"No One Can Safely Use Fidelity's "Planning Tool" to Plan their Finances"

If that major headline appeared this morning in the Wall Street Journal, phones would be ringing at Fidelity customer service.

A more general and relatable heading that would give you pause would be

“The vast majority of personal finance advisors give sub-par advice to customers who need help.”

Not here, though. Money is too important not to use the latest ideas. Personal Finance Economics will keep you on the cutting edge!

What is All the Fuss?

Boston University professor

Larry Kotlikoff

is a brilliant economist who has been calling on the financial industry to supplement the training of their advisors with new tools to help households make better financial decisions. This week, he wrote a fair and transparent assessment of Fidelity’s retirement tool with the startling subtitle above. I doubt Fidelity will lose any sleep over the post, but if they respond, they may pick on the fact that Kotlikoff has built a piece of software, MaxiFi, that competes with Fidelity’s retirement tool. But it doesn’t compete, as Kotlikoff aptly points out in irrefutable detail. Kotlikoff has the economics right. Fidelity is the Aussie Olympian Raygun in this breakdance. Fidelity’s coders won’t even talk with him! I declare any Fidelity v. Kotlikoff a non-event because the match is over.

There is a more subtle point for us: financial planning competence doesn’t come with the brand. Conventional personal finance advice is based on rules of thumb, and the pros need to pick up their game.

Larry is a friend, and my students have benefited from the comp’d use of MaxiFi software. It is the only software game in town. Good luck finding a commercial competitor or a book, besides my book with Aaron Stevens, that brings foundational knowledge to the masses. They are non-existent…for the moment. The street’s adoption of modern portfolio theory took a while; Markowitz’s seminal work was published in 1952!

But My Advisor is an RIA and CFP

Advisors and personal finance writers are working with how they are trained. Unfortunately, educators have been slow to incorporate economics-based financial planning into financial planning majors and industry seminars. Business schools’ finance faculty, trained with a heavy dose of economics, send their finance majors into investments and alternative asset classes. The curriculum falls short by not offering a personal financial decision-making class. The CFP Board does not have economics-based financial planning as part of its curriculum.

There is no reason to tear down the “focus on investments” infrastructure that financial institutions prefer. There is every reason to adopt economics-based methods for fundamental personal finance decisions, such as choosing where to live or whether a Roth or regular IRA is better. These are questions essential to every household, not just the wealthy. A financial institution must stack its deck with new tools if it wants to play the inclusive card.

What Should I Do Now?

Keep Personal Finance Economics as a resource. Subscribers and followers will always get the economics approach to financial decision-making. Money is too important not to use the latest ideas.

If you want to sync up to the latest on financial planning practice, these posts in the archives will bring you up to speed,