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Finance is a Strange Industry

Finance is a strange industry. There's nothing else like it.

I can't think of another industry in which there is so much ignorance around costs. Nearly all financial fees are deducted from assets automatically, rather than clients receiving and paying an invoice. This makes them out of sight, out of mind. Ask someone how much their cell phone bill is, or how much a gallon of gas costs, and they can tell you down to the penny. But ask them how much they pay in advisory fees, and they may have no clue whatsoever.

The irony is that if you are moderately wealthy, advisory fees might be your single largest annual expense -- and you're probably oblivious to them. You diligently include an $8.99 Netflix subscription in your monthly household budget, but have no idea you're paying 50 times that much to your 401(k) adviser. No other industries work like this.

I can't think of another industry in which people capable of doing so much harm don't need credentials. Doctors must attend medical school. Lawyers must pass the bar. Hairstylists and manicurists need licenses. Becoming a London taxi driver requires passing a test that can take years of practice.

But managing money requires little more than the desire to manage money. If I want to be a firefighter, I need extensive training. If I want to manage the firefighters' retirement fund, I need a nice suit and a sales pitch.

Selling, rather than managing, financial products does require a license. But it is embarrassingly simple to obtain, and anyone willing to study for a few weeks can pass the test. "You should meet some of the cavemen I know who've managed to pass it," financial adviser Josh Brown once wrote. No other industry has the potential to do as much harm to society while demanding so little proven expertise. (Politics may be an exception.)

I can't think of another industry in which results matter so little. Investor Marc Faber was finally called out by a CNBC host last month for lacking credibility after years of failed predictions. Faber's response was incredible. "I started work in 1970," he said. "Over my career, somewhere, somehow I must've made some right calls. Otherwise I wouldn't be in business." What those calls were, he didn't say.

The truth is that finance is filled with people who remain in business despite awful track records. There were 894 mutual funds in 2012 that had been in business in 1998. Of those, only 275 beat their benchmarks. That means more than 600 funds have underperformed what could be achieved in a low-cost index fund, but still remained in business for a decade and a half. The worst mutual fund to own over the last 10 years -- one that has underperformed all of its peers and trailed its benchmark by 150% -- still manages more than $1 billion.

Few industries in which results are measured objectively could get away with this. Competition would clean out the bad. When you mix financial illiteracy with innumeracy and emotion, poor performance is easily ignored.

I can't think of another industry that is so poorly taught in school. Making students memorize the periodic table but teaching them almost nothing about basic finance is bad enough. But even at the college level, how finance and investing is taught is disconnected from how it actually works. Finance is taught overwhelmingly as a math-based field, in which students learn how to calculate beta by hand and dissect a balance sheet in their sleep. In the real world, finance is overwhelmingly a psychology-based field, where the best investors are those who control their emotions. This is rarely taught and never emphasized. And it's why some of the world's best investors have no formal finance training. Other fields, such as medicine and engineering, have done a much better job preparing students for the real world.

I can't think of an industry that is so important to everyone yet so few care about. I get why people don't like calculus, or chemistry, or geography. They can do fine in life without mastering those subjects. Finance is different. Everyone's well-being depends on understanding it, no matter how boring you think it is. Everyone has a moral obligation to themselves and their family to have a basic understanding of how saving, investing, debt, and interest work. When people say, "I don't like finance," they're really saying, "I don't like security, stability, comfort, or taking care of my family. And my kids probably don't need college." There are few other subjects -- health might be the exception -- in which people have an obligation to understand something, yet so many willingly choose not to.

There's really nothing else like it. Good luck to us all.

Check back every Tuesday and Friday for Morgan Housel's columns.


Read/Post Comments (20) | Recommend This Article (79)

Comments from our Foolish Readers

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  • Report this Comment On August 27, 2014, at 10:16 AM, CMFStan8331 wrote:

    Strange indeed. At least partially, I think it's a case where technology has far outpaced culture. Almost anyone now has access to investments that used to be reserved for the very rich, but we have almost no processes in place to teach people how to effectively use them. The whole field of financial education offers tremendous potential for growth - that's one of the reasons I'm very bullish on The Motley Fool.

