Dan Ariely on “Asking the right and wrong questions”

Dan Ariely, author and professor of behavioral economics, wrote an interesting blog post yesterday
 Asking the right and wrong questions

 From a behavioral economics point of view, the field of financial
 advice is quite strange and not very useful. For the most part,
 professional financial services rely on clients answers to two
 questions:

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

He goes on to say that the clients suggest that they need 75%, which is a number they’d gotten from advisors in the first place, so it’s useless.  Then he suggests that the actual answer should be a *lot* higher — 135% — though he bases that on the answers to these questions, which are, in my opinion, similarly useless:

How do you want to live in retirement?
   Where do you want to live?
   What activities you want to engage in?

He then goes on to skewer the percent-of-assets model used by so many advisors to determine their compensation – in particular, given that the advisors (according to him) are so bad at figuring out how much clients need to save and how much risk they should be taking, they spend all of their time doing the easier job of rebalancing portfolios and, in his opinion, they get paid too much for doing so and probably shouldn’t be doing so in the first place.

It’s a controversial article – and my opinion is that he’s both right and wrong in a variety of ways, the most obvious being the useless questions he suggests for figuring out how much one needs for retirement.  And the question of paying an advisor a percentage of assets to manage those assets is a more complex question than he suggests, though it seems clear that a lot of people are, in fact, paying a lot too much for asset management and not getting enough actually planning along with it.

Ariely very rightly  suggests that the more difficult questions – how much you need for retirement (and something not addressed by Ariely or, in general, well enough anywhere — how to actually extract that money once one has retired) — are things that professional advisors can and should help people with.  And they should be able to make a living that way.
Here’s Ariely’s blog post:

http://danariely.com/2011/08/30/asking-the-right-and-wrong-questions/

One comment

  1. Where’s the really important one: “what would you like me to do with the money when you win the lottery?” 🙂

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