How Much Financial Advice Do You Need? (Hint: Less Than You Think)

Financial Advice

How much financial advice do we need? It's a question we all ask ourselves, whether we pay a certified financial planner handsomely or go it alone.

But with a troubling national shortfall in retirement savings and the lingering effects of a foreclosure crisis, policymakers and researchers are asking the same question in the hope of coming up with low-cost ways to keep people on the right track.

The answer, to judge from a rash of recent studies, is not much.

The credit-rating agency Experian recently conducted a study with Neighborworks, a nonprofit that helps lower-income families buy homes, measuring the effectiveness of Neighborworks' weekend workshops. It showed that as little as eight hours of counseling on real estate basics reduced mortgage delinquencies by more than a third.

The study included experienced homeowners as well as first-time buyers, and Experian was careful to control for those who required remedial advice.

"The study looked at pre-home ownership credit behavior, so you didn't only have people who already had bad credit," said Douglas Robinson, a Neighborworks spokesman. He added that middle- and even high-income buyers could also benefit from a brief acquaintance with what to expect from home ownership.

"We reduce the 'unknown knowns,' " Robinson said.

Other studies have shown that the unknowns can be reduced with far less effort.

At Stanford University's Institute for Economic Policy Research, a group looking for ways to spur higher retirement savings found that employees who got occasional, customized projections from their employer of how much income their IRAs and 401(k)s would provide them responded by increasing their annual contributions.

Similar results can be realized simply by using an online retirement calculator. A recent paper from the Employee Retirement Research Institute showed that those who figured their retirement needs with a Web tool increased the adequacy of their savings targets as much as 18 percent. In fact, those who used an online calculator ended up with more realistic savings targets than people who relied on a financial adviser.

That evidence raises another question: What kind of financial advice do we need?

Jack VanDerhei, research director of EBRI and co-author of the paper about online calculators, suspects that most people seek out advisers for guidance on other investment matters, such as asset allocation. "That tells me nothing as to what my overall savings targets should be," VanDerhei said.

And it does little to connect our picture of home ownership or retirement with reality.

"All of us sort of dream in color," said Anna Behnam, a financial adviser with Ameriprise Financial Services in Rockville, Md. "When we think about buying a house or car, we focus on what we want." The basic service of financial advice is to get us to think in black and white, Behnam said. It seem that even a little bit of cold, hard calculation can change our behavior by taking the emotion out of a home purchase or budgeting for old age.

The prevailing emotion in buying a home appears to be infatuation.

"We tell people, 'Don't fall in love with the first house you see, or even the last,' " said Robinson at Neighborworks. "Our counseling lays it out in almost spreadsheet form: You earn $50,000 a year. So here are your transportation costs, your daycare, food, what it costs to wear a suit and tie every day."

People also fall in love with their retirement dreams, but fear tends to be the principal driver of retirement planning mistakes.

"People think it is beyond their capabilities no matter what they do," said VanDerhei. When asked what percentage of their income they need to save for a decent retirement, he said, some respondents to EBRI's most recent Retirement Confidence Survey said 20 percent -- far higher than is practical or necessary.

The same fear can make people resistant to seeking financial advice. "People think they can't afford a planner," Behnam said. "They think a planner will tell them to do things that they can't afford to do." The promise of these recent studies is that people may be more receptive to a small injection of financial planning.

Some question whether these nudges will be enough to prevent future rounds of foreclosures or prevent America's coming retirement crisis.

Gopi Shah Goda, who led the Stanford study, noted that, after receiving retirement income projections, employees raised their annual contribution by an average of only $85. Still, the advice was more likely to lead to outcomes better than employees would have with default contributions set by human resources -- and far better than letting them guess how much to put aside, which EBRI found is the method used by 45 percent of workers.

Looked at that way, it's little wonder that a little advice goes a long way. "A lot of the problem is that people are so clueless," VanDerhei said.

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A reverse mortgage, secured by the home, can be paid as a lump sum, a set monthly amount, a line of credit, or some combination.

September 20 2013 at 1:11 AM Report abuse rate up rate down Reply

I get my mony frum welfair becauz im a retard and I liv in my momies basement im alreddy retirted

April 19 2013 at 3:32 AM Report abuse rate up rate down Reply

don't got ?
do without.
use it up or wear it out.

life is not complicated.
don't have the CASH TO BUY IT ?
save for it or fughetaboutit.

April 18 2013 at 12:55 PM Report abuse rate up rate down Reply
1 reply to setanta995's comment

wanna hotpocket an sum coolade ?

April 19 2013 at 3:33 AM Report abuse rate up rate down Reply

Ignorant article, in light of all the people who used their homes as ATMs for higher living, and then lost them.
How about the people who didn't move quick enough in 2008 and lost 25-50% of their retirement savings?
How about the people who got out at the bottom and will never recover in time?
Don't take this moronic advice; it is worth what you paid for it.

April 18 2013 at 10:06 AM Report abuse +1 rate up rate down Reply

The best way to have money is don't spend it. There is a "green" way to do almost everything.
Here's an example: Nearly everything I do is five miles away or less. Instead of driving there, I ride my Mongoose 21 speed bike - I get no gas stress, no seat-belt worries, no rotund around my middle, lots of fresh air. The greener you live, the better the quality of your life.

April 18 2013 at 6:38 AM Report abuse -1 rate up rate down Reply