Investing Won’t Solve Your Money Problems

On The Long View podcast, author, financial professional, and podcast host Joe Saul-Sehy discusses “Stacking Benjamins,” and a new book he co-authored called “Stacked: Your Super-Serious Guide to Modern Money Management,” which he co-wrote with Emily Guy Birken.

Here are a few excerpts from Saul-Sehy’s conversation with Morningstar’s Christine Benz and Jeff Ptak:

Will Investing Solve Your Money Crisis?

Benz: I wanted to ask, is it your sense that people place a disproportionate amount of emphasis on investing as a means of addressing their financial problems? And, more broadly, do you think there is confusion in the population about what is financial planning and what is investment planning, and which one do I need?

Saul-Sehy: Absolutely. You’ve heard these things before, Christine, where somebody will say, “My financial advisor got me X percent.” If you’ve a financial advisor and you’re talking about the percentage return that your advisor “got you,” I think number one, you’re using your advisor wrong, and B) you’re mixing up two different things, which is, just investing and doing a really comprehensive financial plan. Because often, a comprehensive financial plan means saving you money. As an example—and this is a big part of what I loved about being a financial planner—was taking this idea that the insurance industry loves of talking about do I need insurance or not, and making that a bigger conversation, which encompasses insurance, certainly, but it is wider and that’s, what risks am I taking and how do I mitigate those risks? And maybe that involves insurance and maybe it doesn’t.

Well, a good financial planner will help you look at your risk management situation. I’ll give you an example. The best risk management that you can have is having an emergency fund. Because if you have an emergency fund, the threat of you having a short-term disability, you can handle that with your emergency fund. You don’t have to buy short-term disability coverage. If you are willing to take these risks, you can raise the deductible on your homeowner’s insurance, you can raise your deductible on your car insurance because you are now self-insuring. Maybe this helps solve some of the long-term disability issues and also means you buy less life insurance as you build assets. So, a good advisor often saves you money in places—or not even an advisor, frankly. It doesn’t have to be an advisor; it’s just a good financial plan. A good financial plan will often save you money, and instead of just looking at investments, I think if we look much more holistically, I think we’ll do a good job.

And even, Christine, when we look at investing, I don’t think we tether investing to goals enough, which is another reason why our investments often aren’t sticky. They don’t stick, and we make bad decisions with investments because we’re so busy with the fear of missing out on X investment that we will change them out versus stick with the ones we have. So, an analogy that I like being a farm boy from West Michigan is that every investment has a growing season. And if you go into the investment knowing that this investment, or this mix of investments, meets your season, then you’re more likely to plant at the right time and you’re much more likely to pull it out at the right time to harvest that investment at the right time.

As an example, over a short term, you’re not going to use stocks because the stock-growing season is, generally speaking, over 10 years. Real estate also great over a 10-year period of time. But certainly, with a one-year time frame, using stocks you might as well go down to the casino based on the short-term numbers in the stock market, and in real estate, you have to invest so much on the front end and it’s so illiquid that your ability to get out quickly is hampered. Also, if you’re in real estate investment trust, you’re going to have some volatility as well. So, I totally agree. I think we definitely oversize investing versus this holistic picture and then looking at when am I going to need the money and then investing as a way to do two things: number one, get there, but also number two, to cover those risks I might have.

Should You Hire an Advisor?

Ptak: A do-it-yourself mentality infuses the book and your podcast as well. Can everyone do it themselves? Or should some people hire an advisor? And a companion question of that is, how can you tell if you need to hire someone?

Saul-Sehy: I’m glad you asked that because I think, Jeffrey, myself that yes, two things that seem to be incompatible. Yes, you can do it yourself and this is not difficult. It isn’t difficult. However, I do like advisors. I love advisors. But let’s be clear about what I’m talking about, because when I say that I know there’s people out there going, “If you’re smart enough to do it yourself, why would I waste money on an advisor?” We all have blind spots, and I have blind spots. And I’m not talking about abdicating; I’m talking about having advisors that make me smarter. So, what I disliked very much when I was a financial planner was it drove me crazy when people would come into my office and go, “Here. I’d like you to know everything about my financial situation. I prefer to know nothing about it. And six months from now or three months from now, I’m going to come back and I’m going to judge you on how ‘we did.’” And you can’t run a business that way. You shouldn’t run a family that way.

