Fair warning: this is a long post…:)

Last Friday, the Dow Jones Industrial Average closed above 14,000, which is where it’s been hovering the last few days. Reaching this benchmark is a pretty big deal; it’s a threshold the Dow hasn’t seen since 2007 – right before the crisis that led to the Great Recession.

If you’re asking, “And what does this have to do with me?” – perfect! It’s a great lead in to the open-ended statement that serves as the title for this post:

The biggest problem with the personal finance industry is…

In a moment, I will share what I believe is the biggest problem with my beloved industry. (And yes, I do love my very flawed industry.) But let me first set the stage to provide context for my musings, beginning with this week’s announcement by the U.S. Justice Department.

Standard & Poor’s

The rating agency Standard & Poor’s is being sued by the U.S. government for its alleged role in the 2008 financial crisis. If you are so inclined you can check out the 128-page document, which details the allegations by clicking here. In short, the complaint is that S&P mislead investors by giving “stellar ratings on toxic mortgage securities” and not disclosing its conflicts of interest of getting paid by the very banks they were favorably rating.

“Pound Foolish”

Pound Foolish: Exposing the Dark Side of the Personal Finance Industry is a recently released book (January 2013) by Helaine Olen. And it is causing quite the stir! In her book, she questions the structure of the personal finance industry and the value of the advice given by celebrity financial gurus like Suze Orman, David Bach, and Dave Ramsey.

Admittedly, I have yet to read the book (it’s in my Amazon shopping cart, though). But I have watched Ms. Olen’s interview on CBS’ Money Watch and read a number of book reviews, along with a number magazine and blog interviews of her.

Based on this second-hand perspective and the comments posted on various blogs in reaction to her thesis, I can’t wait for my copy of her book to be delivered. In my opinion, she’s posing the right questions and pissing off some people in the process. To me, that’s a good thing! She’s prompting a much needed conversation about what personal finance is…and isn’t. (Reminds me of the webinar I hosted last summer, “How to Make Personal Finance…Personal!“)

Prof. Edward Zelinsky

As you may know, I speak at least once a week. I’m either leading a workshop or webinar, moderating a panel or appearing as a panelist. One of the many perks of the latter is the opportunity I have to share the dais with legends of my industry. Prof. Edward Zelinsky would be such a person; he is an expert on U.S. tax law and has testified before the U.S. Congress and the House Judiciary Committee. He is a professor of law at the Benjamin N. Cardozo School of Law, which is where we met; we were panelists for a talk about women and money.

A woman in the audience, whom had once been a student of Prof. Zelinsky’s, asked a question about the state of social security and shared how her mother was able to live off her social security income in retirement. The likelihood of you and I being able to do the same just isn’t happening. But her question invited a lively conversation about the recent fiscal cliff debates and social initiatives and the role of government in our personal financial well-being.

So, what’s the problem…

Given how often I use this space to spread my message of money is never just about money, it will come as no surprise to you that I disagree with my industry regarding its tendency to focus just on the numbers. This, to me, represents the biggest problem with the personal finance industry.

Some of my peers would have you think your experience and success with money begins and ends with the numbers. That is only part of the equation. The other part is the psychology + emotions of money. It’s not an either or proposition; rather, it’s a both/and: money + (psychology + emotions) = your financial experience and influences your success.

Because of this, the ramifications of focusing just on the numbers are many and not always obvious at first glance; here’s what I mean:

Dow Jones Industrial Average
This index is intended to give you a sense of how the market is doing and, by default, how your investments should be faring. But unless you’re invested in the 30 stocks that comprise the Dow, using this as a benchmark is insufficient. Plus, you may look at the Dow’s movement and draw conclusions about the overall economy that are inaccurate.

It is myopic to focus just on the numbers, especially if you’re using a narrow selection of numbers.

Who and what can you trust?
As the S&P suit highlights, both novice and sophisticated investors can be duped by the very resources you rely upon for guidance.  Sure, it would be helpful if the proverbial left hand knew what the right hand was doing. However, just as important is if the left hand understood what the right hand was doing!

But when it comes to managing your finances, you are frequently asked to put together the pieces of the puzzle absent, sometimes, all of the information required to do a decent job.

However, when you get swept up in the euphoria of the bull market and the numbers are good, you rarely stop to ask, “What, if anything, am I missing something?”

Yes, it’d be great if companies were proactively transparent. Yes, it’d be great if some companies didn’t chase profits by any means necessary. But companies are run by humans and humans can sometimes choose to behave in funky ways.

One-size doesn’t fit all
You may not know what’s missing, but you intuitively know something is missing. So you seek help.

But your source of help gives you generic, one-size fits all solutions that you follow believing that doing something is better than doing nothing.

Setting aside my severe dislike of the phrase “financial literacy,” and my disappointment with how my industry pimps it as a “do good measure,” my biggest problem with focusing on the numbers in this particular regard is that it doesn’t allow for context.

Not all financial hardship is due to someone behaving irresponsibly. Sometimes, sh*t beyond your control happens and you deal as best you can. But there are some finger-wagging gurus who don’t make allowances for life’s unexpected events, or the truth that wages have stagnated while the cost of living has increased.

Again, I haven’t read Ms. Olen’s book, but I suspect this is one of the points she is raising with her critique of celebrity gurus.

It doesn’t allow for evolution
The question posed by the woman at the event where Prof. Zelinksy and I were panelists reminded me of this. It’s understandable to want what our parents and grandparents have/had, especially since we’ve paid into the “system.” And I do believe some sort of solution needs to be found. But to expect that we will have the same benefit when nothing about our economy, way of life, or way of working in the 21st century resembles these elements of years ago is a setup for disappointment.

Plus, I think people forget that the personal finance industry as we know it today is relatively young. Retail mutual funds, available en masse, and self-directed investing are really by-products of the 401(k) – or defined-contribution – movement that started about 40 years ago.

I could go on, but I think you get my point…we individually and collectively pay a huge price when we focus just on the numbers.

On a personal level, it prevents you from making the wisest choices and decisions possible. On a social level, corporate and government policies tend to be stuck in catchup mode, unable to reflect the realities and dynamics of the day.

Now that you know what I believe to be the biggest problem with the personal finance industry, and why I believe going beyond the numbers is so necessary, I’d love to hear how you’d complete the sentence:

The biggest problem with the personal finance industry is…


p.s. want to know what I love about my industry? I love that it enables you and me to explore EVERYTHING AND EVERY AREA where life + money intersect. I find that pretty darn fascinating and exciting! 🙂

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