Towards an Industry of Pure Financial Advice

Wednesday, June 5, 2013 at 12pm
By John Friedman

I admire Paul Krugman in lots of different ways.

People think of Krugman above all as an economist and as a liberal. Those who don’t like one or both of those labels argue that he’s wrong about everything. I won’t take those folks on here, other than to say that, just as I would trust a good engineer to design a tall building more than I would trust a child who can’t add two and two together to build even a small portion of a short building, so too would I trust a good economist to predict the economic future more than I would trust a politician with an axe to grind to explain the supply and demand function of employment.

But I do not come here to talk about Krugman’s economics. Instead I come here to talk about his writing and, in particular, his blog writing.

Krugman writes short and simple. For obvious reasons, I seek to emulate him in this regard!

More relevant here, Krugman is also not afraid to beat the same tune out on the same drum over and over and over and over and over again.

Krugman’s drum beat the past many years has been that, in responding to The Little Depression (his term for what most folks call The Great Recession), we are making the same mistakes that we made in responding to The Great Depression, i.e., we have fallen short on using fiscal stimulus and, as a result, are building an underclass of folks who are apt to be permanently under- and unemployed, with the even larger result being that we are coasting along at far less than optimal utilization of our nation’s productive capacity, all of which equals pain and misery unnecessarily courted, as in oh the humanity.

I, too, have a drum to beat. I’ve beaten it fairly often in here. The difference today is that, here today, I am announcing that I am going to start beating it on a regular basis. Drip drip drip drip. And bang bang bang.

*  *  *

The drum I beat is this:

(a) Normal Folks (NFs) need, and deserve access to, decent and affordable financial advice.

(b) The Financial Services Industrial Complex (the FSIC), as currently constituted, does not wish to provide that advice.

(c) We, as Financial Services Providers (FSPs), can and should take steps to address this unfilled need.

 
Stated succinctly (as Paul would wish it to be stated), and oh-so-SEO’y, you can think of this as an unmet need for pure financial advice, and my drumbeat as a clarion call for us to build an industry that provides pure financial advice.

*  *  *

So, hey you FSP guy: the next time you’re walking down the street, seeing lots of folks all around you, ask yourself this: how many of those folks, do you imagine, are consistently getting good, sound, unbiased financial advice? What’d’ya think? Half of ’em? A quarter? All of ’em? Or maybe one percent do? Or point oh one percent? Or maybe none at all?

I live in what most folks view as a pretty darn affluent part of the world — in the heart of the little city by the bay that I like to call Ess Eff Sea Ay — and my hunch is that, when I walk down the street, at least half the people I see are not getting good, sound, unbiased financial advice, ever, let alone consistently. They’re pretty much the same half that I imagine not having their estate planning done (but they do have their dentistry done).

Why? Well, I think it has to do, in no small measure, with the business models that the FSIC likes to use and, more particularly, with the fact that the FSIC has never figured out how to make easy-boatloads of money by providing pure financial advice unbundled from The Big Three, of Investments, Banking and Insurance (The TBToIBI — which I like to pronounce as the TEE’ Bee TOY’ Bee).

So what do I mean by “un-bundled? I mean that pretty much the only time the FSIC provides financial advice to anyone is when the advice is bundled in with something else, as in:

Wanna do some investing? We’ll throw in some advice with that (because we can charge you commissions and fees or both when you do the investing).

   and

Wanna buy some insurance? We’ll throw in some advice with that (because we act as a distributors for the insurance companies when we do that, and they pay us commissions when you buy the insurance).

   and

Wanna bank with us? We’ll throw in just a teence of advice with that (so long as you leave some dead money with us, because then we can loan it out at a much higher interest rate than we are paying you for it).

 

That’s all well and good. But in the world in which I walk down the street, a lot of the folks I see are, I imagine, uncomfortable with the tying-together of the advice with anything else. To the above, they say:

How do I know your advice about which insurance I should buy is good advice given that you only get paid if I buy insurance from you? And who exactly are you working for?

   and

Why should I pay you 1% of the assets you manage for me each year, year after year after year after year, when most of your work happens in the first year and after that you’re getting paid way Way WAY too much money? And why should I do that in a world that only giveths, say, a real 4% a year? So you want to take a quarter of my return for all time, straight off the top? And how about if I want to rejigger my balance sheet to use cash for something you don’t get your vig on, like buying a house? How you gonna well-advise me about that? You’re going to tell me that if I show up some day saying that I want to take $100k out of the money you’re investing for me, that you’ll never even give a moment’s thought to the $1k less revenue you’ll make each year, forever, if I go ahead and do that? No pressure from you if I want to use my money for something other than investing through you? And, while we’re at it, how about just charging me commissions for buying and selling the investments, and how about if you help me buy big chunks of five ETFs, and have that be that except for once a year when we rebalance and you then earn some more commissions?

   and

Advice? Advice from someone in a bank? I don’t need no stinkin’ advice from a bank!

