Bad Advice

Advice Everywhere, Who Should You Trust?

Talk about risk in the financial services industry is everywhere.  And I mean everywhere.  This post on Investopedia refers to 11 different types of investment risk.  To be certain, big dollars are spent by firms to promote their essential products and strategies you need to control your risk including insurance products, asset allocation programs, and other legitimate methods for consumers to protect the money they have earned and invested.

But is one of the biggest investment and planning risks you face simply the risk of getting bad advice?  If so, it is not on the list and you will rarely hear about it from advisors.  Duh.  But there are so many examples of how getting bad advice is costly, why isn’t this listed as a real risk?  Seriously!

What about people that have been swindled out of their money by Bernie Madoff or Charles Ponzi and his original “Ponzi’s Scheme” (a good read I would recommend), Tom Petters, or any number of scams?  These are extreme cases, but getting garden variety bad advice from a financial advisor, though not financially devastating, can certainly be costly and could result in having less money than otherwise.

Of course, we can’t do everything for ourselves and rely on doctors, plumbers, auto mechanics, teachers, or any other number of professionals or trades people. Unless you move to the outback, it is highly likely your success in life is impacted by the performance of others.  So I am not suggesting that you shouldn’t seek out the guidance of a professional for your financial matters – doing so can be a very wise move.

But as you begin to look for advice,or if you currently receive advice, here are some considerations on adviser risk:

What if the advice you receive is affected by how the provider is compensated? This one should be obvious, but it isn’t.  Consumers should absolutely ask how an advisor gets paid and how much they make based upon their recommendation. You can also ask if there are any alternative ways for them to be compensated.  

Does the advice sound too good?  Is it filled with a bunch of sales jargon?  The radio infomercials are the worst.  It is discouraging that people fall for these.  Many firms promote their unique insights and special techniques for helping investors. “Invest like the professionals” or “Learn the secrets of investing success.”  If the advice is so good, particularly on investment ideas, wouldn’t the provider be better off keeping it to themselves and profiting from their knowledge?  Of course they would.

Does the advice promote a new, hot idea?  If so, be very, very cautious.  This could be promoting something that does not have a substantiated history of performance through different market cycles.

I could go on and on but don’t need to – here is a good article on investment advice from a great blog, A Wealth of Common Sense.

Finally, when it comes to advice, I think this commercial from Charles Schwab is awesome!  If we had the budget for a national advertising campaign, this would work well for PlanVision.  While it speaks to compensation, it also could be applied to investment advice.

Uncertainty

The Five Most Important Variables in Planning for Retirement – In Order

As you think of your future and contemplate your retirement (or a period of time that you have more financial flexibility), you begin to wonder what your life will really be like.  Who will you spend time with?  Will you work?  How much free time will you have?  It is very natural to visualize, or dream, about these times.  You picture yourself in desirable places with people you want to be with or doing things you want be doing.

For many people, even those with modest assets and modest expectations, these can be liberating and pleasurable thoughts.  They provide you motivation to work hard, save money, and prepare for your future.  So when we work with our clients to help them plan for the future, we review the various aspects that impact their ability to retire on their own terms.   For almost all of our clients, the most important variables, in order of importance, are:

1)   Your Spending Level.  How much you spend in retirement, your budget, is the single most important variable in whether or not you will accomplish your goals. People that have modest expenses in their retirement years have much more flexibility than those that don’t.  What is interesting about this is that many people do not drill down on this figure until right before retirement or right after they have retired.  More recently we have increased our focus on this aspect of our clients’ circumstances.

2)  Your Retirement Date.  Choosing to retire early, or delaying your retirement, will have a significant impact on whether or not you outlive your money.  Anyone who decides to, or is willing to, work later in life or integrate part-time work into their retirement takes quite a bit of pressure off of their finances.  Of course, the early retiree needs to have more confidence in their budget and larger assets.  And it doesn’t hurt to be open to looking for work if things don’t turn out like you had planned.

3)  Your Longevity.  This is a feature of life that is almost totally out of your control. Tragically, many people that have saved and prepared for their future pass away right before or just beginning their retirement.  Almost all of us personally know an individual or Family that has suffered through this.   While we would all hope for many healthy years later in life, a long extended life can also put stress on any financial plan.

4)  Your Retirement Savings.  How much you are able to accumulate in savings is clearly important. Someone with $10 Million in funds can (hopefully) live a retirement free from financial worry while someone with $100,000 in funds is virtually living paycheck to paycheck.  Most middle class people fall somewhere in between – but much, much closer to the $100,000!

5)  Your Interest Rate.  Finally, how much you earn on your investments certainly impacts what you can do.  However, we do not believe this is as important as the first four variables.  Therefore, we encourage our clients to focus more energy on doing what they can to control their budget, evaluate their retirement date, and save for their future.  What you earn on your funds is by no means inconsequential, we just don’t think it should be your highest priority.

All of these factors are clearly connected and for any given individual, one of them may be far more important than the others.  In addition, we all have to make trade-offs.  And how our life unfolds can change our plans and priorities.