1. Some people are intimidated by math. Or they simply can't do math and hate it. In any case, sitting down with pencil and paper to compute a budget, income statement, balance sheet, savings and investment plan, etc. sounds a lot like doing “word problems” in their 8th grade pre-algebra class.

2. Some people are keenly aware that there is way too much they don't know about finance, investing, taxes, etc. A lot of effort has to be invested upfront learning about it all before they can even begin to apply things to their situation, and just thinking about that is discouraging. I fell into this category a few years ago.

3. If their finances are in shambles (and they are, for many people) then it might be a sore subject. Some people would probably rather not think about their financial future, hoping instead that it will just take care of itself in time.

In short, I think a lot of people are just embarrassed by their situation and their lack of knowledge for improving it. This probably makes them feel even more vulnerable to those who might be trying to scam them.

1. Some people are intimidated by math. Or they simply can't do math and hate it. In any case, sitting down with pencil and paper to compute a budget, income statement, balance sheet, savings and investment plan, etc. sounds a lot like doing “word problems” in their 8th grade pre-algebra class.

2. Some people are keenly aware that there is way too much they don't know about finance, investing, taxes, etc. A lot of effort has to be invested upfront learning about it all before they can even begin to apply things to their situation, and just thinking about that is discouraging. I fell into this category a few years ago.

3. If their finances are in shambles (and they are, for many people) then it might be a sore subject. Some people would probably rather not think about their financial future, hoping instead that it will just take care of itself in time.

In short, I think a lot of people are just embarrassed by their situation and their lack of knowledge for improving it. This probably makes them feel even more vulnerable to those who might be trying to scam them.

My focus is the problems with advocacy of Passive Investing. When you think about it a bit, it's easy to see why this idea became popular with financial planners. There are times when super-safe asset classes like TIPS and IBond and CDs offer a better long-term return than stocks. But there are never times when the commissions on the non-stock asset classes are as big as the commissions on stocks. So the industry stands to generate hundreds of millions by promoting Passive Investing (while bankrupting the rest of us).

It does not follow that the financial planners are deliberately leading us astray. People who work for Pepsi generally believe that Pepsi really is better than Coke. People who make a living selling stocks are drawn to theories that argue that stocks are always best. That's just human nature (the psychological term is “cognitive dissonance”). The effect is not limited to those who make money selling stocks. Those of us who have come to believe in Passive Investing ourselves eventually become defensive over challenges to it. We don't want to have been proven wrong even if our belief in the theory ends up costing us large amounts of money.

The answer? Self-awareness.

The emotional aspects of money management have barely been touched on in the literature. Yet they are probably 70 percent of what we need to know about to manage our money effectively. The good news is that if understanding of this point breaks through because of the economic crisis, we have the potential to learn more about how to save and invest in five years than we have learned in the past 50. The lessons that we have been blocking out of consciousness for a long time now can bring about an economic revival if the pain of failing to let them in gets great enough that we become a bit more humble about our present state of knowledge of what works.

Rob

I'll try that on my flight home tomorrow…

I think a good response to the, “what do you do for a living,” question might be, “I'm a REAL financial planner.” Either you sit in peace and quiet afterword anyway, or it prompts the question, “what's the 'real' part for?” (or something similar).

-Rick Francis