Financial Knowledge All Adults Should Know?

[Vanadium 50]

I;m going to disagree that the Rule of 72 is something every adult needs to know. It's like knowing how to cast out nines - a product of a different time. Today a calculator that will do this for you exactly - no need for approximation - costs about $6. The average adult doesn't need to make a decision faster than he can punch it into a calculator. (And if asked to, he should run the other way!)

 

[StoneTemplePython]

The average adult doesn't need to make a decision faster than he can punch it into a calculator. (And if asked to, he should run the other way!)

I liked this quite a bit btw.

It is an old-school approximation... my sense however is that most people are really bad at interpreting geometric growth (decay) and ways to think in terms of doubling times (half lives) tends to be quite useful for intuition. Rule of 72 strips away logarithms or opaque buttons on a financial calculator app to make doubling times more easily accessible.

But yea, these days it probably doesn't quite belong in the bucket of "financial knowledge all adults should know".

I am a bigger proponent of back of the envelope estimates than most.

 

[Imager]

Today a calculator that will do this for you exactly

I wonder how many people could do an interest calculation on a calculator without the manual? My time in Finance was all spreadsheets, my HP12c sat in the desk for months at a time.

 

[russ_watters]

I;m going to disagree that the Rule of 72 is something every adult needs to know. It's like knowing how to cast out nines - a product of a different time. Today a calculator that will do this for you exactly...

I wonder how many people could do an interest calculation on a calculator without the manual? My time in Finance was all spreadsheets, my HP12c sat in the desk for months at a time.

Manual? Calculator in a desk? No, I just typed "investment ret-" [autofill] and hit enter and google gave me web based investment return calculators where I could just plug in some numbers.

...I do still track my 401k in a spreadsheet though...

 

[Vanadium 50]

I will agree there are ways to go beyond the calculator approach I suggested. But that just takes my point further along. Technology has moved to the point where the consumer has the ability to calculate it themselves and not rely on what they are told. I think that's a good thing,

 

[Chris Riccard]

But to know why digital roots work, I think it's interesting.

 

[Vanadium 50]

But just because something is interesting does not mean it's "financial knowledge all adults should know"

 

[mheslep]

That is horrible advice! An education is about the best investment anyone can make

Average annual earnings for Bachelors Degree:
$59,124, unemployment rate 2.8%

Average annual earnings for High School Degree
$35,256, unemployment rate 5.4%

That is roughly a $24K difference, making a few thousand dollars a year in debt service well worth the investment, esp with the interest tax-deductible at that income level

https://smartasset.com/retirement/the-average-salary-by-education-level

What applies for the "average" by definition does not apply to "anyone", i.e everyone. Moreover, those average results are skewed upwards by outcomes based on degrees in the sciences and the better schools. A degree in pseudo humanities studies from lower ranked schools, is a much diffetent proposition especially if obtained by student loans upon which no payments are made for a half dozen years.

 

[mheslep]

So how else can someone finance their education? While they cannot be discharged in bankruptcy, which could be a problem, this fact also allows for lower interest rates than other forms of unsecured consumer credit.

At the same time, increasing the demand for student loans against the available loan capital (currently about $1T in the US) and increasing the number of those marginally likely to pay back the loans will tend to increase rates.

 

[russ_watters]

The thread is re-opened.

Further discussion of Dave Ramsey will not be permitted and new posts about him or his methods or claims are subject to deletion. Thanks to everyone for the thorough debunking and exposure of his claims as fraudulent.

 

[russ_watters]

I will agree there are ways to go beyond the calculator approach I suggested. But that just takes my point further along. Technology has moved to the point where the consumer has the ability to calculate it themselves and not rely on what they are told. I think that's a good thing,

I was actually agreeing with you in a slightly snarky way and was as you suggest merely extending the point; I agree that with all the new tools for calculating exact - whatever - there is no need for most thumb-rules anymore.

 

[Vanadium 50]

After another thread turned south, it dawned on me that a key idea that is underappreciated is that of risk, and more specifically, the relationship between risk and yield.

