A few years ago I wrote about one of the curious fixations I observed among the wealthy denizens of the finance industry: the need for “personal finance” education. In this telling, the problems troubling American civilization are not the result of financial deregulation, or corporate consolidation, or employee misclassification, or wage theft, or race and gender discrimination, but rather a simple lack of knowledge. If high school students were instructed in how to balance a checkbook, no other changes would be necessary to usher in the gleaming, gilded, capitalist paradise of Galt’s Gulch.
I already explained why this conceit is absurd, but I’ve recently been thinking about how to break down the different layers of communication that are passed off under the mantle of financial education.
I consider financial “education” the most elementary layer of personal finance communication. People aren’t born knowing what a 529 college savings plan is, what the contribution limits are, or what expenses are eligible for tax- and penalty-free distributions, and many people die without knowing what they are. That makes education the pure transmission of information: 529 college savings plans exist. Individual retirement accounts exist. 401(k) and 403(b) workplace retirement savings plans exist.
This information may be interesting, but it’s not useful on its own as anything more than dinner party conversation, and we’re not allowed to hold dinner parties any more.
However, when financiers say personal finance “education,” what they usually mean is generic financial advice.
The difference between financial education and financial advice is the difference between saying “there is such a thing as individual retirement accounts” and “you should maximize your annual contribution to your individual retirement account.”
Financial advice, unlike financial education, is tailored to the individual’s circumstances. IRA’s exist whether or not your income makes you eligible for deductible contributions, Roth contributions, or non-deductible traditional contributions. But whether or not you, personally, should make deductible, Roth, or non-deductible traditional contributions depends on your personal circumstances — and even worse, it changes as your circumstances change! At the most basic level, the more lucrative your non-IRA investment opportunities are, the less inclined you should be to make IRA contributions.
Unfortunately, most financial advisors don’t know what they’re talking about, because they aren’t actually trained in giving financial advice: they’re trained in tax evasion.
I once researched, but never published, a post about the role taxes played in post-war Britain on the global export of British music, as performers were required to spend most of the year outside of the United Kingdom in order to avoid taxes on their worldwide income. There’s even an anecdote about a Beatle (or was it a Rolling Stone?) insisting his private jet circle over Heathrow until midnight so that he didn’t exceed his allotted days on English soil.
This is the category of advice financial “advisors” tend to provide: tax evasion stands in as a substitute for actual financial advice. Without knowing anything else about a person’s situation, you can tell them to maximize their IRA contributions, maximize their 401(k) contributions, harvest capital losses during high-income years and capital gains during low-income years, strategically name 529 plan beneficiaries, and front-load contributions to donor-advised funds.
But it’s absurd to call this financial advice. Someone who tells you how to make more money is offering financial advice. Someone who tells you how to spend less money is offering financial advice. But someone who writes a letter for you to the IRS explaining that actually comparable salaries in your industry are $30,000 so you shouldn’t be liable for FICA taxes on your sales of $5 million isn’t offering financial advice, they’re evading taxes on your behalf.
You may think that’s a service worth paying for, or you may not, but when financiers promote the benefits of financial education, don’t forget they’re talking about spending scarce classroom time teaching kids how to evade taxes.