A critique of financial advice

Dan Ariely has a post called “Asking the right and wrong questions” about financial advisors.  It starts off with:

For the most part, professional financial services rely on clients’ answers to two questions:

  1. How much of your current salary will you need in retirement?
  2. What is your risk attitude on a seven-point scale?

In his research he found that the typical answer to the first question was 75%.  Digging deeper, it became apparent that that number came from a common-knowledge rule of thumb, not from introspection.

The research project elicited that information in another way and came up with a different number.  Have a guess what it was.

One more quote before you go off to check your guess:

So we have an industry that asks one question it’s giving the answer to, and a second question that assumes that people can accurately describe their risk attitude (which they can’t). This saddens me because, while I think that financial advisors are overpaid for the service they provide, in principle they could contribute much more, and they could even deserve their salary. But only if they start offering a more useful service, one that they are in the perfect position to provide.

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