The economic and dogmatic biases of financial planners are so powerful that the tendency to overemphasize certain recommendations and underemphasize others is quite often the norm, not the exception. Here are three of the most overrated recommendations and their corresponding biases followed by the least appreciated, most underrated recommendations.
- Tax privilege – Whether deferring, deducting, avoiding or evading, financial planners go to great lengths to minimize taxes today and in the future (and sometimes in the past). This is not only a good idea, but a duty on the part of a qualified financial or tax advisor. But any time tax privilege is billed as the tip of the spear, it’s probably a sales pitch. Unscrupulous advisors prey on the elderly who, living off of a fixed income, are very sensitive to taxes as a meaningful factor over which they have no control. But many are also in a very low tax bracket, nullifying the supposed benefit of the tax-free status of muni bonds or the tax-deferral of fixed annuities. Many advisors also encourage their clients to maintain a mortgage into retirement “for the tax deduction,” but last time I checked, you need to pay the bank a dollar to save a quarter; and since you can only deduct mortgage interest, mortgages nearing the end of their amortization schedule offer very little deduction. These advisors may just want to see the money you’d use to pay off your mortgage invested in the accounts they manage—and charge fees and commissions on. The avoidance of taxes is a worthy endeavor, but “don’t let the tax tail wag the dog.”
- Rates of return – No, I’m not denying the power of compound interest, for goodness sake—my calculator and a bazillion sales slicks from mutual fund companies prove it works, and that even a slight difference in annualized rates of return over a lifetime have a powerful impact. But the amount of attention this gets in the financial planning process is nearly absurd. This is because in order to retain your investment management business (the primary cash cow for most advisors), they need to convince you of the positive difference that their skill or style will add to your bottom line. But guess what factor has an even bigger role to play than your rate of return toward the goal of financial independence? The amount of money you save and invest.
- Retirement goals – Beginning with the financial industry’s epiphany some years ago that the biggest, wealthiest generation the world has ever seen would be colliding with the largest transfer of wealth (to that biggest, wealthiest generation from their parents) in history, the practice of financial planning has become increasingly retirement-centric. It’s almost as if every recommendation in a financial plan is serving the sacred cow of an extended, blissful, effortless retirement. I’m all for reaching financial independence, but making financial planning solely about deferred gratification means that the practice adds very little value to our todays. Additionally, as it turns out, both doctors and number crunchers confirm that most people would be better off to maintain some degree of productive work as long as possible.
- Career – Most of us will spend the majority of our waking adult hours engaged in the act of work. It is often the way we support our families, contribute to society and make our mark on this world, and it is also the means toward the end of saving and investing for the future. But how many advisors engage in (or are skilled at) career counseling? As the primary source of funding for our financial future—and the way we expend much of the energy we have to give in our lifetimes—this is the most underrated (and under-resourced) financial planning recommendation.
- Liquidity –401(k)s, IRAs, Roth IRAs, 529s, annuities, cash value life insurance policies and irrevocable trusts have tangible benefits, but they all lack the intangible and underrated benefit of liquidity. All these accounts that have been given special federal dispensation to allow for various (typically tax oriented) benefits have handcuffs, making it difficult to access your cash for any other reasons. And life is filled with “any other reasons”! Surprises and change are two of the only guarantees a financial planner can make, and that means we must plan for them by infusing financial plans with the capacity for flexibility through margin. This means you should have cash in the bank and boring, conservative investments in an individual or joint brokerage account to fund the short-and mid-term, in addition to the long-term. Liquidity isn’t sexy enough to sell and your advisor doesn’t get paid on your cash in the bank—that’s why you don’t hear about it as much.
- Simplicity – As a young stock broker and insurance agent, I was taught to make things complex to convince prospects that they were in desperate need of my proprietary knowledge (and products) to secure their financial futures. But in addition to the economics of manipulation, ego also comes into play here. Advisors love to talk about the most complex things they know because it makes them feel smart, but a truly gifted advisor will take complex matters and simplify them for you. And, in my opinion, unless there is compelling evidence that your life or balance sheet is going to be materially impacted to the positive, advisors should err on the side of simplicity, not complexity.
Economic and egotistic bias drives the financial industry, but it need not drive your financial planning.