So are we allowed to eat those eggs or what?

So are we allowed to eat those eggs or what?

Like when you’re the only kid in the neighborhood with a computer, I’ve become a money expert among my friends. Hey, it beats being the computer nerd.

Many of you reading this can probably relate. The topic of money is strange and unusual for many regular folks, and so they turn to experts for advice. But since the topic is taboo, guys with a decent knowledge get asked. Trust is more important for many people than getting the best answer.

The other day, I spent some time with a friend of a friend who was having money problems. To make a long story short, his expenses were just too high for his income. He needed to either cut his fixed expenses drastically or increase the amount of money he made.

I gave him some tips, like switching telecom companies to get cheap internet for six months, ditching his cell phone, and sending $100 per month to each of his creditors to keep them quiet no matter how many letters they send. I told him it was probably wise to let his life insurance lapse and put that money towards paying off his credit card debt. And so on. It was pretty basic stuff.

After this conversation, I started thinking more about the financial planning business. I posted some thoughts on the Twitter.

I’m gonna be ALL OVER that 10,000 character limit on the Twitter when they inexplicably make that change. No more splitting my HOT TAKES into several different tweets like a chump.

The gist of my rant is this. I think we can all agree that fee-only financial planning is a much better solution than the standard model of an advisor takes a 1% trailer fee each year to sell you expensive mutual funds. Fee-only planners can offer unbiased advice, and they’re not relentlessly pushing products. These are good features.

But there’s one huge downfall, and that’s the cost. For somebody with a $500,000 net worth, paying $1,000 or $1,500 annually for somebody to bounce ideas off of isn’t such a prohibitive cost. But for my friend’s friend with $48 in assets and $5,000 in liabilities, it’s impossible. Even if he could come up with the cash (or if the planner would accept some sort of payment plan), the value he gets from the amount charged would end up with him feeling ripped off.

The people who most need financial planning simply can’t afford it. They don’t have the money to pay a planner out of pocket, and without the ability to invest no traditional financial advisor will talk to them.

So what’s the solution? That’s a good question.

Teaching financial literacy

I think the traditional method of “more education, stupid” is probably the worst approach we can possibly have.

Related: Sorry, more financial literacy doesn’t work

Currently, basic personal finance education is taught in just about every Canadian high school, and has been for years. It’s a simple concept that most kids pick up on. When I took personal finance education back in 2000, just about everybody in the class got higher than 80% on the test. It was a nice departure from a math class which usually involved functions and geometry.

Kids forget all sorts of stuff they learn in high school. I couldn’t tell you crap about Canada’s early years even though I spent an hour per day for many weeks learning it. Nor could I tell you anything about calculus, chemistry, or Corel Ventura, an actual program I learned how to use in 1999. There are a million other things I knew well enough to regurgitate for a test that I barely know exist today.

That’s because as soon as we finish high school, we go from being generalists to specialists. Many students go off to college to study one thing they’re interested in. Others go get jobs, which usually involve becoming quite good at one specific activity. Eventually, most of us settle into a world where we spend much of our time doing one thing over and over again.

In that type of world, how do we expect people to retain much knowledge of something that probably didn’t really interest them back in high school anyway? It’s been pushed out of their head in favor of the stuff that matters — at least to them. Something PF nerds constantly forget is the rest of the world isn’t as interested in this stuff as we are.

And then the solution to that problem somehow becomes “teach more of it?”

That reminds me of the old joke about two Polish guys who were buying watermelons at the store for $1 each and then selling them for $1 each. The first one says “geez, we’re not making any money.” To which the second one responds “I know what we should do! We gotta sell MORE!”

Besides, the folks who push financial literacy education have the most to gain from it. I know several personal finance bloggers who secretly (or not-so-secretly) pine for the chance to teach this stuff to the next generation. They know that as experts, they’ll be at least consulted on how to deal with the problem of teaching kids, which at worst enhances their credibility and ideally gets them an extra income source.

Asking a personal finance aficionado if we should expand financial education is like asking a barber if you need a haircut.

A new helping model

I am 100% convinced personal finance education in high school doesn’t work — at least as well as we’d like. I think a similar course during one’s last semester in university would be more effective, but I’m still not holding my breath. The fact is most folks will ignore personal finance education until they get to the point where they’re screwed.

I’m not even convinced giving folks a generic course for free they can take when they hit rock bottom is a good solution. Firstly, there’s lots of education out there in the form of blogs, books, and other sources of media, all for free. All you need to do is type a few words into Google.

