you use a financial advisor – and with a good one you can do better than you can on your own – make certain they adhere to the fiduciary standard and it is in writing. And as Russ says, “understand and be comfortable with [their self interests] and the motivations associated with it.”

  14. John, you seem to be a stand-up guy and I see from your site that you charge about $300 for a consultation, which sounds reasonable. However you are on the West Coast and I am in NY. I would prefer a face-to-face meeting with someone if they are to comment on my total financial picture. Possibly such a meeting would be of help, but unless I can find someone truly expert, reasonably priced, and responsible on Long Island, I’m not likely to plunk down any cash just yet.

  15. Here’s a suggestion, Larry … if you are willing to pay for a second opinion on your efforts (which I believe is a good idea – I bounce my investment and financial planning concepts off on other planners all the time), go to the web and look up Garrett Planning Network. There is likely to be a Garrett planner operating in your area. They should be “fee only.” Their rates are reasonable. They usually aren’t limited to high-net-worth clients and many are CERTIFIED FINANCIAL PLANNER professionals. Lastly, ask for and examine their advisor agreement and their written code of ethics. Make sure the fiduciary standard is in writing.

    Disclosure – I am not a member of the Garrett Planning Network, but I’ve met many of them in my work with the Financial Planning Association. They mostly have their hearts in the right place and while most don’t have my behavioral finance background, they are more than qualified to render an honest opinion.

  16. Thank you very much, John. I will consider this strongly as I get a bit closer to retirement age.

  17. Mike,

    I happen to enjoy reading academic papers. I try to disseminate some of those information in my blogs:

    Other than you, I’ve found several other bloggers who keep a close eye on academic research as well, like Larry Swedroe and Steve LeCompte.

    Michael Zhuang

  18. Michael: I’ve been reading Larry’s blog for some time now. I hadn’t come across Steve LeCompte’s yet though. Thanks for sharing it. 🙂

  19. Mike,

    I’ve found Steve doesn’t necessarily share our belief in passive investing, but he is very well read. It is nice to follow what he reads.


  20. Larry,

    I followed with great interest your “conversation” with John.

    Your experience with Merrill Lynch is not at all unique. In fact I wrote “Pity the High Net Worth” based on the real story of a Merrill victim.

    As to you question “why should I pay 1% …”, you should not if you read Mike’s book, follow Bogleheads forum and use Vanguard mutual funds. Like John, i am a fee-only advisor. I found I add the most value to those who neither have the time or the interest to do what you are doing. I belief the value I add justify what i charge …

    1. I keep them away from Merrill Lynch and the likes.
    2. I help them become a better investors.
    3. I make sure other aspects of their financial life are taken care of.

    Lastly, I can second John’s recommendation of the Garrett Planning Network. Planners in the network are hourly fee only. I also know a couple planners in the network, all upright people.

    Michael Zhuang

  21. Aaron @ Clarifinancial says

    Mike, I should have read this a long time ago. Thanks for putting it in the Carnival (right below an article about using whole life for retirement). So much good information here; I have officially bookmarked it.

    I have to say, I share your cynicism to a large degree. And it’s my belief that we can create a better way that led me to start Clarifinancial. Is it perfect? No, it’s still missing some functionality. But for most people, it beats the heck out of any other method of buying life insurance because it forces goal-focused objectivity where there might not otherwise be any and it takes the labor away from those who would.

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