Mary Barra at General Motors, I think has done a great job of keeping this company relevant. And being a Detroit guy, I love talking about GM. And certainly, that’s not the car company everybody is talking about. Everybody is talking about Tesla or Rivian. They’re talking about these other companies. But Mary has taken this company that my dad worked for and retired from and has kept them in the conversation, which is to me super exciting to watch over the years as she has done that. Well, Mary doesn’t show up at work once every three months and says, “Hey, vice presidents, how are we doing? What’s going on with this car thing that we’re building?” No, she goes to all the meetings. She knows all there is to know about a car, but she still has these people around her that protect her blind side and also are probably smarter than her in these different areas of the car. So, the person who knows the suspension, the person who knows the interior, the person that knows the engine, these different professionals they make her go faster.

And that’s the way I look at a good advisory relationship is, I want to build the plan, I want it to be my plan, it’s stickier if it’s my plan, not if it’s some advisor’s plan, and then I want to surround myself with people who make me smarter. And if I do that, I think that is the first question we should ask. In my book, I get into things like make sure they’re a fiduciary, and I walk through who good advisors are and what they look like. You definitely want those things. But even before that, just foundationally, the idea that you are not smart enough to do it yourself so you hire a financial planner, I think, is a false statement, and I also think a dichotomy between doing it yourself and hiring advisor also is not a correct statement. I think you do it yourself, but you do it in a really smart way with people that know what they’re doing.

Flaws with Financial Advice

Benz: One thing I liked in the book is that you noted that every business model for financial advice has some sort of flaw or bugs you in one way or another. Can you discuss your issues with some of the key ways that advisors charge clients? And at the end of the day, which option you think is the least bad for consumers?

Saul-Sehy: There’s three basic types of advisors. There are commission-based advisors, which are the dying breed. There is no fee for service, they are marketing products, and you buy a product from them, and they receive a commission. The second type is a fee-only advisor. They will take a fee from you for service, and that’s become a little bit of a hybrid there too, where sometimes they also use an assets-under-management model where they will take a set fee like a 1% fee from you for money that they help you manage, where they will also call that fee-only. That to me is closer to the hybrid of the two, which is a fee-based advisor where they may charge a fee for service, but they will also receive commissions or also receive a percentage.

My problem, just to start with the commission-based advisor, is the same that everybody has. If I need product X and this commission-based advisor doesn’t have that to reach your goal, you’re going to be using a suboptimal thing. You’re going to get whatever it is that they have. I remember talking to people over the years that will say, “I walked into my bank, and I asked him for X, and they said they didn’t have it, but they had this other thing, and it was really cool.” That is a commission-based advisor who is changing the product mix on you based on just what they have versus what might be best for your situation.

On the fee-only side—just to get to the two ends of the spectrum—on the fee-only side, you have advisors that are not about the product. And the cool thing is, is that as a fiduciary, meaning contractually in writing they say that they have your best interest at heart, and they have to. They are certainly going to do the thing that they think is right. In the middle, you have this middling muddle of I’m not sure where the commissions are, I’m not sure where the fees are, I might know where the fees are. The commissions, sometimes they’re going to be selling stuff that they get a commission for, sometimes I don’t know what that is. By the way, the fee-only advisor is that the fee-only advisor—and study after study this has been done—the implementation rate from fee-only advisors is the lowest of all advisors. The commission-based advisor has obviously the highest implementation rate.

So, the question that you ask yourself is, is it better to be going 90% toward the goal and be doing something versus being 100% right and you don’t implement? Because the key is implementation. It’s not about what you know. Like we said earlier, it’s about what you do. So, the advisor, Christine, to answer your question directly, that is the best for me is definitely the fiduciary advisor where I’m paying them a set fee and I know that they’re doing what is clearly what they believe is best for me. But I go into this relationship knowing that I have to implement. I have to know that statistic that the chance of me not implementing and the advisor pushing me to implement. The advisor doesn’t care if… They do care because they’re a human being and they want to help you be successful. But once they’ve delivered the product, they’ve already been paid. And so, if you don’t implement, well, that doesn’t mean that the family is not going to eat. The commission-based advisor, it may only be 85%, 90% right, but they’re going to make sure that you do it, because otherwise they don’t eat. I’ll go with the fee-only advisor first, knowing that I’m going to have to be a self-starter, and I’m going to have to put myself on a timeline to get this stuff done.

