Financial planning can be difficult, and most people would benefit from seeking the advice of financial planners, but that doesn't mean one should take such advice at face value.
This is a point that Industry Focus: Financials host Gaby Lapera learned when she opened an IRA. Listen in to the latest episode to learn about what she learned from the process and ways to help combat so-called authority bias -- i.e., our innate tendency to trust the advice of experts.
A full transcript follows the video.
This video was recorded on July 10, 2017.
Gaby Lapera: Never will I ever take advice at face value. This applies to a lot of different arenas in life, but more specifically for what we talk about on the show all the time: this applies to financial planning and stock theses. I actually asked one of our financial planners who works for our sister company, what is some advice that she's heard from clients or that people have tried to give her herself that she has been like, "Wow, that's terrible advice," that kind of illustrates my point that you shouldn't take advice at face value. For example, you don't need to invest in life insurance when you don't have a spouse, children, or significant assets. If you have life insurance through your work already, you probably don't need to buy extra if you don't have any of those other things.
For example, me. I don't have a spouse or children or any significant assets, so I'm cool with just my work policy. And if a financial planner is trying to sell you something like that, and your conditions don't really warrant it, maybe you should examine whether or not the advice you're getting from them is coming from a good place. This is where I want to put a plug in for something call the fiduciary rule, which basically says that financial planners need to swear this oath, it's like the Hippocratic Oath except for financial planning, saying that they will put their customers' best interest first. I think a lot of people just assume that financial planners are doing this already, which is a mistake, unfortunately. There's a lot of financial planners out there who are just like, "Yeah, sure, I'm totally doing what's best for you, and what's best for me in terms of money," because sometimes, by selling you things, they make a percentage. That's an example of financial planning.
A more personal example for me is, I remember when I was 18 and I marched into the bank and I was like, "I have a job. I would like to open an IRA. What kind of IRA should I open?" And the banking lady looked at me and said, "You need a traditional IRA, obviously." And I was like, "OK!" And I opened a traditional IRA. Come to find out a couple years later, a traditional IRA did not make sense for me at the time. I was making $7 an hour.
John Maxfield: [laughs] Your big tax break.
Lapera: Yeah, I don't think I needed huge tax break there. In fact, up until last year, I believe the government owed me money every year up until this last year. So, a traditional IRA was not the best idea for me. And for listeners who aren't familiar with traditional and Roth IRAs, traditional IRAs give you a tax break up front. Whatever you contribute, you can deduct from your taxes. Roth IRAs are a better idea for people who think they're going to make more money in the future, and will be taxed more heavily in the future, which was basically 18 year old me. I can assure you I'm making more money now than I did when I was 18, because I was making the minimum wage when I was 18, which I think was still like $5.70 an hour. It was not a lot of money.
Maxfield: Those were the days, huh?
Lapera: Those were the days. I was on an upward, and hopefully continue to be, on an upward trajectory in terms of wealth generation in my life. A Roth IRA is really great because when you get taxed on that money, the money gets taxed before you put it into the IRA, but when you withdraw from the IRA when you retire, you don't have to pay any taxes on it. Which is really great. That's awesome. If you can get a Roth IRA, you totally should. But, yeah, that was a mistake I made, and it was this horrible thing where I had opened the IRA with Bank of America, and then they acquired Merrill Lynch shortly thereafter, and then my IRA was in this unholy limbo where no one could figure out who owned it, Bank of America or Merrill Lynch, because in theory, Merrill Lynch owns all of the IRAs now, but mine somehow fell through the cracks and no one could figure out how to get the money I put into the IRA out of the IRA and into an account that anyone could access. I couldn't even put money into my IRA. Anyway, that's my story. I should not have taken financial advice at face value at that point. The internet was around, I could have gone and checked for myself, but I didn't.
Maxfield: And you know, it's funny you say that, because when you talk about that -- I'm sure this is how you feel, it's not like you don't want to take advice from an expert -- just because someone's an expert doesn't necessarily mean you should 100% follow their advice, you know what I mean? When you think about it in a behavioral finance context, they refer to this as authority bias, where people have a tendency to, some experts says something and people take it at face value. To a certain extent, you should factor in what experts are saying. That doesn't mean you have to take it for the absolute truth. I think there are three things in here to keep in mind. The first is, if you're making a serious decision, how to structure your retirement portfolio or the infrastructure for how you're going to prepare for your retirement, always keep in mind the bias of the person giving advice. In Gaby's case, in the absence of fiduciary rule, a financial advisor could very well be representing their interests in terms of selling your products over your interests.
So, you would want to know that. And then, a thing to keep in mind is, a lot of times when people come to decisions, they'll cite quotes and stuff like that, and a lot of times those quotes will be taken out of a larger context, whether those quotes are taken from an investor conference, an investor talking about it through an entire presentation at a conference, but only a couple sentences are pulled out, you want to really understand the full context around if you're going to make a decision, particularly a financial decision, based on advice from somebody, particularly if that advice is through hearsay, so you're reading about the advice as opposed to directly seeing it in front of you, you want to take the full context into consideration.
Lapera: Let me just insert myself in there really quick. What you said, this obviously also applies to stock theses. It's very well and good to read an article and get one line pulled out of a transcript. You're far better off going in finding the original transcript yourself, and seeing what all the information was around that quote. And not just that, you're far better off going and checking to see what the 10-Q or 10-K says for yourself. If you're really interested in the company and you're thinking about making the financial decision to invest in the company, you should do some of your own research, you shouldn't just take what experts, "experts" sometimes, say at face value. You really need to do some of the digging for yourself, I think. Just a little bit, maybe not a lot, but just enough to confirm that what they're saying, what this person's thesis is, is actually right.
Maxfield: Yeah. Primary sources is the way to go. If you have the opportunity to go and examine primary sources, that's where you should go. That's the best step.
Lapera: One of my favorite pictures I've seen recently was a picture of a dog with his little paws on the keyboard, and overlaid on it says, "You can be anyone on the internet." And that's true. [laughs]
Maxfield: [laughs] That's so true.
Lapera: So, just keep that in mind.
Maxfield: And to add one tiny bookend to this, the last point to this is, you can help to combat against following bad "expert" advice by triangulating your resources. If you see one article that says something that you think is worthy to factor into your investment thesis, go and see what other people are saying, and try and triangulate it from other perspectives. If you can corroborate evidence, not only should that give you more confidence in all of the information that you have underlying your thesis, but a whole bunch of corroborating pieces of evidence increases the probative value of each individual piece of evidence, if everything goes together. So, triangulate it from multiple sources, I think that's a great way to think about how to defeat that authority bias.
Gaby Lapera has no position in any stocks mentioned. John Maxfield owns shares of Bank of America. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.