Chickens and eggs

I want to riff off of a few lines from this post from Smoke Stack, a new newsletter from Frugal Banker (probably not his real name), Mr. Banker is in the financial advisory biz, and I am really curious to see where he goes with this newsletter. (You can sign up for yourself here.)

Anyway, the quote…

At the risk of stepping on Banker’s toes, there is great irony here in the issue he identifies. I’m not a financial advisor, but I am involved enough in money that I have a lot of conversations with people about money. And if anything, I’d say “more than half” is an understatement. Whether it is retirement or college or car payments or just putting food on the table, money anxiety is real.

The financial advisory business might be the solution. The irony is it is also a big part of the cause.

And now a brief (paid) endorsement:

To the extent that this content is intelligent, it is so because I use tools like Koyfin to make sure I have the best charts, data, analysis, and transcripts available. Koyfin provides a lot of the same tools you get with a Bloomberg terminal or Capital IQ at a fraction of the price.

Interested? Click the button below to get 10% off your first year using Koyfin.

I shouldn’t overstate this. The root cause of money anxiety is, without doubt, that money is very important and a scarce resource. Only Uncle Sam has a printing machine. For the rest of us, there is only so much money available at any given time. And it is never enough. In theory, a financial advisor should be able to make what you have go further. Which, in theory, should help ease money anxiety.

But in practice, as the above quote alludes to, financial advice is a product that is sold. When your job is sales, it is really hard not to see every potential customer as a dollar sign. Even the best-intentioned salesperson. (And I do believe there are a lot of well-intentioned financial advisors.) At the end of the day, these advisors are mere human beings with their own anxieties about paying their own bills. This is their job; how they make money. Why shouldn’t they at least in part focus on maximizing the money they make?

Which gets to the irony.

Financial advisory services are sold, and they are sold primarily using two tools:

1. Fear

2. Complexity

We know this. It is why it is financial advisory firms who do surveys that determine that nobody has saved enough for retirement. Again, the most basic reason people are anxious about money is because money is scarce and necessary. But a secondary reason is that we are constantly bombarded with messages telling us we should be afraid and anxious. By the very people who want to swoop in and solve all of our money problems.

Imagine if General Motors commissioned and then trumpeted studies about the dangers of mass transit and cycling.

The complexity is the other key part of the sales pitch. Last time out we talked about “the equities paradox,” the idea that investing is easy, but stock picking is hard.

The best, most foolproof way to relieve anxiety about retirement and college savings and having enough money is:

1. start saving ASAP

2. focus on costs

3. don’t put all your eggs in one basket

4. don’t buy and sell based on your mood/market conditions/moon cycles

There is no better way. There are no shortcuts. No cheat codes. Alas, that formula does not require forking over thousands in fees. I just gave it away here, for free. This is no way for a financial advisor to make a living!

The solution, for the financial advisory business, is to add needless complexity to that formula, and to come up with all sorts of magic boxes that could potentially be shortcuts. The needless complexity makes us feel like we need an advisor, a guru that can help us navigate through the maze. (Complexity also breeds anxiety.) The magic boxes are of questionable effectiveness but are predictably very lucrative for those who sell them.

There is a big swath of the financial advisory industry that has taken a pretty simple process and created all sorts of needless complexity and magic shortcuts all towards the goal of making sure you are willing to pay them massive amounts to do for you what you can do on your own.

No wonder we are all anxious!

I’m not trying to go to war with financial advisors. I think there is a real place for fee-based (by the session or by the hour) providers of financial advice. Even the savviest DIYer needs a check-in from someone who knows the landscape just to make sure you are on track. It is a healthy exercise, especially for those who have the confidence to do it themselves. We are the people who need to make sure that our confidence is not foolish hubris.

These fee-based advisors can also be therapists, holding your hand through volatile times to make sure you don’t make any rash decisions that could derail the best laid plan. (see step 4 above)

But do make sure you understand your costs, and how they eat into returns. Don’t be afraid to ask hard questions about an advisor’s motivations. And do be skeptical about magic boxes, shortcuts, and needless complexity. Pay for the service you need, and nothing more. Index funds work fine.

Money anxiety is a real thing. And it is time for those who would claim to be able to cure it to take ownership of the part they have played causing it.

I’m excited to see where an insider like Frugal Banker goes from here.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.