That discussion turned on stocks, but an easier-to-understand example is that of a loan. (A bank deposit is also a kind of loan, one where you loan the bank money rather than the reverse) Let's say I load Trusty Russ $1000 for a year, and we agree he'll pay me 5% in interest. Trusty Russ is a trustworthy, stand-up guy, so I am confident he will pay me back. Now suppose someone else - call him Shady Joe - wants to borrow money from me, and Shady Joe has only a 90% chance of paying me back. Am I willing to loan him money at 5% interest? Heck no - I want more interest to compensate me for taking on the risk of nonpayment. I would want no less that 16.67% interest from him: that's the value that gives me an expectation value of the loan equal to Trusty Russ'.

So risk and yield are correlated. As the risk goes up, so must the yield. For this reason, if you see a high yield investment, you know there's risk associated with it.

The difference between Trusty Russ and Shady Joe is called "specific risk". I can mitigate it by making a large number of loans. If I made 100,000 loans to people of equal ability to repay to Shady Joe, I'd expect 10,000 to default, with a 1 sigma uncertainty on that 10,000 of about 100. So I know how many people will default to within about 1%.

There's also systematic risk or market risk. A good example for this is inflation. If Trusty Russ pays me my $1050 in dollars that have inflated by 10%, I will have lost purchasing power. I should have charged him maybe 14% in interest instead. So part of the 5% interest I charged him is compensation for my lack of use of this money while he has it, and part of this is the risk that inflation will mean that he pays me back in inflated dollars.

Where people get in trouble ("Bulls make money, bears make money, but pigs get slaughtered") is by chasing high yields, blissfully unaware of the risk they are taking on. As they say, this works - until it doesn't.

 

[russ_watters]

Another great point made in the other thread and to avoid losing it, I'll quote it here:

Only 2 things I'd add:

1.) Savings accounts are perhaps not as "safe" as people think as they are vulnerable to wipeouts and erosion due to inflation. This was a significant issue in the 1970s in the US though in general we are lucky here. People are prone to forget that this even happened in Western Europe over the last century as well. (Deflation can happen as well though it is not as common and perhaps not in line with governmental habits of printing more money when in a pinch.) Savers in e.g. Peru and Brazil (not to mention Venezuela) over the past few decades know otherwise.

My point here is that savings accounts are "safe" but have an Achilles heel: inflation. Hence some sort of diversification / other return drivers are needed.

Yes, and I know I was guilty of glossing over that point. Unadjusted value is often defined as the baseline of safety, but inflation does represent a real-world loss.

Beyond that, missing-out on equity gains because you invested too heavily in fixed income can also be considered a risk because that's money you need to live (if the goal is retirement savings). Risk and reward are often thought of as opposite sides of the same coin, but in some contexts they can also be thought of as a spectrum of a single issue.

 

[russ_watters]

Where people get in trouble ("Bulls make money, bears make money, but pigs get slaughtered") is by chasing high yields, blissfully unaware of the risk they are taking on. As they say, this works - until it doesn't.

Municipal bonds. Governments always pay their debts and never go bankrupt, amirite? Let's invest our pension in them!

 

[Vanadium 50]

it can be considered risk, but the concept is slightly different. One applies to each investment in one's portfolio, the other is a measure of the likelihood of reaching one's financial goal. They are related, but related in the way strategy and tactics are related. I would like to use different words: high inflation is a threat to my goal of a comfortable retirement, but high-yield bonds are risky. I might decide that junk bonds should be part of my portfolio to reach my strategic goals, but also decide that to reduce the risk, I want to do so via a mutual fund rather than individual bonds.

I almost wrote that another thing all adults should know is to understand your goals. Without that, you'll never be able to plan for them. For example, my primary goal is a comfortable retirement. So a goal like "save as much as possible" is a too vague - what I really want is as much money as possible, consistent with a very low probability that my savings and investments will fall below what I need for a comfortable retirement. That has caused me to eschew investments that would probably pay off but also would increase the probability that I would run out of money: in short, I am willing to take on a smaller mean if I can get a smaller standard deviation.

