A personal finance advisor should be different from a personal finance guru

[Free-quent Flyer]

I'm currently reading this book recommended by Personal Finance Digest called "Get What's Yours: the Secrets to Maxing out your Social Security." It's two things: first, it's a deep-in-the-weeds examination of the mechanics of Social Security and an explanation of different strategies singletons, marrieds, the divorced, the widowed, the childless and the childful, can use to maximize their lifetime Social Security benefits. That part is excellent (I'll review the book on my blog soon).

But the second component of the book is also an illustration of a trend that I find extremely troubling, which is lifestyle advice masquerading as personal finance advance. In other words, a personal finance guru pretending to be a personal finance advisor.

For example, this from page 99:

"If you're sick and tired of your job, you can't stand your boss, and you can't wait to retire, please stop and think it over. This is a huge financial decision. You need to get it right.

"Idyllic retirements are more the stuff of movies than real life. Your golf game may be lousy; your bowling, worse. You may already go to as many book clubs and yoga sessions as you can stand. You could drive your partner nuts hanging around 24/7, and you could live, well, forever...Do you really want to be retired and living on peanuts for more than half a century?"

This is not personal finance advice. It's lifestyle advice. It's not advice to do or consider doing a particular thing with your income, assets, or liabilities. It's advice to be a particular kind of person: a person who is willing to work a job they hate, answer to a boss they hate, and who can wait to retire.

In the world of personal finance, this mixing and mingling of personal finance and lifestyle advice is extremely common — so common you may not even notice it any more. For example, I've heard a rule of thumb when house hunting to "buy the smallest house in the best neighborhood you can afford" (for example: http://fruitionfinancial[dot]com/2013/05/01/house-rule-2-buy-the-worst-house-in-the-best-neighborhood/). But that's not personal finance advice, that's lifestyle advice: be the kind of person who will be satisfied with a smaller house rather than a larger house.

Likewise, "consider contributing after-tax income to a 401(k) in order to retain the option to later roll it over into a Roth IRA" is personal finance advice, while "instead of buying a new car, buy a used car and use the savings to increase your after-tax 401(k) contribution" is lifestyle advice.

Just because a decision touches upon your finances does not necessarily make it a legitimate subject for personal finance advice. That's because your personal finance advisor is a different person than you, with different preferences for large versus small, new versus used, and work versus leisure. They may be able to tell you what the consequences for your personal finances are of one decision over another, but they can't tell you which you should prefer, because which you should prefer is a characteristic of you, not of your money.

 

[Mountain Trader]

Well said.

 

[Alex1432]

Isn't personal finance and lifestyle closely connected? It maybe prudent to point out that early retirement can cause issues in your personal life. I think there maybe a preachy feel to some of that advice, but I am sure everyone well give advice like spend less on going out to restaurants if you are in credit card debt which is lifestyle as well as financial.

 

[stlcole]

@Free-quent Flyer I am struck by your comments because they remind me of what economists might say about parents and kids. Let's say a kid choses to go to home-coming the big Saturday football game and then on Monday get's a C on a calculus test.

A parent might be very upset, "I told you you need to study more and shouldn't have spent so much time at the football game and home coming." The parent did not receive any of the fun and enjoyment of the kid's time at home-coming or the football game. But the kid sure did. Further, the kid might do some surprising and unexpected things to make up for the bad grade, turning a set-back into an important life challenge. An economist would note that the utility derived from the kids decision is much different for the kid than for the parent, and so its very appropriate to see polarized responses, and also see both responses as very rational. Similarly, an economist would understand why so many personal financial advisors (and forum posters) would moralize as parents do.

When we comment on the choices of others, it's really hard to have empathy for the enjoyment that they are receiving for the choices they are making, but we are naturally very sensitized to the risks and costs they are incurring. Since our values are different from everyone else, we will likely see less value in the gains, and more burden in the costs. This asymmetry even goes for comments we might make about people who really-really-really-really enjoy savings, as in, "They are loaded, why would they drive a 17-year old rusty Toyota Tercel?"

One of the things that is too often forgotten (and it even applies to kids), is that we make choices all the time, that it is our highly personalized assessment of the costs/risks and benefits which drives our choices, and that we are all highly optimized decision-making machines. The input we welcome most easily is, "If that's what you want, here is an even better way to get it." Another valuable input can more information which helps us to recalculate our personalized assessment of cost, risks and benefits (although beware of well developed confirmation biases and other heuristic distortions). Another valuable input can be understanding after someone recognizes and wants to discuss a poor decision.

But who ever really listens to any input which contains the subtext, "That is a very stupid decision"? And I think @Free-quent Flyer, you comment calls foul on this implicit moralizing. Hinting at any kind of outrage about someone else's decisions is the quickest way to get someone to stop listening.

While it is always so easy to say, "that is a very bad decision and you will live to regret it," what is true is that many, many, many people swear that their worst decisions are the ones which made them who are, and they have found surprising and unexpected benefits from those bad decisions. So even when we are appropriately critical of someone's life choices, we can never be assured that those people won't receive demonstrable, unexpected, life-improving benefits. There, I am done with my implicit moralizing.