My parents gave me a copy of The Wealthy Barber around the time I started working. I couldn’t read it. The story got in the way. Besides, there’s wisdom everywhere if we’re willing to listen. Why place more credence on what a celebrity says? We can learn from a real barber and other people we know and meet.
David Chilton wrote The Wealthy Barber Returns, which dispenses with the barber. I bought the book shortly after its release and deferred reading it until now. I wish I hadn’t delayed. The new book is well worth reading.
David has a deep understanding of the financial world. More important, he understands the irrational ways we behave. Most important, he’s funny. Very funny. What a powerful and useful combination.
This post features selected experts from the book.
Financial Marketing
One of the biggest reasons that it’s so difficult to save is that … almost everyone wants you to spend as much as possible … our instant-gratification-oriented minds aren’t putting up much resistance … There are really only three Canadians who want you to set aside some money — your future you, your financial advisor and me.
A
new study from the US government’s Consumer Financial Protection Bureau (CFPB) finds that 25 times more is spent on financial marketing than financial education. In the US, that’s about $17 billion on marketing versus $0.7 billion on education. If the marketing didn’t work, would the companies spend the money?
Unfortunately, the financial sector is the least trusted in the world according this year’s Edelman Trust Barometer. What’s good for the industry is bad for us. Education and changes in behaviour are the antidotes.
Peer Pressure
It’s hard to overstate the impact our “reference groups” have on our spending decisions. We consciously and unconsciously take in their consumption cues. Their lifestyles intoxicate us and when partnered with the great enabler — easy credit — lead us to act richer than we are, “act” obviously being the key word.
The antidote is to
“expand your reference group as much as possible … not only to include the less fortunate throughout the world, but also to encompass those who have gone before us … Many Canadians are completely out of touch with how much our lives have improved over time.”
David says that
"when people ask you to do something, you’ll have to reply, ‘I can’t afford it’ … We can’t possibly d o and buy everything we want. There’s no shame in that. Accept it.”
He’s right but can you resist? I prefer the terminology “I choose not to” because there are things I can afford but which aren’t good value. I don’t often say this out loud but think it to myself.
As a vegetarian, eating out has a lousy ROI when the bill is split evenly. Buffets are the same way. My next one is $26 per person plus beverages. There’s no way to get my money’s worth (without gaining weight).
Conflicts of Interest
"I phoned the loan officer. I asked him, point-blank, why he gave a huge line of credit to a customer who hadn’t requested it and who had admitted that she has a significant spending issue. His answer was succinct, honest and illuminating.
“It’s my job,” he said. Banks are a business and, like all businesses, they sell something … it’s no longer only about providing credit to those who need it, now it’s also about convincing people they should want it.
That young loan officer had a true conflict of interest … what was best for the client and what was best for his employer weren’t aligned. He went with the paycheque and it’s hard to blame him.
Too few realize that they receive financial advice which doesn’t put their interests first. More financial education would help.
Investing
To outperform the market’s return, you have to outperform the majority of others who are also trying to outperform the market’s return … When you hand over your hard-earned savings to a professional money manager you deem smarter than yourself, be careful … it’s irrelevant if he or she is smarter than you. Instead, what matters is whether he or she is smarter than most of the other people who are smarter than you … we can’t all outperform. We need a bunch of underperformers to balance the scale.
We can’t beat (or cheat) the math of markets but
“it’s estimated that Canadians do, in fact, try to beat the market with well over 80 percent of their stock-market money.”
What Are You Paying Your Advisor?
The financial-advice business must be the only business in the world where most customers aren’t told what they’ve received or how much they’ve paid for it. Performance and costs matter. But to evaluate them, you need to know them.
Do you ask what you’re paying?
There’s another problem I see almost as much as bad advice — no advice. I’m very frustrated by the number of people I meet who are paying advisors handsomely through their mutual-funds’ MERs, yet almost never hear from them … … we have a wacky number of financial products in Canada that are too expensive by any common-sense measure. For example, I see some mutual funds with MERs in the area of three percent. Anybody who thinks that’s a fair deal for clients has a fundamental misunderstanding of arithmetic, markets’ returns or both
Do you get value for what you’re paying? If not, consider other options. If you need help understanding, consider hiring an independent fee-only advisor.
David leaves us with hope.
Over the next few years, the costs of financial products and financial advice are going to go down significantly. Competition is heating up and consumers are becoming better educated — a powerful combination.
You don’t have to wait. Get better educated today.
Links
Podcast 249
[instead of using Audacity, created with Cyberlink AudioDirect 4 for the first time; using M4a instead of MP3]
direct download |
Internet Archive page |
iTunes
PS If you already have The Wealthy Barber Returns, maybe it’s time to re-read it?
Mall Santas are a traditional part of December. Do you remember the magic from your childhood? We can learn many lessons from them.Appearance: Mall Santas show that a rolly polly figure can be an asset.
Breaks: Mall Santas can’t take a coffee break whenever they want.
