Financial advice is often complicated, overly generalized, and at times condescending- come on now, how many times have you heard advice like, “Spend less than you make”; “Save 10% of your income for emergencies” or “Make sure that you save at least 6 months of income (some say up to 18 months of income for emergencies).” Some advice is given with the best of intentions and it can be useful to begin with appropriate rules of thumb; however, generalized goals can be extremely discouraging and even counterproductive.
Bonus: S.M.A.R.T financial goals can be incredibly helpful. Goals which are Specific, Measurable, Attainable, Relevant (also Review and Revise goals), and Time bound.
SMARRRT!
Competent advice needs to incorporate behavior, learning styles, and the environment. Yes, environment is critical. If the advice is “open an online account”, reducing fees, adding benefits, etc… and the individual lacks reliable, safe, and confidential internet connection… the advice, while it may help someone else, isn’t appropriate. This is a simple example. Financial environment includes disparities (racial and others) and available products and services. Prejudicial and predatory practices exist and are a problem.
Financial education is important, however, financial knowledge on its own is useless. You may be familiar with the idiom, “Knowledge is Power”, yet many very intelligent people don’t seem to apply what they know (I speak from a wealth of experience). Motivation without proper awareness or skills can be dangerous.
I remember some terrible advice I received as a teenager. A well-intentioned friend told me, “If you don’t file an income tax return, then you never have to file a return and can save loads of money in taxes.” As a teenager with a really low paying job, this sounded great! I was excited to follow the advice. What I didn’t know, is that as a student and then young adult, I left thousands of dollars on the table. I qualified for the Earned Income Tax Credit (EITC) for years, but never applied due to the horrible advice. My hard-earned money became a gift to Uncle Sam. Very ironic considering my goal was to avoid paying taxes in the first place!
Now, we can dismiss this example as “kids…. They’ll learn someday.”
Unfortunately, I’ve since corrected well educated, “well-trained” financial professionals when it comes to their advice. A safe financial environment with accurate information is essential so that everyone has opportunity to thrive.
Financial Capability includes: knowledge, behavior, and environment.
Personal finance advice would do well to consider the medical community, where there exists an important understanding, “Do No Harm”.
According to Wikipedia, “The Hippocratic Oath is historically taken by physicians. It is one of the most widely known of Greek medical texts. In its original form, it requires a new physician to swear, by a number of healing Gods, to uphold specific ethical standards. The Oath is the earliest expression of medical ethics in the Western world, establishing several principles of medical ethics which remain of paramount significance today. These include the principles of medical confidentiality and non-maleficence. As the seminal articulation of certain principles that continue to guide and inform medical practice, the ancient text is of more than historic and symbolic value. Swearing a modified form of the Oath remains a rite of passage for medical graduates in many countries.”
Ethics are critical for our personal lives and professions. Care and compassion are as important as competence. While some financial advisors are fiduciaries, individuals with a legal or ethical relationship to act in the best interest of another, many are not. As consumers, it’s critically important to be informed about what we’re buying and the advice we’re receiving.
I'd love to hear your thoughts.