  • Report this Comment On August 27, 2014, at 10:17 AM, slpmn wrote:

    Even Harvard is stupid about the costs of financial management:

  • Report this Comment On August 27, 2014, at 10:19 AM, TradeWithPat wrote:

    This is a really well written and interesting article by Morgan Housel.

    I would add that another problem is financial media consists of anchors with communications degrees that have never made a trade in their lives. These folks add no value in my opinion.

    No one cares more about your money than you. Trusting your retirement to someone who specializes in sales and never made a trade won't work out.

  • Report this Comment On August 27, 2014, at 11:00 AM, mdk0611 wrote:

    At the high school level, who's available to teach it that's qualified?

  • Report this Comment On August 27, 2014, at 11:48 AM, TMFBoomer wrote:

    Great stuff, Morgan!

    Every college needs a Fool Finance course to save students from the misery of another derivatives and risk management course. I can't think of a classmate of mine that went on to employ complex quantitative financial models in their day jobs. But plenty could have used a primer on the nuts and bolts of long-term investing.



  • Report this Comment On August 27, 2014, at 1:25 PM, RenegadeIAm wrote:

    We have a Prussian-militarist designed, 19th century factory-model education system that is designed to train four classes of people: professional employees, State bureaucrats, academics, and grunts (military and factory).

    This antique model is being ferociously defended by special interests that look out only for their own cash cows.

    Education decisions are being made for political reasons (e.g. "Who will deliver the most votes in November?"; "Will the campaign donations forcibly extracted from taxpayer-funded unions keep coming to my re-election effort?") rather than in the interests of our next generation.

    Our kids are being taught that business and finance knowledge is bad (even evil), but that victimhood and entitlement are good.

    Still, people who teach THEMSELVES finance are far, far ahead of those who think that they are "over-educated" because they are taught only victimology 101 and why The Man is keeping them down.

    In fact, "The Man" IS keeping them down, but "The Man" is actually the system that is teaching them fear and victimhood--and running the education system--not the imaginary bad guys who are actually creating the jobs and paying the taxes that pay their "teachers."

  • Report this Comment On August 27, 2014, at 1:57 PM, mcampbell8 wrote:


    I agree with your assessment. The financial collapse of 2008 should have taught us to not trusts the financial community or our government regulators who were asleep at the gate. No one will ever have our best interests at heart as much as us. And to depend on the financial community is to put your life, so to speak in their hands.

  • Report this Comment On August 27, 2014, at 1:59 PM, TheDumbMoney wrote:

    Terrific piece. I do think politics, which you mention in a parenthetical, is the only exception. Note how even more emotion is involved in politics than in investing, and how politics also suffers from tribalistic tendencies. There is a connection between that and the low expertise requirements, I think....

  • Report this Comment On August 27, 2014, at 2:01 PM, RockyTopBob wrote:

    One of the main reasons I joined TMF many years ago was the upfront accountability, rare in an industry full of fools, not Fools.

  • Report this Comment On August 27, 2014, at 2:03 PM, deckdawg wrote:

    I think the government qualifies for most of your categories.

    Total cost is very hidden.

    Have you seen some of the cretans in elected and appointed positions?

    Results matter very little .. the same cretans get re-elected year after year no matter how badly things are run.

    Voter turnout? In most elections 40% would be considered excellent.

  • Report this Comment On August 27, 2014, at 2:53 PM, timbng wrote:

    I'm an investment advisor and we invoice our clients in arrears every quarter. They write us a check, and we have literally zero access to their funds. This way our people know exactly how much they pay. Almost every anti-advisor/anti-broker article is rife with sweeping generalizations, with little respect to those who do not operate in such a manner.



  • Report this Comment On August 27, 2014, at 3:32 PM, herky46q wrote:

    Another really good commentary. I have no idea in dollars how much I pay for my investments. Until there is a law requiring it, I guess nothing will change.

  • Report this Comment On August 27, 2014, at 4:44 PM, aleax wrote:

    Let me mention a few major industries "you can't think of"...:

    ignorance around costs: medical procedures. Indeed making their costs transparent is a long term objective of a hardy band fighting for that, as a preliminary to getting them in some control.

    I know perfectly well what my 401k handling costs: $20 a year [$50 if I also want a "brokerage window" to trade any securities for a $2 commission, rather than just Vanguard MFs] -- it's with Vanguard, and they're both transparent AND very low cost (and effective)... and not incidentally have grown to have the largest amount of AUM (this year in particular their inflow's ridiculously higher than their competitors'), which BTW also throws some doubts on your "results count so little" meme below.

