Great Information Doesn’t Replace REAL Financial Planning

Neat Document-Wed Aug 19 2009

It is seriously dangerous to to mix investing with entertainment. The classic example is thinking that Jim Cramer is a financial planner rather than some sort of circus clown.

That seems to be pretty clear cut.

What is just as dangerous, but far more tricky, is understanding the difference between good (even great) financial information and real financial planning.

There is a huge difference.

Take a look at these two articles:

Both in the Wall Street Journal.

Both about bonds.

Both contain good, well-researched information, but good luck trying to figure out what you should actually do with your life savings based on them.

One says that “investors burned by the stock-market meltdown are piling into bond…funds in an effort to tone down risk and generate stable income.”

The other says, “Bond funds are facing a host of pressures that are…raising long-term risks,” and that Treasury funds which are considered the “risk-free asset class, probably are the riskiest asset class right now.”

This is not meant to be a criticism of the Wall Street Journal, far from it. It is meant to prove the point that for real people trying to make very important decisions about their money, it’s painfully conflicting information.

One makes it sound like bond funds are a good place to put “safe” money, and the other makes it sound like a gamble.

The point is this: the financial press, personal finance bloggers, and best-selling authors are often GREAT sources of information. But please, please don’t confuse great information with real financial planning. I know many of the best personal finance bloggers and I think that they would all agree that there is a big difference.

As good as J.D. of Get Rich Slowly is at providing a filter for information, and even his personal experience and opinion, I know that he doesn’t think of himself as a financial planner. Information, yes. General advice, yes. Financial planning advice, I doubt it.

General advice vs. specific financial planning advice. Maybe that’s the issue. I am not sure where one ends and the other begins, but I do know there is a difference.

One issue is that real financial planning is personal. It has to be. A good plan will be unique to your situation, and what is right for your situation may be a disaster for your neighbor.

I can’t tell you how many times I have seen people make mistakes because Suze Orman said to do something that just did not apply to their situation. Suze may be a genius. She may have great information. She may even provide some good, general advice. But she is not YOUR financial planner.

Sometimes these sources of information can help you make better planning decisions, BUT without going through the process of planning for your situation, it often becomes a painful experience figuring out how it applies to you.

So read whatever you want, but then find a member of the Secret Society of REAL Financial Planners and find out how it applies to YOU.

Update: A slightly tongue-in-cheek sketch reply from Mike of Oblivious Investor.

By Carl on 08.19.09 > Link

Tagged as: bonds, financial planning, SSofRFP

  • The real problem is not the information. It is how we interpret the information.

    I view the promotion of Passive Investing (the idea that you don't need to change your stock allocation in response to big price changes) as financial porn. But I have seen advocates of Passive Investing argue that those who point out the flaws of Passive Investing are putting forward financial porn.

    Once we adopt an investing strategy, we want it to work. We become emotionally invested in it. From that point forward, we filter every information bit we come across so that we hear it as confirming our biases.

    I believe that we don't need to change the information we hear so much as we need to change our attitude toward the information. We need to strive to become more humble. We need to acknowledge that we don't know it all today and that we never will. We need to train ourselves to seek put opposing views that challenge our biases.

    When I say "we," I don't mean just middle-class investors. I also mean those we refer to as "experts." They don't know as much as they like to think they know either (in my assessment). And they are even more reluctant than the ordinary investors to admit getting it wrong. I think a good case can be made that in general it is the "experts" who are the most off the right track in their understanding of how stock investing works. What a mess!

    Rob
  • Dylan
    I think there are important distinctions to be made between information, advice, and planning. As a simple analogy to illustrate the difference, think of these in terms of air travel:

    An example of information is: It can take 45 minutes to get through security sometimes.
    An example of Advice is: Aim to arrive at the airport 90 minutes before your flight.
    An example of planning is: Arrive at the airport at 2:15 PM for the 3:45 PM flight.

    Planning is specific advice for a specific set of circumstances. So, if an article in a travel magazine or on a travel blog said to arrive at the airport at 2:15 PM, and passengers did just that, some may miss their flight or waste hours sitting around, waiting to board. Instead, the magazine or blog is more likely to give general advice like aim to arrive at the airport 90 minutes before your flight, and with this advice, you can do the math and plan. (I realize planning what time to arrive at the airport is far cry from planning a lifetime of cash flows, but I wanted to focus the example differences between information, advice, and planning, not the skill set for planning travel vs. finances.)