 

[CWatters]

Here in the UK there are lots of TV adverts for short term "pay day" loans. Typical interest rates are over 1000% APR. The idea is you borrow for a few weeks and repay on pay day. Most people should never need these because credit cards effectively give you short term loans at zero interest rate. If you are maxed out on your credit cards already you probably need help not more loans at extortionate rates.

 

[NTL2009]

Here in the UK there are lots of TV adverts for short term "pay day" loans. Typical interest rates are over 1000% APR. The idea is you borrow for a few weeks and repay on pay day. Most people should never need these because credit cards effectively give you short term loans at zero interest rate. If you are maxed out on your credit cards already you probably need help not more loans at extortionate rates.

While I agree that people should have things in better order than to resort to a payday loan, the 1000% APR is not a useful measure, it a kind of sensationalism that doesn't serve us well. Consider the business end of this:

Say the loan company makes a $200 loan for one week. A payday loan ... (from wiki: is a small, short-term unsecured loan, "regardless of whether repayment of loans is linked to a borrower's payday."). If we assume some nominal fee of, say $20, just to process the paperwork and cover their overhead (storefront, security, employees, etc), that's a 10% rate for one week, or 142% APR (1.1^52 is the correct math, or close, right?), before we've allowed the loan company any profit, or adjustment for defaults. Obviously, these are risky loans, or the borrower would find a lower rate from a more conventional source. Is it unreasonable for the loan company to want to make a $10 (5%) profit over their expenses? That's $30/200, 15% which is 1.15^52 = 1433%, not even factoring in defaults.

Now consider a person in a predicament, who needs to get his car fixed to get to work or lose their job, or needs some new clothes for a job interview, and is flat broke. A $40 or so loan charge could have a huge payback for them. Should they be denied this opportunity because of some sensationalized arithmetic?

I'm hesitant to demonize the lenders, the problem lies with the people who are in this position, and that's probably a very complex, multi-dimensional problem. These are the people who will go to a back-alley loan shark for the money, which is likely worse than these payday storefronts.

 

[Vanadium 50]

The payday loan story is substantially more complicated, I'm afraid. (Full disclosure: I used to own stock in a company that did this. Full disclosure 2: I sold it when I concluded that, as difficult as it was to make money in this industry, regulation changes would make it worse).

"Let them use credit cards" is a bit like "let them eat cake". Many of my former clientele had no credit cards. Furthermore, for the well-to-do (i.e. us), credit cards are a great deal. No annual fee, and 1-2% back in the form of cash or awards. For the poor, if they can get credit cards at all, they get a terrible deal. $50-75 annual fee, no rewards, and a high rate if they carry a balance. A card that charges 24% on a $500 loan paid off over two months plus a $75 fee ends up costing $90 in fees, which is comparable to what payday loans cost. The difference is that they call out 24%, even though the fees are 5x the interest.

The rates are high because the default rate is high. Here's the basic business model. Banks can't afford to make small loans (true: despite having six-figure relationships with my banks and a credit rating well above 800, my bank won't loan me $500. The cost to process it and to check on my ability to pay will wipe out any profit they get.) There is an underserved populace without access to other forms of credit in need of small loans. The key to making this profitable is to reduce administrative costs, such as a thoughtful determination of who is likely to pay it back, and offer loans to everybody. Fees are set to cover the inevitable high default rate.

Why would anyone take out such a loan? The alternative is to bounce checks, at $30 or $35 a pop. Yes, payday loans are expensive, but they still undercut banks. And it's interesting to see who is out in front on the battle against payday lenders. Banks. And when payday lenders go out of business in the next year or two because of increased regulatory costs, what will happen and who will benefit? More bounced checks and banks.

Finally, this is an industry where averages are particularly deceptive. The average borrower gets a loan, pays it off in a month, maybe two, and that's that. maybe in a year or three they'll be back, maybe not. However, there are a substantial number of people - maybe 10%, but more likely high single digits (and it will vary by geography) - who don't pay it back and roll it over and over and over until they default. So the characteristics of the average loan look very different than the characteristics of the average borrower.

