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Social Security Spousal Benefit Calculation Before FRA
10 months ago
On Why Good Financial Decisions Are Often Wrong
While beginning my day some time ago, a local news station played on the television in the background. As I sipped my coffee and discussed the day with my wife, I overheard a story begin to play with a title similar to "home renovations that pay off now." This story, which on the surface seemed to make perfect sense, presented a clear opportunity to discuss why good financial decisions are often wrong.
The premise of the story was pretty straight-forward. It was the type of story media outlets recycle often and seem to use as filler when they are short on news. The newscaster discussed the amount someone could expect to pay for a certain home renovation (e.g. kitchen remodel, home expansion, etc.) and the amount that each renovation might increase the value of the home. Finally, the story was wrapped up with a comment about which renovations returned the most money for your investment and then concluded by listing which renovations were the best to make.
I have found when talking to people that often financial decisions are approached in this manner. They are reviewed primarily from a "maximize return" perspective and the highest expected return equals the "good" financial decision. There is good reason to consider the return to expect from some financial decisions, but it is my opinion that generally this is not the best way to make decisions. Far more important is the value you receive by choosing either side of the decision. What is important to you? How much are you willing to pay or give up to choose a certain path?
Take the home renovation example, a kitchen remodel may return more than an in-ground swimming pool addition, but if your goal is to swim in your backyard every day and you never cook, the kitchen really does not make much sense. You may get more money back if you choose to sell the house in the future, but you get no return from the kitchen while you still own the home. The kitchen remodel might be the good financial decision but entirely wrong for you.
Other examples of this type of decision-making include maintaining a mortgage for a tax deduction when you could pay it off and you are debt-averse or taking more investment risk to maximize return at the expense of sleeping well at night.
Don't forget yourself and what is important and valuable to you when making financial decisions. Don't allow someone to convince you to make a choice that does not represent your values simply because it has the highest expected return. Well-considered financial decision are made by considering the expected return, long-term impact and what is important to you, then balancing those factors to reach the decision. A good financial decision according to the experts could be entirely wrong for you.
Who Should You Trust With Your Money?
Maybe nobody.
For several years I worked for an financial planning firm that I would have been comfortable recommending to anyone and using as a model for the type of firm to look for. The firm was fee-only, the culture had a true focus on financial planning and believed strongly in acting as a fiduciary. Employees were well-trained and asked to maintain and expand that training. Everything you would think to look for in a financial planning firm was in place.
Unfortunately, despite all the right signals being there, clients and employees of the firm were ultimately harmed in very dramatic ways. Former clients no longer have a concept about the amount of wealth they have, are unsure how they will pay next month's bills, and have had their financial well-being forever harmed. Former employees most important asset, their earning power, has been hurt immeasurably. They have been stained by association with the firm despite no knowledge of alleged wrongdoings. It is an all-around bad story.
The question I have often asked myself about the experience is "who can I recommend people use as a financial planner when the indicators here were positive but ultimately resulted in such harm?" The more I have considered this question, the more I have begun to believe that I cannot recommend people who handle your money and act as investment advisors and financial planners. There is simply no need to trust somebody to handle your money.
I am not saying financial advice is unimportant. In fact I believe the need for good, objective financial advice is extremely high. What I think is unneeded is someone to physically handle your money, whether that be managing an investment portfolio for you, being able to make distributions of money out of your accounts, etc... Yes, someone providing these services can deliver a lot of convenience and take work off your shoulders, but there is great risk involved as well. Despite controls that are in place, you just cannot be quite sure what is happening with your money. Is that risk worth the convenience?
I think it makes more sense to seek out a financial planner that would provide advice without touching your money. You will end up having to do some of the work yourself, but you eliminate one risk on your financial well-being. And it should make the cost of advice much less expensive and much more accessible to you if investment advice is not provided.
So, who should you trust with your money? I am beginning to think you should only trust yourself with your money. Seek someone out to provide financial advice and financial planning service, but don't let them touch your money. Why assume that risk?
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