    I also don't think the question to ask is, "where does one end an another begin?" because I think there can be a fair amount of overlap. Going back to personal finance and the role of a planner, a financial planner may provide information, advice, and planning. However, people may become well informed through reading and/or only actually need advice in certain areas prior to engaging a planner. Along the spectrum, I think information is the easiest to obtain. Knowing what to do with the information becomes a little more challenging. And when we get to the actual planning, this is where I think a financial planner can add the most value by providing situationally specific advice.

    Carl, you said, "I can’t tell you how many times I have seen people make mistakes because Suze Orman said to do something that just did not apply to their situation." I've seen it too, but I've also seen people do a lot of things correct because of something Jack Bogle said that they knew to apply to their situation. Does everyone do that? No. Is everyone capable of doing that? I don't know. But, I think it's fair to say the point at which someone is no longer well served by reading, and ought to engage a SSRFP planner, is different for everyone.
  • Dylan-
    Very well put. Thanks!

    One clarification on the sketch: I do not mean that using "information" from
    "some blog, article, or book" as a factor in your decision making process is
    a disaster. I meant using a single blog post, article, or book, to invest
    your life saving often is a disaster.

    When I drew it I was
    thinking about the disaster of trying to make a decision based on
    those two Wall Street Journal articles about bonds.
    There is so much conflicting information from so many sources that I
    don't know how people sort through it all.

    I think that is one of the reasons
    GetRichSlowly is so good is that JD does a good job of filtering much
    of that noise.

    Like you pointed out LOTS of people have saved themselves a lot in terms of
    cost and headache using some of the "Boglehead" information.

    I think that it has also been pointed out that it is also just as difficult
    (maybe even more) to find a financial professional you can actually trust.
    [see Mike's sketch for that one]

    @Holly, I wish I had an answer for you on how to find a REAL planner. I have
    found that there is not a qualification that guarantees that you have
    someone you can trust, so the way we have handled that in the past, is email
    me a bit about yourself and where you are located and we will do our best to
    direct you. If we don't know a member of the Secret Society in your area, I
    can give you some general direction. Not perfect, but for now it is the best
    we've got.

    Hope this helps clarify some issues. Thanks for the discussion. Keep it
    coming.
  • Dylan
    On the sketch, and it maybe because I'm looking at it like the "Entertainment/Investing" one (which I think is brilliant BTW, and the circles are also nice and round). In that one the bad idea is where the two come together, in any amount. If this latest sketch is meant so say "using a single blog post, article, or book, to invest your life saving often is a disaster, that's more than the just that shaded overlap the arrow points to. Anyway, I realize that a sketch is subject to interpretation and isn't meant to be taken as white paper, but I just want to share how I initially interpreted it.

    On finding a REAL financial planner, I think it goes beyond trust. A REAL financial planner is not only trustworthy, but actually does planning too. To further complicate things advisers, trustworthy ones, have varying ideas about what real financial planning actually is.
  • Dylan
    Boy, Carl, you really got my ming thinking at the end of the day with this topic. I also want to add that there is a fair amount of contradiction among REAL financial planners. They differ on the use of single premium immediate annuities, income replacement assumptions, inflation, longevity, and investments.

    I know REAL planners that recommend overweighting REITs with a separate allocation, while others recommend just going with the REIT exposure in the total stock market. And the whole FF small/value bias and DFA question, look out! Treasuries vs. aggregate bond market. How big the emergency fund should be. How many years worth of cash reserves to keep in retirement. The list goes on and on.

    These are issues where I think a little extra knowledge and perhaps even some advice from PF blogs or articles can make people become better consumers of financial planning advice.
  • behaviorgap
    Yep.

    The REAL financial planner thing is really hard.
    Trust but verify.
    Measure competence somehow.
    Ask people you trust for a reference.

    In terms of a list of members of the Secret Society of REAL financial planners, I have a list, It has the 3-4 planners that I would want my wife to call if I was no longer around.

    Planners that I can personal say I would trust my families money with. A few in Tucson, one in Atlanta, one in North Carolina, one in Las Vegas. I am sure there are others but those are the folks I had in my mind when I started this Secret Society.

    In fact if you are looking for a REAL planner, and live in one of those cities, email me and I can connect you.

    I know that there are more members, In fact I have been exchanging emails with a number of them. I just don't know then well enough, so they are secret. My goal, and my plea is that we find all the members of the secret society and expose them! Tell the world the difference they are making...