What is Timelining?

Ptak: You note that a lot of basic personal finance books tell people to start by outlining their goals. You prefer a different spin on that exercise, which you call timelining. Can you walk us through what that entails and what the advantages are?

Saul-Sehy: I’m glad you asked that, because frankly, I’ve read a lot of personal finance books and most of them start with goal-setting. Most advisors will tell you that you should start with your goals. I like a mutual friend of ours, I’m sure, Roger Whitney, the Retirement Answer Man, says that if an advisor leads with product and not process, you should run. So, starting with processing, goal-setting makes sense. But when you look at the efficacy of goal-setting and the amount of times that we don’t end up implementing anything or moving toward our goals, it’s incredibly frustrating.

The way that I found for this to be sticky, which is the key, getting back to behavior is realizing why goal-setting doesn’t work. And the reason why most of us, as they listen to this, probably aren’t working on their New Year’s resolutions anymore—which is a form of goal-setting if you think about it at the beginning of the year—is because of the fact that these goals exist in a vacuum. And when real life shows up a week, two weeks, a month later, the goals go bye-bye, and I’ll get back to these New Year’s resolutions as soon as I deal with real life. So, the key is to integrate these into real life. And I love it when goals fight against each other in real life, meaning that the things that are important to us are what we’re really going toward. If it’s not important to us, then truly is it really, really a goal? So, I also like if we’re going to get this done, what a lot of brain experts have told me about how the brain works, which is, visualization is a great key to success. You look at the success people have when they do vision boards, when they put it in front of them. If I want to do something, I put it on my screen saver. I do that all the time with my goals. I will make sure I see it all the time, and man, does it work.

So, what I found is much more successful than just goal-setting is take out just a sheet of regular copy paper, put it landscape style, put yourself as a stick figure on the left side, draw a line that represents the rest of your life and plot out those goals on a timeline. And not only now do I have the same goals I had when I had my New Year’s resolution, but now they’re time-specific, and we talk about how time-specific goals were much more likely to get the smart goal process, but also, I see this goal in relation to other goals. And while language was developed over centuries and centuries, and for us as humans, learning to talk takes us a year or two, and our vocabulary as children takes a number of years for us to get the vocabulary together. Sight is something that if we’re born sighted, we have immediately. And so, this idea of spatial recognition is inherent to the vast majority of us. And because of that our unconscious mind very quickly looks at these two things and it compares them. Is that goal more important than that one? How do I get both of those? Oh, I’m trying to retire at the same time that my kids a junior in college. How am I going to do that? It doesn’t mean you can’t do it. But it certainly means that there’s going to be some friction between these goals, and there always will be friction between our goals. So, I like that. We begin having these wonderful value conversations that we don’t have with New Year’s resolutions or with regular goal-setting about which ones of these are the most important between these goals.

The second thing that we do is we also see that growing season that I mentioned earlier. So, when it comes to your investment philosophy, it’s much easier to determine in your head which growing season I need, which type of investment historically meets this goal. And the cool thing about that is it gets rid of the fear of missing out. Like, if there’s some investment that my buddy has that is supposedly a fantastic investment, it’s OK for it to be a great investment; it just doesn’t meet my growing season. It’s no longer about good or bad. It’s about does it fit.

And then, the third thing is, a lot of us have trouble with budgeting, and if we take all these different goals and we draw a line back to today, we very naturally ask ourselves, “For me to make these a reality, how much do I need to save toward these goals?” And I begin tethering the goals to my saving today, makes saving more exciting, makes it more fun, but also, we can see realistically what we have to do to get those and then we start making again some value decisions about how I’m spending money today. Do I value going out to dinner as much as I am versus having the second home or putting junior through college? And certainly, without judgment toward those things, we can find some middle grounds. Maybe I pay for three quarters of college or half of college, or maybe I retire two years later, whatever it might be. I love this idea, Jeffrey, of goals fighting it out for brain space, and I think that’s what timelining your goals does that just simple goal-setting doesn’t do.