 

[StoneTemplePython]

Finally, this is an industry where averages are particularly deceptive. The average borrower gets a loan, pays it off in a month, maybe two, and that's that. maybe in a year or three they'll be back, maybe not. However, there are a substantial number of people - maybe 10%, but more likely high single digits (and it will vary by geography) - who don't pay it back and roll it over and over and over until they default. So the characteristics of the average loan look very different than the characteristics of the average borrower.

This seems to be a textbook case of the so called inspection paradox (and a basic application of renewal theory) but I wasn't aware of it. Do you have any easy sources I could comb through and find a table with supporting figures? E.g. the 10-K of ___ company from 2 years ago.

 

[Vanadium 50]

I don't have one off the top of my head, but First Cash (ticker FCFS) and EZCorp (ticker EZPW) seem to be on their way to a duopoly. FCFS used to provide a lot of data in their financial reports. I'd start with that, although FCFS is not what it used to be, post-merger, and if you can't get what you need, try EZPW.

 

[pBrane]

What financial wisdom, concepts, and knowledge do you feel all adults should know to be literate/functional/successful in society?

If you have kids/will have kids, what would you want them to know by the time they enter the work force?

In 'western' countries, the National debt is the taxpayers (and children's) debt.

The National debt is leveraged into existence by the market maker banks (JPM, Goldman, Barclays etc).

The taxpayers have the market maker banks (JPM, Goldman, Barclays etc) back in valuable cash through taxation.

The taxpayers never had the valuable money, leveraged money has zero value.

The children did not borrow it, but they do pay it back in valuable cash through taxation.

I think the 2018 UK leveraged borrowing was in the region of 50bn.
A good working wage in UK is £1000/week, £25 per 40 hour week.

50bn at £25 = 2bn work units.

The Bank of England seems to believe that every year or so swapping 2bn hours of taxpayers work for leveraged money is a good idea.

I do not.

The BoE could 'print' 50bn almost cost free.

Why does it borrow leveraged money? I do not think there is a logical reason. Perhaps there is a more human one based on deception and mendacity.

 

[CWatters]

As I understand it printing money normally causes inflation so we end up no better off. Although inflation reduces the value of borrowing.

The main problem I see with the UK economy is the trade deficit. We import a lot which means we are exporting money. We need that to return to the UK in the form of investment. For some decades foreign car makers have invested in the UK because cars made there can be exported all over europe (and we had favourable labor laws and tax rates). Now that money maybe invested making cars in Spain or Germany instead.

 

[pBrane]

As I understand it printing money normally causes inflation so we end up no better off. Although inflation reduces the value of borrowing.

The main problem I see with the UK economy is the trade deficit. We import a lot which means we are exporting money. We need that to return to the UK in the form of investment. For some decades foreign car makers have invested in the UK because cars made there can be exported all over europe (and we had favourable labor laws and tax rates). Now that money maybe invested making cars in Spain or Germany instead.

Goldman or JPM printing money is no different from tjhe BoE doing it, except the BoE works for us. The others work for Wall st and the City investors.

When the market maker banks print money we will pay them back in cash.

This year they gave us nothing except a 50bn as a number, our children will give them 50bn as a number of cash pounds.

Think about it, if they 'lend' leveraged money they cannot lose even if we decided not to repay them! They have no skin in the game.

CWatters, would you really play poker with someone who could create poker chips at will?

 

[StoneTemplePython]

In 'western' countries, the National debt is the taxpayers (and children's) debt.

The National debt is leveraged into existence by the market maker banks (JPM, Goldman, Barclays etc).

The taxpayers have the market maker banks (JPM, Goldman, Barclays etc) back in valuable cash through taxation.

The taxpayers never had the valuable money, leveraged money has zero value.

The children did not borrow it, but they do pay it back in valuable cash through taxation.

I think the 2018 UK leveraged borrowing was in the region of 50bn.
A good working wage in UK is £1000/week, £25 per 40 hour week.

50bn at £25 = 2bn work units.

