[quote author="MalibuRenter" date=1228457735][quote author="MalibuRenter" date=1228380986]I have been trying to formulate a good response to Prof Shiller's comments on this topic
"In the first of three proposals, Shiller said finance needs to be democratized. He said "a good part of the problems we have is because individuals aren't able to get good financial advice." To remedy the situation, he said the clientele for financial advice needs to be extended beyond the wealthy. As it stands now, many people deal only with salespeople such as real estate agents - people who won't be there after the sale and who have an incentive to complete the transaction quickly.
Shiller said the government could sponsor subsidized financial advice so that people could pay an hourly rate for advice from experts who don't work for any particular company."
More later.</blockquote>
I like Shiller, but in this case I disagree. It is true that most people don't get real unbiased financial advice. However, having the government hire people to do this type of consulting en masse is not a good idea.
Part of my problem with the approach is that each person would probably get only one financial advisor. My search for good financial advice has been long and frustrating. There are a ton of CPAs, CFAs, MBAs, investment advisors, economists, and professors. There is Turbotax and the web. However, I was unable to find a serious analysis of renting vs owning which I thought captured sufficient accuracy and detail. Even certain professors at major universities blew the analysis bigtime.
In the end, I had to build my own spreadsheets. That's part of what I do for a living, on other topics. I discovered things I had never heard elsewhere, like the aftertax cost of a fixed rate loan rises from year to year, by a rate not much different than rent inflation. I also noticed that an entire technique was missing from academic models, and its absence was causing a lot of stupid results. To get rid of lots of problems related to picking the appropriate discount rate, whenever there is a cashflow difference between being a renter and a homeowner, have the party with lower cost save the difference in your proformas. Then, the PV rate is much less important, because both parties have the same standard of living.
This does not bode well for individual financial advisors. The questions of whether to buy a house, how much someone should spend on a house, and how that affects the rest of their finances would probably be incompletely analyzed. I suspect the same pattern would repeat for investments, whether to get married, planning for college, or planning for retirement.
I am thinking of an alternative approach. Start with the objectives and then seek a solution. Please feel free to add criteria, but I think you want at least these:
1. You should be able to help a very large number of people with financial decisions and financial planning.
2. The cost to those being helped should be low, perhaps free.
3. The assistance should be able to accomodate a very broad group of people in a large variety of circumstances.
4. The advice should take into account potential future variations in each person's income, investments, home value, etc.
5. The advice should either come with a clear action plan, should guide you through implementation, or should be able to do substantial parts of the implementation for you. For example, if it recommends certain types of investments, it should guide you to places where you can purchase them, even recommend a few top contenders.
6. The advice shouldn't be just asset advice. I am struck by how even wealthy people typically get investment advisors, but not liability advisors. There is a whole branch of corporate financial analysis having to do with asset-liability matching and simulation. When I have done simulations, either personal or for work, I have typically found a lot of interesting implications. For the rent vs buy decision, liquidity problems of being a homeowner during a downturn really become obvious.
I am starting to think that for many purposes knowledgeable people creating software and putting it on a blog with interested test users would be a pretty good start. Someone could offer large awards for the best rent vs buy calculation, the best retirement calculator, etc.
Any thoughts?</blockquote>
I use Naviplan plan software and found it to be closely accuate. You can download a free trial verison at their site. However, the program is quite over whelming. I've been using it for 3 years and I've probably only utilize half of its function.
I'm working on posting some proformas on this site. The discouraging thing about proformas is you can spend an exborbanent amount of time trying to perfect them but you never will because the future will always hold some unknown.
