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All Financial Advice Is Wrong - Upset The Industry Series Part 3
Over the past couple blog posts I have spent considerable time attacking the "investment performance" value-proposition many financial advisors offer their clients. In part 3 of my Upset the Industry Series, I am going to discuss where this investment focus comes from along with an insurance focus many financial advisors employ and why I fundamentally believe this needs to change to truly help you as a client. As always, my writing in this series remains a stream-of-consciousness exercise and barely edited.
I believe the focus on investments and insurance in the financial advisory world stems from the history of the industry. Financial advisors and planners evolved out of the insurance and investment world, as a group of stock brokers and insurance salesmen recognized the need to help their clients more fully than simply selling them insurance and investment products. As the financial advisory industry grew, more people bought into the concept of helping clients with more of their financial lives by adding a discussion about goals, taxation, cash flow and estate planning. Ultimately, however, many of these people entered their careers working for insurance and investment firms where their compensation was largely based on the sale of insurance and investment products. This early training in insurance and investments created a memory in financial advisors that these two pieces were more important than other items.
I additionally believe that the focus is created because it is easier to sell insurance and investment products than other elements of the financial planning process. Fear can be used to sell insurance. Greed can be used to sell investments. But selling budgeting services is far more difficult. Convincing someone that there is great power in discussing their deepest goals and crafting a path to reach those seems a bit airy and impractical. So the focus has remained on the easy sale, despite their relative unimportance.
Investments and insurance do have an important place in the financial planning process. Both play a role in helping clients reach their goals and dreams. But they are certainly not the most important elements and do not warrant the significantly overweighted focus they receive in the financial advisory world. In the long-run, poor investment decisions can hurt your financial well-being tremendously, but the likelihood that good investment decisions increase your financial well-being is very low. Insurance plays an important role to transfer some risk you are not willing to bear yourself, but the best result with insurance is that you waste the premiums paid and never need the insurance. Both are important, but neither really moves you forward.
There are elements which do call for a greater focus in the financial planning process. Having a deep understanding of your values and goals leads to planning which you are committed to and want to achieve. Without understanding your values and goals, the financial advice you receive will be wrong. Focusing on how you spend your money and whether your spending matches your values can tremendously improve you financial well-being. The greatest investment ideas will have little impact if you are unable to save money to place in these investments. Understanding your relationship with money (and you do have a relationship with money) will help you understand your financial decision-making process better and allow you to make well-informed decisions in the future. These are the areas where financial advisors should be focusing. They are not sexy and do not offer the hope of becoming wealthy overnight, but they have meaningful and controllable impact on your financial well-being.
As long as investments and insurance remain the primary focus of the financial advisory world, the financial advice you receive will remain wrong. That advice simply cannot be correct without really knowing you. How could anyone offer an appropriate investment portfolio without understanding what you hope to achieve and what type of risk you are willing to accept? They can't! How can insurance products be recommended without knowing what risks you are comfortable living with and which you want to pay money to pass to an insurance company? They can't! If you are offered investment or insurance products without the advisor getting to know you deeply, you are being offered products based on assumptions the advisor is making about you. The most likely investment assumption is that you want to have the highest return possible at any cost. The most likely insurance assumption is that you want to purchase as much insurance and transfer as much risk as you can afford.This may be true for you, but I submit that a financial advisor should know this with certainty before making the assumption. Assumptions have a habit of proving incorrect in the long-run.
All financial advice is wrong.
It bears mentioning that there are already financial advisors who are moving in this direction. They are a part of a movement known as financial life planning. Advisors in this movement are committed to getting to know your values and goals deeply, then helping you craft a path to reach those goals while respecting your values. A couple resources for locating one of these advisors include the Kinder Institute of Life Planning and Money Quotient.
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