 

Instead, what I see in SFCA are people walking down the street wondering, e.g., if they should make a big but risky career move, or if they should rent or buy, or if they should be saving more (with only a very few wondering if they should be spending more), or if they’ve been hoodwinked by some FSP, etc. And, yes, sometimes they wonder if they are smartly invested or adequately insured or using the right bank.

And most importantly, what I surely do not see are those same people thinking, Gee, if only I could get some free advice to help me answer all my financial questions, since surely givers of free things never expect anything in return, do they?

So what I see are people who’d like to sit down and talk about those decisions with someone who is smart as all get out and who does not also have a dog in the fight — someone whose business model is designed purely for helping people make financial decisions, whatever those financial decisions might be and wherever they might lead.

*  *  *

Right now the Financial Services Industrial Complex is in the pure-advice dark ages. It simply has not figured out a way to make money (let alone many easy-boatloads of money) by providing pure advice. 

Things might well remain this way for the rest of our lifetimes; gosh knows there are a lot of very big vested interests who want it to stay this way.

But I see lots of promise in the future. A certain well-funded startup down south of here, offering to do decent-enough investing for a quarter of the price of the mainstream Financial Services Providers, is opening up a very tantalizing opportunity: you pay the well-funded startup folks and their investing machine a fee of 0.25% of your managed assets per year to manage those investments for you, and then you buy pure financial advice services from someone else. So the investment service provides investment services and the advice service provides advice.

And just like that, presto-change-o, you have access to good money-storage services and good financial advice services — and for, say, less than half the cost, and within business models that are a whole lot more transparent and aligned, and easy to use and understand.

Add to that trustworthy insurance folks who sell insurance and bank folks who sell you dead money in exchange for providing you with banking services, and you have a good roster of financial services in your life.

Now we’re talking TBFoIBIA — The Big Four of Investments, Banking, Insurance and Advice (which I like to pronounce as the TEE’ Bee FOY’ Bee Uh, with apologies to the ACMs — to the Abbreviation-Consistency-Meisters).

*  *  *

So, let’s march on towards on industry of pure financial advice, shall we?

You will hear this beating drum beating again . . .

 

 

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Comments

  1. Posted by Millie Galloway on Sunday, June 9, 2013 at 12am
    Yes, Financial Advisors cost. But if they are able to provide the services above -- and particularly if they can do it earlier in one’s investing life -- their value can be meaningful.
  2. Posted by @wbenutley on Sunday, July 21, 2013 at 9am
    There is no doubt that Normal Folks need pure financial advice. They also need to lose weight, eat better, floss their teeth and vote in all elections. What I doubt is whether or not they *want* this advice badly enough to pay for it. Until there is demand, there can be no supply. And I mean demand outside of the cultural centers of SF and LA. I mean demand nationwide.

    When this pure advice thing happens, it will be the consumers who lead the revolution, not the financial people.
  3. Posted by JF on Monday, July 22, 2013 at 8pm
    Thanks, @wbenutley, for your comment.

    You might be right that NFs, in aggregate, might not want pure financial advice badly enough to pay for it. We need only look around to know that, so far, the evidence is that very few people have ever looked a financial advisor in the eye and written out a check to pay for that advisor's services, either after-the-fact or upfront (as I require . . . ).

    I work mostly in SFCA, so it's hard for me to judge others elsewhere, but my experience is that just about everyone everywhere wants pure financial advice, and, that, here anyways, quite a few people are willing to pay for it. A lot of people when I tell them what I do say, "I've been wanting to talk with someone like you for years, but it seems like there aren't any of you out there. I mean, when I wanted to hire a financial planner, all I found was people who wanted to manage my money, and who would only talk to me if I have a whole lot of it!"

    So, by my experience, anyway, they are out there -- and they're under-served.

    I disagree with you, though, that consumers will be the leading cause of change. As best I can tell, it's been a very, very long time since consumers had their way with anything having to do with the Financial Services Industrial Complex. Rather, I see change arising more from disruptive businesses, so, just as the Schwabs and the E*TRADEs pulled the rug right out from under the old line stock brokerages, so too might the Wealthfronts et al. -- or startups not even dreamed up yet -- bring about big change in the world of financial advice. Time will tell. I for one have stated (somewhere in here I believe) that I'd bet on the FSIC to trump Silicon Valley fairly handily.

    If pure advice happens, I think it will come about via a roundabout manner, i.e., via the debundling of money management services from advice, because it's arguably a lot easier to build a machine that can scale to handle the money management piece in a satisfactory way than it is to build a machine that can scale to handle the advice piece in a satisfactory way, after which people might take a much easier look at the cost of paying for advice directly rather than bundled in with money management. I, for one, certainly hope so!

    And I end with a point of agreement: I agree with you that the financial people will not likely be a leading cause for change. Things are awfully good for most of them right now.

    Thanks again -- yours was a thought-provoking comment, and that's the best kind. And please do let me hear more of your thoughts, on this reply or on anything else