The Bank of England seems to believe that every year or so swapping 2bn hours of taxpayers work for leveraged money is a good idea.

I do not.

The BoE could 'print' 50bn almost cost free.

Why does it borrow leveraged money? I do not think there is a logical reason. Perhaps there is a more human one based on deception and mendacity.

I'm with @CWatters (I think?).

I don't think this post made much sense. And supposing it does make sense it doesn't meet a materiality threshold of "financials knowledge all adults should know". You are quoting 50bn GBP or approx $64Bn. Uk national debt (in dollars) is 2.86 trillion, per here:

https://www.economist.com/content/global_debt_clock?page=55&sort=desc

In short, your post, at best, zooms in on how $\lt 2.3\text{%}$ of the borrowings work in the UK and say that is financial knowledge all adults should know.

Maybe you're trying to get at what's known as Riccardian Equivalence, which I think is too literal and too strong but there's an interesting idea under it. Focusing on a small amount of "leveraged money" just seems very strange to me.

There also seems to be a stock vs flow error here in that borrowings are stock variable but the cost associated with them is a 'flow variable' that is much less per annum than the principal value. But then you equate the flow variable of per annum wages with the stock variable of amount of "leveraged borrowing" which at a minimum needs considerable justification and is likely an error.

- - - -

The taxpayers never had the valuable money, leveraged money has zero value.

I'd also like to know what this statement is intended to mean.

 

[CWatters]

The amount of money banks can create is limited/regulated by the requirement to hold capital. It's true they don't have to hold the same amount but this has been tightened up a fair bit since the banking crash.

A chunk of that 50bn has been used to purchase government and corporate debt and equities (essentially loans to the government and companies).

They clearly can loose as Lehmans found out when people couldn't repay the sub-prime loans it had made/purchased. I agree they needed to be reminded of this.

 

[Rive]

Why does it borrow leveraged money? I do not think there is a logical reason.

The general idea is, that to prevent inflation influenced by politics, government and such, the amount of money should be linked to the actual economics activity somehow. Since there was already an existing system for this based on the loans held by banks, it was regulated instead of replaced. As loans are expected to be rational, based on economical activity ... well, that's it.

What's often forgotten about the 'debt money' is, that while the amount constantly growing with debt paid back, the amount will actually drop when debt goes default. During an actual crash the amount of money might easily prove to be insufficient, resulting in a chain of events hurting everybody (deflation). And that's the reason of the 'money print' - ease the sudden shortage.

Of course, it's all just 'in short'.

This seriously abridged part might be considered 'knowledge all should know'. However, since it's not really different than shortening gravity to 'all things falls down' (which is also definitely a 'knowledge all should know', regardless of the fact how inaccurate it is) it has holes and mismatches with political reality, giving food to a very large and loud crackpot community.

I don't think this topic really needs all that, so we should stop, maybe.

 

[pBrane]

I'm with @CWatters (I think?).

I don't think this post made much sense. And supposing it does make sense it doesn't meet a materiality threshold of "financials knowledge all adults should know". You are quoting 50bn GBP or approx $64Bn. Uk national debt (in dollars) is 2.86 trillion, per here:

https://www.economist.com/content/global_debt_clock?page=55&sort=desc

In short, your post, at best, zooms in on how $\lt 2.3\text{%}$ of the borrowings work in the UK and say that is financial knowledge all adults should know.

Maybe you're trying to get at what's known as Riccardian Equivalence, which I think is too literal and too strong but there's an interesting idea under it. Focusing on a small amount of "leveraged money" just seems very strange to me.

There also seems to be a stock vs flow error here in that borrowings are stock variable but the cost associated with them is a 'flow variable' that is much less per annum than the principal value. But then you equate the flow variable of per annum wages with the stock variable of amount of "leveraged borrowing" which at a minimum needs considerable justification and is likely an error.

- - - -
I'd also like to know what this statement is intended to mean.