    How is the only question...maybe by selling t-shirts...
  • roncameron
    I live in Tucson and am looking for a real ( preferably fee only) planner. I would appreciate your recommendation. I would like to add that I have parkinson's disease..
  • Holly
    I wish the page linked to by "find a member of the Secret Society of REAL Financial Planners" actually gave someone any information on how to find a financial planner. It does not. I seem to recall that there is information on behaviorgap.com on how ti find a good financial planner, but 10 minutes of looking around did not yield me results.
  • Dylan
    It is a "secret society" after all. I've actually though about suggesting to Carl that he formalize this and build a list/group, but I think that it is easier said than done. Their are a lot of potential pitfalls in taking on such a task. I do think it's an interesting discussion to have.
  • @Dylan and Holly- you are right. It is easier said than done. At some point
    I would like to organize a list of the Secret Society. So much to do, so
    little time. It all seems to come down to trust and competence and
    unfortunately you can't open the phone book and find "Planners That You Can
    Trust".
    Secret indeed.
  • I can't remember which WSJ writer wrote (either Clement or Zweig I think), but all he really does is repeat the same principles over and over, but use a different way to get a point across.

    The last place people should be looking for advice is in the daily news or entertainment, but unfortunately it's one of the first.

    Great article.
  • Whether you're talking about financial planning, investing, dieting, fitness, medicine or dozens of other topics, there's never been a shortage of information out there. Some of it is good, responsible information, but it's all still just information.

    Carl - your message of context and creating a plan that reflects a person's very specific and unique circumstances is where some (not all) of this information can be translated into wisdom. And while a Financial Advisor isn't required to help create wisdom from information and relate it to your personalized financial strategy, this is the true value that many of the best Financial Advisors deliver.

    Another great post and sketch, Carl. Keep up the great work
  • Rick Francis
    Carl,
    I think the reason for the contradictory articles is that bonds appear schizophrenic right now! The credit crunch has made some corporations desperate to loan money- thus paying an interest rate premium. On the other hand the government is keeping the Federal funds rate low (artificially low?) to stimulate the economy. Government treasury notes have very low interest rates too as everyone seems to want “safe” returns without concern about the low interest rates.
    My limited understanding of bond funds is that bond funds derive their value from all the bonds they hold. The value of the bonds change due to defaults and changes in interest rates. If the interest rates increase bond funds degrease in value when interest rates drop bond funds increase in value. We have historically low interest rates on government treasuries, so the logical assumption is that interest rates will go up in the future and the bond funds of treasuries will drop in value.
    I wouldn't expect the credit crunch to last forever so it seem possible that corporate bond rates could drop before general interest rates rise thus increasing the value of corporate bond funds. However, if interest rates increase quickly enough corporate bond rates should rise as well. With the economy defaults could be unusually high too…This situation doesn’t give me a lot of confidence in bond funds as a stable fixed investment…. Personally, I'm much more attracted to REIT and stock indexes with high dividends- VNQ 8.58% yield and VGK has a 7.20% yield.
    Mike makes another good point- I don't think I’ve ever seen my favorite investing book, The Boglehead's Guide to Investing in a bookstore.

    -Rick Francis
  • Dylan
    Carl, I really like your other sketches, but I don't like this one. Here's why. The shaded area represents the overlap, so it appears that any influence on the investing of your life savings based on a book/blog/article will be disastrous. Is that really the message you are illustrating? I'd agree that basing everything on "some blog, article, or book" is ill-advised, but that's not what I see in your sketch. I actually think the sketch would be better if you changed "a disaster" to "be cautious." Just my opinion, you're the artiste.
  • Dylan-
    I had not looked at it that way.
    What I was trying to illustrate was the danger of relying on general
    advice (no matter the source or the quality) to make decisions that
    are clearly personal to your unique situation.

    I hope the point was clear in the post...

    In case it is not, the point is really is that taking "rules of thumb" or
    general advice from any source (including behaviorgap.com) can only take you
    so far. At some point the real work is figuring out how that information
    applies to your situation. For some people that will involve hiring a REAL
    financial planner, and as Mark has pointed out, that is a challenge in
    itself.
  • Regarding the likelihood of finding good advice in books/blogs/etc, I like how William Bernstein recently phrased it: "More than a little luck is involved. Head down to the personal-finance section of your local Barnes and Noble, and you’re more likely to run into Suze Orman than Jack Bogle."

    And thanks for including my reply. :)
  • My thought is that it's equally unlikely to find good (judged by the results) financial advice from planers/advisors as it is to find it in some random finance book.

    Unlike Carl, too many simply don't get it. They are stuck in an old century an cannot think outside the box.
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