Why Money Advice is Bad

Bad Money Advice is about just how bad the money advice that consumers get is. From earnest but ill-informed newspaper reporters to pseudo-religious  gurus who preach about how US_Silvercert1to become rich by acting rich, the personal finance advice we get is just not what is should, or could, be.

But much as I enjoy ridiculing the purveyors of this advice, particularly those that make a good living at it, I do not, in the grand scheme of things, really blame them. Most are doing the best with what they have. Even the more villainous merchants of financial hokum are merely supplying the populace with what they are willing to pay to hear.

Mine is a sort of Newtonian view of economics. I believe that nothing happens in a vacuum, that for every ample supply of a thing there exists an equal and opposite demand for it, no matter how bad we may think it is. McDonalds does not sell super sized meals of grease and high fructose corn syrup because they have a pro-obesity agenda, any more than Detroit makes towering SUVs because they hate the environment. No, those things exist to satisfy a demand. We like eating Big Macs and driving Expeditions.

Similarly, when something is not as common as we might objectively think it should be, such as salads for lunch or commuting on mass transit, the usual culprit is a gap between what we think should be the demand and the actual demand.

And so it is with decent personal finance advice. It is rare for the same reason that electric cars are. Abstract ideals aside, the truth is that very few of us are willing to pay enough for it to make it worth producing.

Actually, finance advice is even worse than electric cars. Most folks would accept a gift of a new electric car. But most refuse financial advice, even if it is free. According to brokerage Charles Schwab, fewer than 10% of employees use free-to-them seminars or advice websites about their 401ks.

SmartMoney wrote this up with the catchy title Is Free 401(k) Advice Worth the Money? Their take is that so few people use the free help because it is so bad. I agree that it may indeed be lacking in quality, but it is hard to imagine that many people spurning it for that reason. After all, how could they know how bad it is?

I am betting that this untapped advice is, by and large, the sort of bland, conservative, and mostly correct stuff that you would find in places such as, for example, SmartMoney. It almost certainly qualifies as better than nothing.

And yet nothing is, apparently, preferred by most consumers. Advice suppliers can hardly be blamed for that.

Why is this? How come we shun advice on a topic that, let’s face it, as a nation we desperately need help with? Honestly, I am not sure.

It could be simple denial. We know enough about personal finance to know that we are screwing it up. Hence, it is an unpleasant topic to be avoided. Or we might be unhappy about our level of wealth, a.k.a. level of success in life, and want to avoid discussing money for that reason. Or both.

Or perhaps it is overconfidence. We know all we need to know about personal finance already, thank you very much. I have a knee-jerk objection to this because it is so spectacularly untrue, but I know better. Overconfidence and money decisions go together like a Big Mac and fries.

The belief that we already know all we need to know about money feeds into one of my many peeves, the attitude that any aspect of money discovered to be complicated beyond our immediate understanding, from credit card contracts to CDOs, must therefore be sinister and/or fraudulent. In this we are like financial Amish. Any innovations made after a certain date are the work of the devil.

Whatever the reason, the bottom line is that although popular money advice could and should be better, it is not only the people creating that advice that deserve blame. The indifferent audience has to accept responsibility too.

No Comments

No comments yet.

RSS feed for comments on this post. TrackBack URI

Leave a comment

WordPress Themes