    OTOH I have no clue what my recent CT scan cost (not even what it will take off my pocket in deductible and co-pay) -- I know of no medical institution comparable to Vanguard in terms of transparency about all costs involved.

    people capable of doing so much harm don't need credentials: software. And I believe society is far better off because of that -- what's absurd is e.g, requiring licenses to be an interior decorator, NOT failing to require them for software developers.

    results matter so little: team sports. Don't the Cubs *still* have plenty of fans?

    poorly taught in school: again, software. I'm among the most successful pros in the field, yet I'm 99% self-taught in it (I'm an engineer by training). What most schools teach is instead "computer science", despite the fact that, notoriously, "computer science is no more about computers than astronomy is about telescopes"...

    so few care about: as you mention yourself -- health.

    Unfortunately I think the rhetorical structure of this article (the repeated "I can't think of" bolded sentences) just doesn't work, due to obvious counter-examples such as the above ones.

  • Report this Comment On August 27, 2014, at 6:02 PM, drborst wrote:


    I was offended at the last two points. Schools don't make people memorize the periodic table (except in advanced inorganic chemistry), they teach them how to use it. (that's why it's on the wall in most chemistry classrooms). Also, I can't imagine anyone wanting to go through life without some chemistry knowledge...

    But then it dawned on me, you are a finance professional of sorts, of course you think schools should do a better job teaching finance, just like I was thinking schools should have done a better job teaching you chemistry.

    Does everyone really have a 'moral obligation' to learn basic finance? Sure the people on this site might agree, but which bias is that?


  • Report this Comment On August 27, 2014, at 6:47 PM, TMFHousel wrote:

    Your offend too easily.

  • Report this Comment On August 28, 2014, at 1:36 PM, miteycasey wrote:

    My refusal to memorize the periodic elements got me a 'C' in Chemistry my Junior year in high school and I still graduated in the top 10% of my class.

  • Report this Comment On August 28, 2014, at 1:40 PM, The1MAGE wrote:

    drborst (I assume it's Dr. Borst)

    Honestly I am offended by your flippant comments. Sure, if I understand chemistry, I will understand how to split water into hydrogen and oxygen, or be able to start a meth lab, but finance affects all of us.

    So many people are living part or all of their lives in poverty just because they don't understand finances. We can handle that when we're young, but in our 60's and beyond it can be a real struggle.

    The start of the "Great Recession" resulted in the cutting my my hours, and my pay. Yet my bank account kept growing, and my debt kept shrinking.

    By 2011 my stock portfolio/401k was up 50% over what it was before the crash. (We were applying our money to debt at the time, not the 401k.)

    People are still complaining about how their portfolios haven't recovered, or are avoiding stocks, and will never recover. People are delaying retirement, or getting jobs they didn't expect.

    Why? Because they don't understand finances.

    If you don't understand chemistry, you can still wash your car. You don't understand electricity, you can still turn on a light. You don't understand finances, you could lose your house.

  • Report this Comment On August 28, 2014, at 2:59 PM, hbofbyu wrote:

    As straight forward as it sounds I don't think education would be as effective as we think. I have found that people with money problems are not necessarily uneducated in the area of finance. They usually have problems controlling their impulses and living beyond their means.

    Even with no formal education on finance, you can know how every penny of your money is spent - and you look for those things - if you care - and you learn as you go - and you get smarter and smarter about how people try to take your money.

  • Report this Comment On August 28, 2014, at 3:16 PM, hbofbyu wrote:

    Let me add - I think the biggest knowledge deficit is in understanding compound interest. That needs to be taught to all - over and over.

  • Report this Comment On August 29, 2014, at 11:19 AM, Mathman6577 wrote:

    While some regulations are important (i.e. medical licenses for doctors, water pollution standards, etc.) others are not (i.e. licenses for barbers, etc.). The net effect of most regulations is to raise prices that consumers have to pay. In the financial industry the answer is probably somewhere in the middle (i.e. some basic regulations are needed but people still need to do more research on their own and not get taken advantage of by advisors).

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Morgan Housel

Economics and finance columnist for Analyst, Motley Fool One.
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