Financial Guidance: The Good, the Bad, and the Ugly

How to know if the financial advice you’re paying dearly for is money down the drain

Man listening to the advice of an angel and a devil

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Frequently I am asked: “Is financial advice worth it?” The underlying question is whether, in the end, you will have more money or less for having paid for such advice.

The simple answer is that good financial guidance can easily be worth many, many times what is charged for it. On the other hand, a great deal of what passes for advice out there in the marketplace is worth nothing. The challenge lies in discriminating between the good, the bad, and the worthless.

It would take far more than one column to describe which financial assistance has real value. Indeed, it would take a book. A long journey begins with a single step, though, so let’s start with a few basic principles. Good financial advisors can give you extraordinary value by guiding you in what economists know to be true about investing, taxation, and finance and, most importantly, by using that knowledge for your benefit rather than that of their own.

It is worth noting that investment advice and financial advice are not at all the same thing. Financial advice concerns the entire range of economic issues facing your family, now and into the future. Investment advice, on the other hand, is a small subset of that. Investment advice alone is deeply inadequate as a means of planning one’s financial future. With that said, though, let’s think about investment guidance.

Economic science knows a great deal about investing, markets, and what actions an investor should take. By extension, highly trained economists have tremendous insight into what financial talk is nonsense, reflects nothing but random chance, or is dishonest. Using established economic facts as a polestar in financial decision making is one of the smartest things you can do. I am indebted to Apollo Lupescu, Ph.D., of Dimensional Fund Advisors, for suggesting the term evidence-based investing.

pullquoteAmong the ways that evidence-based guidance can help you are diversifying fully, avoiding excessive risk, understanding how markets actually work, changing investments efficiently, and holding costs to an absolute minimum. Beyond these, a skilled advisor can create tremendous value by optimizing the tax consequences of how you invest.

Taking advantage of the various preferences and pitfalls in the tax code can often put even more money into your pocket than excellent investment advice.

Most valuable of all, a worthwhile financial advisor can offer help in avoiding the excessive costs, bad ideas, scams, and “gotchas” that seem endemic in the financial arena. Perhaps because there is so much money at stake, there is no shortage of terrible advice. Robert J. Shiller and George A. Akerlof, both Nobel Prize-winning economists and authors, argue that as long as it is profitable, sellers will systematically exploit lack of knowledge and psychological vulnerabilities. Markets are not solely the bringers of material wealth and the greater good, say Shiller and Akerlof, they are also inherently filled with “tricks and traps and will ‘phish’ us as ‘phools.’”

The best financial advisors can deliver extraordinary value by using their superior knowledge, training, and diligence to steer us away from the promises of easy money and the very human inclination to make decisions by gut instinct. They must point like a laser at what economic science knows to be true. And if they will do all this as true professionals, with their sole intentions focused on what advances your best interests without being swayed by their own desires or needs, then they will truly be worth their weight in gold.

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