Ariely compares financial advisors to monkeys

In this undated photo released by the journal Science adult female baboons are seen with infants in Amboseli, Kenya. A team at Iowa State University studied data on primate aging, collected over decades around the world, and compared it with statistics on modern Americans. It turns out the aging pattern for humans isn't too different from most other primates, such as chimpanzees, monkeys and baboons, new research shows. (AP Photo/Science) NO SALES.
AP Photo/Science

Duke behavioral economist Dan Ariely boldly stated in a recent Harvard Business Review article that highly trained monkeys could do the same job of financial advisors.

Ariely, the author of Predictably Irrational and The Upside of Irrationality, says that planners dumb down two basic questions key to financial planning and then charge one percent of assets under management going forward.

Ariely notes the two questions are:

-- How much of your current salary will you need for retirement?
-- What is your risk tolerance on a 10-point scale?

Ariely stated that most people just say they would need 75 percent of current income in retirement, yet when asked how they want to live in retirement and actually think about it, they come up needing about 135 percent of current income. That's because they now have more time to spend on things like travel.

As for the risk tolerance question, I've done my own research that determined the way people feel about risk isn't stable over time. In taking a risk profile survey, I have pointed out that people think they can take a ton of risk in good times like 2007, only to become risk averse in 2008 and early 2009.

Ariely concludes that the real reason people shouldn't pay one percent of assets is that neither question helps to optimize our portfolios.

Financial planner Rick Adkins was more than a little offended as he wrote a rebuttal in the Journal of Financial Planning. He admits there is some truth to the limits of the questions but is disturbed by Ariely's piece. Referring to Ariely's key note address to the Financial Planning Association (FPA), Adkins states that he should have watched a football game rather than listen to Ariely's advice to planners.

My take

Ariely is dead on in his criticism of advisors. Many simplify the important considerations in these two critical questions, only to build unnecessary complexity in creating portfolios which allow them to charge that one percent or more annually to clients.

I also attended the conference where Ariely spoke and, while I'm an avid college football fan, couldn't disagree more with Adkins on the merits of his speech. It was a talk that offered much promise for financial planning to leave the status of a sales vocation and move toward a true profession. While I have been known to be critical of the FPA, I applaud their decision to bring in a speaker who wouldn't just tell us how great we planners are. Adkin's site notes his firm charges from one to three percent annually on assets under management, which wasn't mentioned in his rebuttal. The fee apparently may decrease over time.

My advice

I'm 100 percent with Dan Ariely on this issue. As he says algorithms could do a much better job of helping people understand how much they need for retirement, as well as helping them answer the even more important question of what the level of risk is that will they actually stick with no matter how the market performs.

Think about what activities you would do if you suddenly had 40 to 50 hours a week of free time? How much would those activities cost? Look at your own portfolio and fess up if you were one of the majority of investors who sold some stock when markets tanked. Some people told me they learned their lesson but, when markets were down less than 20 percent last September, admitted they repeated the mistake. Don't ever pay one percent in total portfolio fees.

Max Tailwag'er with award

As far as comparing my profession to monkeys, I do have a slight disagreement with Ariely. Clearly dogs would be a much more appropriate choice as is evidenced by my dachshund being awarded this America's Top Financial Planner plaque.

Besides, Burton Malkiel has already compared stock pickers to blind folded chimps.

  • Allan Roth On Twitter»

    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.