The other thing is for whatever reason, people don’t seem to think the same generic advice applies to them. If you don’t believe me, check out the latest entries in any personal finance sub on Reddit. People ask the most generic crap there expecting a personalized answer. And for some reason, anonymous strangers try to give them one! For free! With only a thank you as a possible reward! And that doesn’t even come 99% of the time!

God, you people are morons sometimes.

The average person doesn’t want generic advice. They want specific advice catered to their personal situation because their problems are totally unique from their peers’ who also spend more than they earn.

(This phenomenon is why I think traditional financial planners have nothing to fear from robo-advisors, by the way. Good luck getting a [perceived] personalized solution to your problems from a software program.)

And then we get back to the crux of the problem. People want personalized help, yet can’t afford it — at least in their early years. But that’s when people need help the most.

Compound interest is a powerful thing. Setting somebody up on a savings plan when they’re 22 is infinitely more valuable than when they hit 42.

The easy solution is to say the government should do it. The government can hire a bunch of money experts, pay them $70,000 per year, and tell them they have one mandate — to give honest, unbiased financial advice to the unwashed masses.

But there are a few problems with that model. There’s no incentive for success. If you have your sweet government job, who cares if anyone actually gets out of debt. You won’t get fired. It’s also expensive, and unnecessarily involves the government in something where it currently has very little oversight.

If you talk to the average politician, they’re not losing sleep about the lack of financial literacy in Canada. They’re a million times more worried about health care, education, public sector unions, and infrastructure. It seems like the government deals with personal finance in two ways — taxes and pensions.

There are already several debt consolidation companies operating in Canada, which tend to be non-profits. They lend the indebted person money at anywhere from 2-5% to get rid of their high interest debt, and then get paid back. Without backing those loans with serious collateral (i.e. a house), the default rate has to exceed any fees collected. That’s what happens when you lend to people with demonstrated money problems.

The interest rate that would have to be charged on a for-profit model would be so high it wouldn’t make sense for the clients to borrow. So much for that.

Another solution is to introduce the concept of a lifetime money coach. This person would help out on a gratis system for things like paying off debt, making it up on charges later for helping out with a more traditional fee-only planning business model.

But again, the drawbacks of that model are very obvious. There’s a longevity factor. A 60-year old planner isn’t going to commit to a lifetime relationship with someone in their 20s. And the chance of somebody showing up for the free stuff and never coming back is a very real problem too.

Perhaps planners will have to get innovative. Take somebody who holds multiple licenses in say insurance, mortgage brokering, and mutual funds. The planner takes the debt management business for nothing with the assumption that they’ll be able to generate fees when the client gets a mortgage, life insurance, and then will charge a reasonable trailer fee on a basket of ETFs.

(Which, by the way, is clearly the direction the mutual fund industry is heading. Give it five years, tops, before a new generation of fund salesmen have modeled their business as live versions of robo-advisors. There’s virtually no difference in selling ETFs compared to funds, and it’s obvious fund companies will have to adapt or die. This is a legitimate threat to the fee-only model.)

The planner takes the risk of not getting paid later, but they know if they do a good job there will be tens of thousands in lifetime earnings in the future because they have multiple ways to get paid from the same client.

But again, that model is riddled with problems. It’s unreasonable to expect somebody to stick with one planner forever. Those are a lot of different hats someone would be forced to wear. Again, there’s the longevity factor. And finally, how do you market that to consumers who don’t have a good relationship with money in the first place? Trust all my money issues to this one guy! He’ll help you, we promise!

Good luck with that.

So? What do we do?

This is probably going to be a huge let-down after 1700 words, but I’m afraid I don’t have an answer. Barring charity — whether that comes from the government or some rich guy — I don’t see a model where a financial planner can get paid a reasonable amount for providing personalized service for the people who need help the most.

My idea is some sort of crowd-sourced model that’s 100% online. A debtor goes and posts their problems in a forum. Well-meaning folks pore through all the details and together come up with a plan that helps the affected get out of debt and back on their feet. The debtor pays a small fee (say $50 to $100) some of which goes back to the people helping out and some of which goes to the website.

This model has many advantages. It’s anonymous, a big plus since nobody likes admitting they’re drowning in debt. People who already supply similar advice for free on places like Reddit could get paid a few bucks for their expertise. And the site could make money advertising other financial services. There are companies that will pay to get access to financial experts.

Some of my idea is built on charity, since there’s no way we could pay even minimum wage to the folks providing the advice. But they’d feel good helping their fellow man and make a couple of bucks for something many already do for free anyway. There are hundreds of personal finance bloggers who don’t make a nickel off their blogs. They write because they want to help.

If anybody has any other ideas, the comment section is all yours.

Tell everyone, yo!