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 to 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.

The Big Picture | Frank Curmudgeon | September 27, 2010 12:29 pm

19 Comments

By Neil, September 27, 2010 @ 1:40 pm

I thought your examples of Detroit and McDonalds were interesting. Detroit’s lack of success suggests that it’s continued supply of SUVs is more an example of failing to read the market accurately. McDonalds, on the other hand, is able to continue to be successful because they add new menu items to satisfy new styles and consumer desires.

Which doesn’t make your post wrong, but it does raise the possibility that maybe financial advice is like Detroit. They’re still providing what was popular 10 years ago, and failing to adapt to the current market. Maybe if someone with a mainstream audience started feeding the populace better advice, they’d lap it up?

Then again, that’s probably expecting too much of the public, which I try to avoid.
By Dan, September 27, 2010 @ 3:11 pm

Well, “everybody knows” that they should spend less than they earn. Fine.

But the next piece of advice says “don’t invest money you can’t afford to lose.” Well, can a 25-year-old with $50,000 in debt afford to lose anything? If not, then how can he invest for retirement?

So perhaps the reason people don’t like PF advice is because there is so much conflicting stuff out there.

And if the stock market doesn’t return the “average” values that everybody is planning on, you’re going to be screwed. And if you’re going to be screwed later, shouldn’t you just enjoy it now?
By mc, September 27, 2010 @ 8:22 pm

The hippie generation, now in late middle age, feels that good financial management is materialistic, and a spiritual person should ignore money management or be deliberately inept at it.
By Rob Bennett, September 28, 2010 @ 5:23 am

I believe that the primary problem is a lack of competition. Our system works when people are prodded to perform better. It does not when they are not. The personal finance field is filled with formulaic thinking that does not get the job done but that is accepted because it is the norm.

The internet could be the answer. We have the ability on the internet to challenge the conventional thinking and to bring something new into existence. If we did that, the Big Shots would follow because they would look bad to be offering advice that is so much worse than what is available free on the internet.

Thus far, most personal finance blogs have shied away from engaging in original thought. My sense is that most bloggers are intimidated by the “expertise” that the Big Shots are thought to possess. We see ourselves as followers, not leaders. We repeat weak stuff that has the Good Housekeeping Seal of Approval when we should be putting our readers first and asking hard questions over and over again until we hear some reasonable responses to them.

I’d mad as hell and I’m not going to take it anymore!

That last line is a joke. But I do see huge potential and I think it’s just a question of people working up the courage to take advantage of the opportunity. Nothing happens unless some person somewhere elects to do it. So we just need to start doing it. There are a whole big bunch of people in the Personal Finance Blogosphere who are capable of giving far more effective money advice than what you hear from the Big Shots. We need to start doing that.

Today! Now!

Rob
By Andrew Stevens, September 28, 2010 @ 12:07 pm

Good insight, mc. Not sure if it has anything to do with hippies, but I certainly meet (and am related to) lots of people who clearly think that I should be ashamed to be good with money and to have accumulated as much as I have. And they do appear to be deliberately inept at it, all the while mouthing platitudes like “you can’t take it with you.” (Who wants to? I just don’t want it to run out while I’m still here.)
By tony, October 1, 2010 @ 3:47 pm

99% of financial “advisors” are salesman. Their loyalty is to the company that pays them and if they are independent and ‘fee based’, they are asset gatherers (more assets, more fees I can charge). The whole industry sucks, and until another business model comes around, like an ‘hourly only advisor’, people will need to educate themselves. However, that is unlikely to happen because peple are lazy; they would rather do things that make them feel good like eating Big Macs and driving SUV’s.
By Greg McFarlane, October 1, 2010 @ 10:23 pm

A well-written and provocative post.

I think the Ostrich Defense has a lot to do with people eschewing financial advice. Who wants to see their horrible financial position laid bare, especially in front of someone? It’s like the fat women I see who use the weigh scale at the gym, but who first glance around the room to make sure no one’s looking.

Plus, financial advice is intangible, and no one’s going to see immediate results. If someone reads my blog and gets something worthwhile out of it, it’s not as if a couple of crisp $100 bills are magically going to appear in the reader’s wallet as soon as he logs out.

And on top of that, people have trouble embracing money for some reason. Presumably guilt. I read a comment on another blog today, a woman saying she wouldn’t want to win $1 million because of the responsibilities and headaches it would bring. Huh? When a significant chunk of the population can’t even accept money as something beneficial, how can you convince them that they should learn how to nurture and grow it?
By RobberBaron, October 2, 2010 @ 8:18 am

Or the problem is “freedom of choice.” Too many choices. Confusing. So either close your eyes and point, follow the most recent advise from your chosen TV guru, chase the watering-hole gossip, or give up all and “carpe diem.” (Well, there is also the shove it under the mattress/savings account syndrome.)

Am I really money ahead personally managing my assets through my online trading account? Considering the time I put in, I could earn more working a side job at McDonads — which, unfortunately, considering the past 8 months, I don’t own shares in!!!
By Jimmy, October 9, 2010 @ 2:56 am

“Bad Money Advice is about just how bad the money advice that consumers get is.” If your grammar and writing skills are that poor, why should we listen to anything you say? “…consumers get is.” REALLY???
By Robot, December 15, 2011 @ 5:20 pm

Money can be bad in many ways if you don’t know how to use it in the right ways. If you show off that you’re loaded with money other people may want to steal it off you, which can lead into worse problems.
By monster, December 16, 2011 @ 8:13 am

My opinion I think bank should lend money to poor people because Money is good thing because without money u can’t have happiness in life and you will find it really difficult to live your life the way u want. Prices these days for food are really expensive these days which means that if you don’t get any money from the bank you won’t be able to purchase food and useful items. Wouldn’t you agree that People who use money on luxurious items would rather donate some money to the people who are at their old ages who can’t work and instead they can buy some food but in other hand to much money can make people selfish, horrible and greedy for more?
Money buys your opportunities in life for example money buy holiday, you can pay for therapy if your unhappy of issues , you could create your own business , without money you would be homeless you could donate money to rescue animals and poor people , you could sponsor or adopt a child, you could pay for necessary hospital equipment and the power of money can give u freedom and anything you wished for.
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