You mentioned
:
"There also seems to be a stock vs flow error here in that borrowings are stock variable but the cost associated with them is a 'flow variable' that is much less per annum than the principal value. But then you equate the flow variable of per annum wages with the stock variable of amount of "leveraged borrowing" which at a minimum needs considerable justification and is likely an error."
:
What does that statement actually mean? I do understand the concept of borrowing but I didn't understand any of that statement.

We are simply borrowing money. It is simple, not difficult. I have borrowed money and I guess most people have.

Why is "equate the flow variable of per annum wages with the stock variable of amount of "leveraged borrowing" required or even relevant when borrowing money from a bank? Does that statement simplify of confuse?

£50bn is 'A small amount of "leveraged money"' ? The fact that is is a small proportion is a red herring the size of giant squid!

At government debt auctions the central banks borrow money from market maker banks that do not have the money to lend to us.

MM banks are constantly in a leveraged state, a leveraged state is their business model and they would collapse otherwise. It's not their problem.

It's only our problem if we borrow from them. It is that simple.

I believe the following scenario is quite possible. Maybe I am in error, if so please point out which step of the the following is not feasible.

start 10:00 am, Monday.
1/2 inch snow in City of London, transport in chaos (agreed up to this point I assume).
MM banker JP Goldman is the only attendee who braved the elements to get to the auction.

JPG has 7bn (green) in his account showing on his laptop.
JPG buy 50bn at debt auction.
JPG right clicks on 7bn, selects 'leverage' then 50bn.
JPG has 7bn (green) and 50bn (yellow) in his account.
Right click 50bn (yellow), transfer to BoE Auction.

On receipt of 50bn (no color), BoE Auctioneer sends 50bn govt bond to JPG.

JPG has 7bn (green) and 50bn (yellow) govt bond in his account.
JPG right clicks 50bn (yellow) bond, selects sell on bond market.

Govt bond sells on bond market at 50bn (green). (Conveniently)

JPG has 7bn (green) and 50bn (green) in his account.
JPG has 57bn (green) in his account.

Finish 10:30, off to the pub.
I would like to make money at that rate.

50bn is 2bn UK taxpayers valuable work hours, why give it to a private for profit corporation when they lent us nothing of value?

Setup a children's bank, borrow from it, then pay back through taxation to the bank that was setup to represent the rights and interests the children whose money is being wholesaled around the bond markets.

bond markets = children debt markets.

Currently we borrow from our children by borrowing from giant corporates.

How does that help us? How does that work? Where is the logic in that?

 

[Vanadium 50]

pBrane, what is your point?

Is it that sovereign debt will eventually have to be paid back? Is it that modern banks use fractional reserve banking? Can you concisely make your point?

 

[russ_watters]

I'm with @CWatters (I think?).

I don't think this post made much sense. And supposing it does make sense it doesn't meet a materiality threshold of "financials knowledge all adults should know".

I see a bit of both here. Most of the thread has focused on personal finance issues, but I do think that understanding national level finance issues is important as well; for responsible voting. So knowing about the National Debt and how it affects us is important.

But the conversation does seem somewhat scattered and not very coherent. So let's try to rein it in. I'd rather not have to do any trimming (and don't have time right now).

 

[StoneTemplePython]

I see a bit of both here. Most of the thread has focused on personal finance issues, but I do think that understanding national level finance issues is important as well; for responsible voting. So knowing about the National Debt and how it affects us is important.

But the conversation does seem somewhat scattered and not very coherent. So let's try to rein it in. I'd rather not have to do any trimming (and don't have time right now).

Agreed, though something is very off here. My sense is a @Vanadium 50 may have guessed it right -- this is a big rant on fractional reserve banking.

 

[Greg Bernhardt]

@rude man just published a nice Insight on the math of options pricing
https://www.physicsforums.com/insights/a-simplified-synthesis-of-financial-options-pricing/

 

[Astronuc]

From Marketwatch Adviser - ‘They’re not required to tell you that, but you should know.’ 4 questionable, but legal, things some financial advisers do with your money

https://www.marketwatch.com/picks/t...ncial-advisers-do-with-your-money-01651851885

1. Is your financial advisor (or organization) forthright about being a fiduciary, or not being a fiduciary?

2. Has your financial advisor disclosed all aspects of compensation for financial products or investments offered? Does your financial advisor have conflicts of interest?

