Dan Ariely, author and professor of behavioral finance, wrote an interesting blog post yesterday
Asking the right and wrong questions From a behavioral economics point of view, the field of financial advice is quite strange and not very useful. For the most part, professional financial services rely on clients answers to two questions:
How much of your current salary will you need in retirement? What is your risk attitude on a seven-point scale?
He goes on to say that the clients suggest that they need
75%, which is a number they'd gotten from advisors in the first place, so it's useless. Then he suggests that the actual answer should be a *lot* higher -- 135% -- though he bases that on the answers to these questions, which are, in my opinion, similarly useless:How do you want to live in retirement? Where do you want to live? What activities you want to engage in?
He then goes on to skewer the percent-of-assets model used by so many advisors to determine their compensation - in particular, given that the advisors (according to him) are so bad at figuring out how much clients need to save and how much risk they should be taking, they spend all of their time doing the easier job of rebalancing portfolios and, in his opinion, they get paid too much for doing so and probably shouldn't be doing so in the first place.
It's a controversial article - and my opinion is that he's both right and wrong, but I wanted to put it out there first and see what folks have to say -- and if anyone here has actually paid an advisor for financial advice (whether percent of assets, or through a commission-paid broker, or any other form of paid financial advice). This, of course, is not a typical crowd - folks in MIFP are more likely to manage their own money and to be more than capable of rebalancing on their own. But the recent discussion certainly suggests that the more difficult questions - how much you need for retirement (and something not addressed by Ariely or, in general, well enough anywhere -- how to actually extract that money once one has retired) -- are things that Ariely suggests *should* be things that professional advisors can and should help people with. And they should be able to make a living that way.
Here's Ariely's blog post: