Dan Ariely’s Despicable Libel

I am so angry, I can hardly see straight.  Let me tell you what’s got me in a lather: behavioral economist and best-selling author Dan Ariely has just massively libeled my profession.  Since I’m not the type of girl to let an insult go by without making a hearty and sassy reply, I will now lay down a heaping helping of verbal abuse to defend myself and my financial adviser colleagues.  The original selections of his ignorant bloviating* are in black, with my witty and incisive replies in blue.  Black and blue – appropriate because he’s in for a bruising.

From a behavioral economics point of view, the field of financial advice is quite strange and not very useful. For the most part, professional financial services rely on clients’ answers to two questions:

  1. How much of your current salary will you need in retirement?
  2. What is your risk attitude on a seven-point scale?

Wait, what?  This little snippet of your blog post is so full of failure I have trouble knowing where to start.  You act like financial planning is the same as filling out a ten question personality quiz in Cosmo – only with two questions.  Are you serious?  Have ever actually met a financial planner?

Firstly, I don’t ask my client how much of their current salary they’ll need when they retire.  I tell them how much they’ll need based on calculations from their current income and spending patterns and the goals they express to me in our interviews.  Figuring out how much they need to live comfortably is my job.  I’m the one with training, education, and experience in budgeting and taxation, not necessarily the client.

Secondly, “What is you risk attitude on a seven-point scale?”  Are you kidding me?  I am astonished that you think financial planners would do this!  What do you think we do, sit down with a client and say, “Now, would you say you’re an income investor, a growth and income investor, or a growth investor?”  Get real.  Finding the appropriate risk exposure for a client is a multistage process that requires that we phrase risk questions many different ways for both the client and spouse separately, in addition to a separate analysis of their capacity to withstand loss.  We then; from their answers to a (in my opinion) particularly well designed questionnaire, from their responses in interviews about risk and return goals, from a quantitative analysis of their ability to withstand risk, develop an index of their maximum risk capacity.

You’ll notice that a seven point scale appears nowhere in this process.  Quit portraying financial planning risk analysis as some simple multiple choice question, because it’s not.

You clearly have no clue as to what financial advising is.  This may be why you think financial advice is “strange and not very useful.”

From my perspective, these are remarkably useless questions — but we’ll get to that in a minute. First, let’s think about the financial advisor’s business model. An advisor will optimize your portfolio based on the answers to these two questions. For this service, the advisor typically will take one percent of assets under management – and he will get this every year!

You know what’s funny?  From my perspective, they were remarkably useless questions, too!  We have something in common.

Yes, let’s think about a financial adviser’s business model.**  Apparently you’re under the impression that an adviser answers two simple questions and then makes 1% per year on the assets under management.  Let’s see what Conger Wealth Management, an actual financial planning firm, does to earn 1% of assets under management***…

  • A full financial plan that includes a reading of your legal documents, insurance analysis, investment analysis, the generation of an investment policy statement, drawing up a client’s personal financial statements, disaster preparedness material, a budget and savings plan, a customized investment plan, a tax analysis, a 40 year long model of cash flow (if appropriate), and so much more!

Do you want to know why this is all under one bullet?  This is what we do for starters!****  Then we also provide…

  • Plan updates as needed, generally from every 6 months to every 18 months.
  • Tax preparation.  Yeah, that’s right, we do taxes.  That’s how we roll.
  • All investment rebalancing and monitoring.
  • A library of PDF scans of client financial documents, available if a client needs them.
  • Counseling on career concerns and life goals.
  • Do you have a financial question?  Market got you worried?  Clients can call us for a phone consultation whenever they need one.
  • Would you like us to help clean up a credit report?  Love to!
  • Need to find a professional such as a lawyer or realtor?  We have a referral list that makes it simple.
  • Do you need someone to calm your economic worries?  Can do.
  • Want to start using Quickbooks or Quicken, but need help?  We’ll send one of our reps to help you get started and teach you the ropes.
  • Want us to vet a retirement community for your aging parents.  No problem.
  • Confused by estate tax changes?  We’ll look into that for you.
  • Need some paperwork shredded?  Drop it off here and we’ll have it shredded with ours for free.
  • And so on.
  • Is there any other way we can be of service?

That’s right.  Dan Airely would have you believe that all we financial planners do is sit on our duffs and reallocate portfolios for 1% per year.  As you can see, at Conger Wealth Management (and I’m sure most other financial planning firms), this is not so.  Here, we take care of our clients, and I resent Dan Airely’s implication that we don’t.

The rest of the article goes on about the uselessness of the two questions he says financial planners rely on for their trade.  I’ve already eviscerated that, so there’s no need to further explore that area.  At the end he hedges his bets by saying: “Financial advisors should be helping their clients with these tough decisions!…It’s possible that the best financial advisors already do help in this way, but the industry as a whole does not.”  Again, I wonder what planet he’s on to come to this conclusion, because the financial advising industry covers many aspects of client wealth.  If you want proof, just check out any of the many industry associations, such as the Financial Planning Association, the Certified Financial Planner Board of Standards, or the National Association of Personal Financial Advisors.  I think you’ll find that the industry expects more from financial advisers than reallocating portfolios.

Dan Ariely closes with: “The fact is that money is hard to think about and we do need help with making financial decisions. The financial consulting profession has an opportunity to reinvent itself to service this need. And if they do, it will be beneficial for both financial advisors and their clients.”  You mean financial planners can be useful by helping clients make financial decisions?  Thank you for that insight.

Dan Ariely, please consider actually doing some research into the subject next time.  Since you consider yourself a researcher, this shouldn’t be hard.  Until then, you don’t have anything to say.

* Google: “define:bloviating”

**  By the way, it’s “adviser” in the U.S., not “advisor.”  This is because it’s how the SEC spells it.  I won’t give him too hard a time, though, since most people (including myself, on occasion) use both terms interchangeably.

***  Due to our fee schedule at the time of this writing, to have a client actually pay us 1% of assets under management, the client would have to have exactly $1.5 MM.  The percentage will slide based on the amount of assets.  For more information, see our fee schedule or give us a call.

**** There is a “project fee” in addition to the percent under assets model due at the beginning of the financial planning engagement.  That is because getting the financial planning process started is, as you can see, a humongous amount of work.  For more details, give us a call.

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One Response to Dan Ariely’s Despicable Libel

  1. Wade Pfau says:

    Hi Abigail,

    I hear what you are saying. You had recently come to my attention after writing about my safe savings rate paper. Thanks about that.

    I’m not a financial planner, but it seems that most financial planners do much more to help their clients that what Dan suggests, as you point out. As Dan was a keynote speaker at the FPA annual conference in 2010, he must have met some good planners before.

    As he is an economist, it seems strange to me that he offers this 135% replacement rate without any further comment about the sacrifices involved in delaying retirement and saving more to make this even possible. I wrote up a new blog entry about that aspect.

    Thanks, Wade

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