3. Does your financial advisor find only ‘suitable’ opportunities?

4. Does your financial advisor disempower you?

I'm considering changing a company holding one of my accounts, since I believe they are not fiduciaries (and they have not volunteered that they are not), and they are certainly not observing the fiduciary rule. Some questionable investments have been made, and the key advisor is very comfortable in allowing certain investments to drop in value. In response, he and others point to the market as the factor, and they do not accept responsibility for hold onto investments that decline in value over several months.

With respect to question 1, it is appropriate and advisable to ask explicitly if the advisor is a fiduciary, and better, as licensed/registered fiduciary, and then get it in writing.

With respect to question 2, it is appropriate to ask when given advice to invest in a given mutual fund or ETF whether or not the advisor obtains some form of compensation, reward or other incentive to promote the particular product.

With respect to question 3, although the advisor suggests that the portfolio is 'well-balanced' or 'conservatively invested', is it really? I've found some so-called investments are actually more likely to decrease in value (more likely have a downside), have a low return on investment, and have relatively high volatility.

I had one advisor tell me explicitly that she did not 'time the market'. During the downturn in the market in February and March 2020, she panicked as sold off some equities after losing value and immediately bought another investment, which proceeded to lose an additional 10-15%. It would have been prudent to sell and hold, but instead she gambled that the market would stabilize. Something similar happened recently with another advisor.

 

[BWV]

With respect to question 1, it is appropriate and advisable to ask explicitly if the advisor is a fiduciary, and better, as licensed/registered fiduciary, and then get it in writing.

It is simpler than that in the US - if they are a Registered Investment Advisor, then by law they are a fiduciary. You can check their registration here:

https://adviserinfo.sec.gov/

it will give information about any SEC violations against the individual or firm

if you enter a broker, who is not a fiduciary, the site will refer you to FINRA, which is the regulatory body that covers them, and can see if there are any past actions taken against them or customer disputers

 

[NTL2009]

From Marketwatch Adviser - ‘They’re not required to tell you that, but you should know.’ 4 questionable, but legal, things some financial advisers do with your money ...

Why bother with an FA? They have no "secret sauce". Stats show a buy/hold of a simple, low-expense, passive Total Stock Fund and Bond fund (like VTI & BND) will outperform 85% of active investments over a 5 year period, and the 15% winners don't show any sign of persistence. No timing, so selection, just buy 'em, rebalance once a year if you want, and get on with life.

Takes ~ 15 minutes a year., if that. You'd spend more time than that reseaching an FA only to find they are likely to underperform that simple portfolio (after all, they have to overcome the drag of their fees to provide a net positive).

 

[Vanadium 50]

Why bother with an FA?

Depends on your goals. (I know I sound like a broken record on goals)

If your goal is to "beat the market", a FA is unlikely to help.

If your goal is to help with tax management, balancing growth and income, handling risk, etc. then they can be helpful. This takes far more than 15 minutes to research.

It is perhaps worth pointing out that taking money out - for e.g. retirement- is no less complicated than putting it in, maybe more because of the constraints.

 

[NTL2009]

Depends on your goals. (I know I sound like a broken record on goals)

If your goal is to "beat the market", a FA is unlikely to help.

If your goal is to help with tax management, balancing growth and income, handling risk, etc. then they can be helpful. This takes far more than 15 minutes to research.

It is perhaps worth pointing out that taking money out - for e.g. retirement- is no less complicated than putting it in, maybe more because of the constraints.

OK, I agree on those points. And most people would probably be best served by hiring an expert by the hour or task for those items. Your typical store-front FA has little expertise in those areas, and they typically charge 1% per year, every year. The advice you mention would not normally need to be re-evaluated (at least not the process) each year.

 

[Vanadium 50]

And most people would probably be best served by hiring an expert by the hour or task for those items.

And you can. It's of order $\$$200/hour. A full-on retirement plan is $\$$1000 or so.

