...because people have a difficult time making good financial decisions for themselves, plans should be designed to “nudge” them, as Richard Thaler and Cass Sunstein of the University of Chicago and Obama’s regulatory brain trust would have it, into making better decisions.
The point I am trying to make with this post is not that subtle but it is succinct. I am all for people taking control of their finances, which can include hiring someone like me or not, and having to live with the consequence good or bad. I would love for there to be a choice of opting out of FICA taxes in lieu of putting the same amount or more if mandated into some private account and, again, owning the consequences good or bad. IMO this is very consistent with the Libertarian viewpoint and I am all for it.
However my belief that these choices should be available does not mean that every person should take advantage of these sorts of things. The premise behind the quote above that many people are simply not equipped to make these sorts of decisions is correct. The idea of people being forced to choose something that is "for their own good" is thoroughly reprehensible to me but as I have said before some sort of privatized social security would be ruinous along the lines what has happened to 401ks over the last ten years.
There is nothing wrong with the concept of allowing people to choose some government plan where decisions are made for them as someone left to choose between to going totally on their own with no safety net or some program where they totally delegate the entire thing is making a choice. People with the introspection to know their short comings could benefit from such a concept.
Note I say concept as I'm not sure how well it would play out in practice but that is a different topic. But if people can choose to totally delegate through a CFP or the like then they can be free to choose something the government might offer. Obviously someone who reads stock market blogs will be unlikely to choose some government plan.
Then there was this very similar article from the NY Times which talked about using technology in a way I had never thought of to, as I read it, scare people straight. There was talk of using software to show the user what they might look like at age 70, or whatever, and then try to dramatize what life would be like for the user based, presumably, on stats about what they had saved and how they might be expected to age, health-wise that I imagine was based on personal habits.
Apologies for being too insensitive but an overweight 50 year old who smokes will be likely to to have much higher health costs than the 50 year old who is fit and trim and my take on the article is that software can let people see this first hand and that it has a powerful impact.
My hope for what the impact would be is to create some understanding about how much money needs to be saved, the benefits of working one way or another later in life and getting people to look at themselves with a critical eye for whether or not they are equipped to manage their finances on their own or get help.
On the idea of going it alone Invest With An Edge did a book review of sorts about The Risk Wise Investor. A great one-liner in the review as follows "Since investors are not robots, we have to remember our human habits, characteristics, and limitations." As I write so often about removing emotion from the equation I am probably advocating that people train themselves to become robots. I guess I would say that the closer you can get to being a robot the better equipped you would be for going it alone but this really is a personal thing of mine and may not carry water with too many people.
The task can be simple; learn a little about how things (like markets and credit) function, learn some basics about saving money, learn some basics about how to build a simple portfolio, learn a little about the types of emotional behaviors that have done people in before and how to avoid those behaviors and then stay current. That will get it done for most people who save properly and live within their means but of course executing that simple task is not easy for many people to execute when emotion and lack of diligence on the above steps results in detrimental behavior.
19 comments:
Looking at the average citizen's debt and how they manage money, privatizing social security would be disasterous. High school's should have a basic finance course required for graduation.
As for people managing their own money or not...
My experiences with professional money managers has never been good. I've been with 3 company 401ks and they have all been "here is a packet of info, good luck." The choices of where I can allocate funds was always limited to mutual funds with whichever broker is handling the 401k so choice is very limited.
For IRAs, I worked with 3 different professional money managers (through my bank, an independent manager, and a brokerage Dain Bosworth way back in the day) told me "we'll just put you in 1 general market stock fund until you can contribute a higher monthly amount." A 4th professional even fast talked me into a VUL but luckily I got out of that after 1 year.
$200/month obviously wasnt meeting their commission threshold but when that was 10% of my pay it was all I could realistically afford. Going back to the finance class high school requirement, I really didn't know what to do at that time.
That was all during my 20s. Now that I am in my mid-30s my retirement accounts have time to recover from market crashes but I don't think I have the time to recover from additional poor money managers.
Obviously not to say all professional money managers are bad, far from it. Just that I don't have the time to keep searching for them.
once someone decides they need help, the task of choosing someone, you are 100% correct, is very difficult.
sadly there are plenty of professionals who do not know what they are doing
Problem I have is when people like Sunstein and Thaler want to make the decisions for everyone because they think they're smarter than the great unwashed. Some people really need the help (not stupid, just mis/uninformed) but some don't. Agree w/ Rhianni32 on the hs grad requirement of a finance course.
Mark from L-Ville
I could not agree more with these comments about finding professional money management help. I read blogs like these (thanks, Roger, for your many good thoughts) and money magazines, but I am not a pro, nor do I feel confident to make all my money decisions without some guidance.
The complicating factor, for me, is that I have read time and time again that the past is not a good predictive indicator of future performance ESPECIALLY for money managers. Those who do "the best" in any given year have often taken risks that would not work in another cycle.
So, if the past is not particularly indicative of the underlying quality of the financial professional, where is someone like me to turn for help? I sure don't have the time or skill to find someone without a lot of work. I guess that's part of the point, too: if I had the skill to identify someone capable enough to manage my money, I wouldn't need him or her.
It appears that there is some manner of systemic issue on this point.
Amen on the high school course. College doesn't require it either. One can graduate from college with skill sets to earn a living but know nothing of money, finance or investing.
To Rhianni 32:
I'm pushing 70 now. In high school, I had the good fortune of a mentor who taught me to pay myself first. Set aside 10% of everything I earned and invest it someplace. Initially it was a pitiful bank account. Later it would become a retirement plan. Later still, a 401K. After 40 plus years it has accumluated to over 2 million. I have never calculated the rate of return. It could have been good, ordinary or even poopy. Don't know and don't care. Slowly but surely it worked and for me, it's good enough. Good luck.
