September 6, 2011
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It's the biggest bunch of hooey I've ever read in the financial planning press.
This is surprising because Ariely has done some good work in the behavioral finance arena, and he's an entertaining speaker on the planning circuit. But I have to wonder: Is this an example of the depth of research he does in his studies?
Here are some examples. Ariely, citing no references, tells us that "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?"
Where, exactly, Prof. Ariely got this inside scoop on how advisors ply their trade is uncertain; there is no reference cited. But I suspect that every single advisor reading this message knows that the initial client assessment process is many orders of magnitude more complex and detailed than this. Going back as far as the late 1980s, the late Lynn Hopewell created a series of articles, later awarded a prize by the CFP Board, outlining how advisors should define client retirement income needs. Simplifying the three articles that became the bedrock articulation of this service, a professional advisor starts by:
- looking at current expenses and lifestyle in some detail, subtracting out expenses that you project won't be there in retirement (college tuition for children, mortgage payments on the house, costs related to commuting to work etc.),
- adding in expenses that will show up in retirement (travel, additional health care costs, maybe a golf club membership etc.), and then
- evaluating the chances of meeting those spending goals based on current savings and a variety of reasonable assumptions. In most cases, today, there is a Monte Carlo analysis that identifies likely best case and worst case scenarios.
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