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
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
Here's Ariely's blog post:
- posted 8 years ago
-- David S. Meyers, CFP(R) http://www.MeyersMoney.com
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