How Much Financial Advice Do You Need? (Hint: Less Than You Think)

Financial Advice

How much financial advice do we need? It's a question we all ask ourselves, whether we pay a certified financial planner handsomely or go it alone.

But with a troubling national shortfall in retirement savings and the lingering effects of a foreclosure crisis, policymakers and researchers are asking the same question in the hope of coming up with low-cost ways to keep people on the right track.

The answer, to judge from a rash of recent studies, is not much.

The credit-rating agency Experian recently conducted a study with Neighborworks, a nonprofit that helps lower-income families buy homes, measuring the effectiveness of Neighborworks' weekend workshops. It showed that as little as eight hours of counseling on real estate basics reduced mortgage delinquencies by more than a third.

The study included experienced homeowners as well as first-time buyers, and Experian was careful to control for those who required remedial advice.

"The study looked at pre-home ownership credit behavior, so you didn't only have people who already had bad credit," said Douglas Robinson, a Neighborworks spokesman. He added that middle- and even high-income buyers could also benefit from a brief acquaintance with what to expect from home ownership.

"We reduce the 'unknown knowns,' " Robinson said.

Other studies have shown that the unknowns can be reduced with far less effort.

At Stanford University's Institute for Economic Policy Research, a group looking for ways to spur higher retirement savings found that employees who got occasional, customized projections from their employer of how much income their IRAs and 401(k)s would provide them responded by increasing their annual contributions.

Similar results can be realized simply by using an online retirement calculator. A recent paper from the Employee Retirement Research Institute showed that those who figured their retirement needs with a Web tool increased the adequacy of their savings targets as much as 18 percent. In fact, those who used an online calculator ended up with more realistic savings targets than people who relied on a financial adviser.

That evidence raises another question: What kind of financial advice do we need?

Jack VanDerhei, research director of EBRI and co-author of the paper about online calculators, suspects that most people seek out advisers for guidance on other investment matters, such as asset allocation. "That tells me nothing as to what my overall savings targets should be," VanDerhei said.

And it does little to connect our picture of home ownership or retirement with reality.

"All of us sort of dream in color," said Anna Behnam, a financial adviser with Ameriprise Financial Services in Rockville, Md. "When we think about buying a house or car, we focus on what we want." The basic service of financial advice is to get us to think in black and white, Behnam said. It seem that even a little bit of cold, hard calculation can change our behavior by taking the emotion out of a home purchase or budgeting for old age.

The prevailing emotion in buying a home appears to be infatuation.

"We tell people, 'Don't fall in love with the first house you see, or even the last,' " said Robinson at Neighborworks. "Our counseling lays it out in almost spreadsheet form: You earn $50,000 a year. So here are your transportation costs, your daycare, food, what it costs to wear a suit and tie every day."

People also fall in love with their retirement dreams, but fear tends to be the principal driver of retirement planning mistakes.

"People think it is beyond their capabilities no matter what they do," said VanDerhei. When asked what percentage of their income they need to save for a decent retirement, he said, some respondents to EBRI's most recent Retirement Confidence Survey said 20 percent -- far higher than is practical or necessary.

The same fear can make people resistant to seeking financial advice. "People think they can't afford a planner," Behnam said. "They think a planner will tell them to do things that they can't afford to do." The promise of these recent studies is that people may be more receptive to a small injection of financial planning.

Some question whether these nudges will be enough to prevent future rounds of foreclosures or prevent America's coming retirement crisis.

Gopi Shah Goda, who led the Stanford study, noted that, after receiving retirement income projections, employees raised their annual contribution by an average of only $85. Still, the advice was more likely to lead to outcomes better than employees would have with default contributions set by human resources -- and far better than letting them guess how much to put aside, which EBRI found is the method used by 45 percent of workers.

Looked at that way, it's little wonder that a little advice goes a long way. "A lot of the problem is that people are so clueless," VanDerhei said.

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"Don't buy a certified used car. Instead, get your own inspection for $100 and save thousands. The dealers who do the certifying will okay anything with four wheels."

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"Many organizations can help if you've received a shattering diagnosis. You can get free or reduced-cost travel, lodging, child care, career advice -- even a wig."

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"You must protect a parent's finances when he or she stops driving. Your parent can't get to the doctor or store. If you've had no human contact for days, you're a sitting duck for a salesman at your door." 

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