(Anyone want to guess how and why I got the fancy dollar signs?)

 

[fluidistic]

Thanks guys for this thread. There are some valuable information in here.
I'm in a bad situation right now. I have a PhD in Physics and between 2 jobs: 1st postdoc ended at the end of March and my 2nd postdoc will start on Sep. 1, but in between, this is a bit of a nightmare monetarily. I have a "crazy idea" that I think may be a sort of revolution regarding thermoelectrics, and I have been awarded a best thesis prize recently (but not many papers published, yet), I wish to do some calculations and publish the work, but I have no time right now. I spend my time on the phone and writing emails to move and seeking for financial help from the Government, but there are many inefficiencies.
With now 2 kids and a wife to feed, being alone to work is definitely tough (it wasn't nearly as tough for my grandfathers who happened to work for families of 8 and 6 people).
If I could tell something to my self of 25 years ago, I would say "keep your pokemon cards in a safe place". It turns out that a single card I had is now worth over 30 k euros, but someone burglarized it back in 2004.

 

[russ_watters]

I'm more on the "do it yourself" side, mostly because I don't trust financial managers/advisors, they are way too expensive for what you get and with the internet it is much easier to do the work yourself than it used to be. It would be nice to have a reliable and not too expensive one, but I'm not paying someone hundreds of thousands of dollars to copy and paste a plan for me or worse use brokerage fees and unnecessary churn to bleed me.

Anecdotes:
I got a small gift of stock from my parents a couple of decades ago that came with an account with their financial manager. Fortunately it's small enough they haven't thought to try to sell me on their services. Several years ago (a decade ago?) when the fiduciary law was passed, they sent my parents a contract to sign waiving the fiduciary responsibility. Who would sign that?

Since then, they've had a bit of a "boiler room" feel, and my parents are not happy with it. Recently they had a retirement disbursement needed, so my mom went to them to pick where to pull it from. They had an under-performing stock and recommended selling that. Fine. But my mom wanted to sell only as much as needed for the mandatory disbursement, and instead they sold all of it (and it was a lot). It was probably just a miscommunication; my mom has bad cell service at home and won't use her land line. But my mom has repeatedly told them she wanted trade recommendations in writing/email, but they won't do it. The Manager even told her they weren't allowed to (nonsense!). So when they asked what to do with the rest of the money (and can we recommend this nice high-fee fund...?) she said to mail her a check. It's going into their Vanguard fund (S&P 500).

Since they have had an accountant do their taxes the last few years, the accountant tells them when/how much they need to sell from their retirement accounts. They don't need a separate advisor for that, and I'm not even sure the financial advisor would know. While they call themselves "financial advisors" what it really sounds like they are is fund managers/brokers.

 

[Imager]

@Astronuc I agree with the comments related to your post. Being a Fiduciary is not going to make them a stock picker. Also even with a "smart" money investment house like "Golden Sacs", a 7 figure account puts you way down the line in service levels.

The impact of paying 1-2% of your total account value per year to adviser is going to have a massive impact over long time periods. I am with Russ_Watters doing it yourself is the way to go.

I am a Finance guy and I rarely buy individual stocks, ETFs give great diversification and it takes very little time compared to picking individual stocks.

 

[hutchphd]

Money not spent is always nontaxable "income".

 

[Astronuc]

Fortune has some good information on 401Ks
https://finance.yahoo.com/news/401-k-plan-quit-retire-150200268.html

Some people who have multiple jobs (sequentially) should know this.

 

[Vanadium 50]

I read that article, and while it usually pretty good, I find the advice to consolidate retirement accounts "lest you forget about them" seemed a little...um...odd. Who forgets about people who have your money? There is a very good reason to leave it where it is: some investments might only be available under the old plan.

 

[Imager]

Another benefit is separating the risk of a single financial institution bankruptcy. While funds are usually insured, the funds would be tied for a while.

 

[Vanadium 50]

Well, I doubt Fidelity or TIAA-CREF is going under any time soon. "Crazy Sammy's Bitcoin Bank and Bait Shop" on the other hand...