You said a mouthful there, Roger. My wife (a CFA) used to work for a company that did training for the CFP exams, and the questions that she used to get from students would STUN you. We're talking "struggling to use a calculator" level here.
Suffice it to say that no matter how bad you might THINK the general level of professionalism among CFP's is....it's almost certainly much worse.
past not indicative of future... in terms of performance that is probably correct but not universally so IMO. While no one is right all the time a really bad manager will be bad a lot and ditto for a good one i think.
part of hiring some has to be agreeing w/how they do things. recently someone inquired about hiring us but our total stock market cycle did not fit for them so they did not hire us. I hope we are good at what we do but not right for this person was not right for this person.
the idea of highschool work on this topic has come up before and I agree 100%.
part of the equation for the profession be worse than one might think is that, blunt comment coming, it draws people with no analytical ability but who think they can make a good income selling.
Vigorously concur with High School Finance Course....would do well to educate the hoi polloi & make them better informed/productive. Give them a dose of Rand, Hayek, & Friedman for required reading. Started reading my Dad's WSJ in high school to crack the code. Two examples of private social security are Chile/PVD & Galveston County,TX employees.With regard to Messrs.Thaler & Sunstein, I can dispense with these minders & moochers.Bye the bye, check out Hussman's reference to Timothy Geithner as Eddie Haskell..killer.
With regard to health costs for fit vs obese/smoker/diabetic over the course of a lifetime, I have read that fit people will actually have higher health costs due to longevity. The fat smoker will die much, much earlier than the fit person.
How's that for insensitive?
that is a valid observation
you heartless SOB, LOL
These people who think they can nudge me are looking to get severley nudged about the head and shoulders.
These narcissist statists are a disaster.
It was a common misconception, in the UK, that to obtain a mortgage meant that you must have sufficient life cover. In the last decade the advice being given was regulated and the products deregulated. The extra competition and longer life spans meant new life cover policies screamed down in price. Although you have to tell your customers you're advising them to take sufficient cover, you cannot mis-sell. Now life cover sells itself. There must be a lesson there, somewhere.
Critical illness policies, OTOH, need some home truths proffered before the client will consider them. The chances of living with a serious illness, and financially broken, are higher then most want to acknowledge. Insensitivity was usually needed to edge people out of their comfort zones, but I didn't have a single client say they were unhappy with my difficult questions. Statistically I'm sure I saved some people's futures, and that of their loved ones.
Rhianni32's point about "here's the packet, good luck" hit home with me a few weeks ago. My wife works for a large corporation and one of her direct reports asked her how he could change his allocations in his 401k. She is completely clueless WRT finances, so they conference-called me, and I walked him through the interface.
Here's a very smart, successful guy with a masters degree, probably earning 6 figures, and he didn't even know how to operate his own 401k. I was stunned, but I can only imagine how many more there are out there like him, with $100K in an account simply set adrift in the market seas.
Amen on the need for financial education....and the idea of Sunstein and/or Thaler controlling anything "for our own good" gives me heartburn.
When I was a High School Principal, I thought it vital that students learn basic financial principals. I submitted a proposal to the Superintendent for a one-semester required course in personal finance.He told me it was not budgeted. I offered to write the course without charge. I wrote the course, submitted it with his blessing to the Board of Education, and then sent it off to the State Department of Education for approval. It was rejected because they had no matching teacher certification to handle the course. Having Principal and Educational Supervisor certification, I replied that under State standards, I could teach any course,thus the rejection was moot if I taught the class.
Most reluctantly, the State Department of Education agreed. Our Superintendent was satisfied, until the teacher's union filed a grievance stating that they did not want an administrator teaching in the classroom.Nothing personal, the union president told me, just protecting their turf.
Although this took place in the mid-1980s, I suspect things haven't changed much.
I remember being tempted to interject at the time that the teachers would have benefitted from this course as well.
T
If the nation was full of financial-literates, who would buy all the rubbish they don't need and get into debt they have to slave away to repay?
A semi-serious question. My answer is to try to ensure those around me, who I care for, can openly talk about any financial ambiguities that might be on their minds.
More and more companies are opting employees into retirement date portfolios in 401k plans. This is a form of "nudging" that the financial magazines and related talkers applaud.
I predict that as the bottom of the equity bear market nears (started in 2000), there will be outrage and lawsuits aimed at 401k advisors who opted clients into plans containing any stocks. That would probably be a great place to buy. Look for 401k plans to start adding things they usually lack like long bonds and gold, and reducing people out of stocks ;-)
"More and more companies are opting employees into retirement date portfolios in 401k plans. This is a form of "nudging" that the financial magazines and related talkers applaud."
I always wondered if the companies got bonuses or kickbacks for the amount being contributed by all the company employees? There has to be a reason why some companies automatically enroll employees at X%.
There are many reasons, some of which have to do with the number of people who participate in company 401k plans. If you get a high enough percentage of people, you can get around some of the rules affecting "highly salaried individuals" contributions to 401k plans. The rules are such that often people who make somewhere just north of $100k/year cannot contribute max to the 401k.
Also, recall a lot of the press years back about how people weren't saving for retirement. So, to "help", a company might make a rule that new hires automatically have, say, a contribution of 2% of salary that goes to a target date fund.
"Looking at the average citizen's debt and how they manage money, privatizing social security would be disastrous."
Um, have you looked at how the U.S. government manages money? The only "security" in "social security" is the fact that the government can print new money and raise taxes to cover their money management mistakes.
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