Minding My Own Business

This is second of two posts covering my recent interview with nationally syndicated financial columnist and author Scott Burns Scott is the chief investment strategist for AssetBuilder where he advocates a low fee approach to investment management and has co-authored the new book “Spend Til the End” with economist Larry Kotlikoff.

Check out part one of my interview with “Spend ‘Til the End” author Scott Burns.

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Jeff: Scott, “Spend ‘Til the End” makes the point that financial education in America is severely lacking.  I’m a classic example of this lack of education.  Everything I know I’ve picked up along the way from family, friends and experience as I’ve managed my own finances.  Fortunately, I’ve been successful despite lacking a formal personal finance education.  What’s the solution to this dilemma?  Mandatory education in our schools?  Do you have any recommendations for how parents can ensure their children are adequately prepared and educated to handle their personal finances?

Scott: Personal finance needs to be a curriculum item starting in middle-school, and it needs to be a requirement for a high school diploma.  It should not be that difficult to educate everyone, for instance, about the idea that paying 18 percent on credit cards is silly and financially suicidal.

Jeff: In “Spend ‘Til the End” you make the point that going to college doesn’t make economic sense.  I believe our country needs to be highly educated in order to maintain our competitive edge.  How does the nation balance this need versus the economic disadvantages the book highlights?

Scott: We need to change the economic model for education.  We can have traditional and highly inefficient education for enrichment and social function.  And we can have certification education for functional competencies.

Jeff: In my personal situation I tend toward being what you call an “over saver.”  I know my father influenced my behavior and attitudes toward money.  What can the “over savers” and “over spenders” do to break free from these early influences?  What can they do to help their progeny have a better financial balance than they have been able to achieve?

Scott: Breaking free from parental financial influences should be easier than breaking away from all the other parental influences.  There comes a time when all of us have to own up to being responsible for our lives regardless of our family of origin.  It isn’t easy, but it’s the only way we ever become self-realizing adults.

Jeff: You emphasize in the book the importance of financial communication between spouses.  What advice would have for new couples that would help them to have open communication about their finances?

Scott: Spend the time to set goals and talk through how you intend to reach them.  Understand that you are a team.  Understand that winning will require that both of you do your part.  This means working out a spending plan so that you spend your money where you intend to spend it rather than discovering where it has been misspent.

Jeff: There seems to be systemic problems with our Government and how it’s benefits programs encourages people to not participate in the work force.  What changes would you propose we make to our benefits programs so they keep people employed and don’t provide incentives to just sit around?

Scott: That’s a really long topic.  I’d start by abolishing the income tax, employment tax and corporate income tax.  I would replace them with a national sales tax.  That would take envy out of the politician’s hands and put spending decisions back in the hands of people.  The same tax system would prebate cash back to all households, providing an income floor.  This would eliminate the buying of legislators, end the massive amount of time wasted on tax conniving and reduce the posturing about all the wonderful things they are going to do for the nation by taking money from one person and giving it to another.

Simplifying the tax system to a sales tax/prebate system would eliminate the snake nest of overlapping rules and programs that makes it possible for a low income household to experience an effective tax rate of 100 percent while a high income household can pay taxes at 15 percent.

Jeff: “Spend ‘Til the End” paints a complicated financial planning landscape.  Do you think individuals can do their own planning alone, or do most people require professional help?  Why?

Scott: Larry is more optimistic than I am on this point.  He believes most people can do it on their own if they just exercise patience enough to learn the software (Jeff’s note: Scott is referring to ESPlanner software developed by Larry’s firm to do living standard financial analysis.) I’ve been getting letters and email from a broad reading public for more than 30 years.  That experience has led me to believe that many people would prefer advice and guidance from someone who has faced the same issues with hundreds of other people.  My expectation is that we will soon see an un-bundling of asset management and financial planning.  This will make it possible to have major reductions in the cost of asset management on the one hand, while it engenders growing consulting practices in fee-only financial planning on the other.

Jeff: Speaking of fees, in the book you and Larry take a swing at financial institutions and the fees they charge for mutual fund investments.  What do you think is necessary to provide clarity concerning the fees  consumers are charged for these financial products?  Should the Government regulate fees?  What do you think about a establishing a standard labeling scheme much like you find on the shelves of every food product in the grocery store?

Scott: I love the idea of a standard labeling system, one that would show what percentage of the return and potential accumulation was likely to be absorbed by the institution selling the product.  Wall Street may finally have gone to enough excess to solve the problem, even without government regulation.  I find it difficult to believe that anyone would take anything said by a Merrill, a Citibank, etc. seriously.  These jokers have wrecked their own businesses with risk and we’re going to be paying the bill for years.  We’re just starting to see the revulsion the public feels toward these grasping bozos and the grief they have brought us.

At AssetBuilder, the registered investment advisor firm Kennon Grose and I started when I retired from the Dallas Morning News, our assets under management have been doubling every six months or so with no advertising or marketing.  I think billions of dollars are moving from what I call the Legacy Distribution System (the expensive, managed risk portfolios and financial products) to inexpensive, index-based portfolios such as the ones we offer at AssetBuilder.

Jeff:  Fees can certainly eat your returns alive.  Here at “Minding My Own Business” we advocate a low fee approach to investing and I have much of my own personal investments in low cost index funds.  I find it comforting that you advocate a similar low fee approach.

Turning back to the book, you reference results from ESPlanner calculations frequently.  Several times today the software has come up in our discussion as an analysis tool.  What do you say to those who would criticize you and Larry that the book is merely an effort to market ESPlanner?

Scott:  That would make me pretty dumb, since I have no financial interest in ESPlanner.  Larry and I are interested in advancing an idea.  We want to improve financial planning.  As noted in the book, ESPlanner may well be the Visi-Calc of the genre (the first to market), but eventually displaced by the equivalent of Lotus or Excel.  It might also be the equivalent of Alta Vista, soon to be displaced by the Google of consumption smoothing.

The software is an instrument for writing the message. It is not the message.

Jeff: After finishing the book, if a reader wants to implement consumption smoothing, how do you suggest they begin?

Scott: Those at ease with personal computers should buy the program and use it to explore the impact of personal and investment decisions.  They can get very specific information/answers that way.  Many people in their 50s will discover that they are over-insured for life insurance.  Once they know that, the savings on the premiums alone, will recover the cost of the program several times over.

Others can benefit simply by recognizing situations in the book that are similar to their own.  Very young workers, for instance, could invest less than the financial services industry would tell them to and invest it to take less risk.  They would feel free to buy houses in areas where prices aren’t a major multiple of the cost of renting.  All workers would get out of the manager picking game and into index investing.  This would materially increase their retirement assets.  They would also feel free to avoid expensive 401(k) and 403(b) programs and substitute IRA accounts.  They would also be more inclined to use a Roth IRA rather than a traditional IRA.

As a matter of fact, we spell out the “take-aways” in a simple table in the epilogue of the book.

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That concludes my two part interview with “Spend ‘Til the End” author Scott Burns.  I hope you enjoyed reading this interview as much I did conducting it and learning more about Scott and his views on personal finance.

-Jeff

I’m managing my money, are you managing yours?

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