Division of labor has played an large role in the economic achievements of mankind. The ability to specialize and accumulate knowledge in a narrow domain has allowed incredible efficiency gains that have lifted living standards for all of us. When I want to get a pair of shoes or a new shirt, I do not try and cobble my own shoes or sew my own shirts; I go to a retailer. I trust that competition and free markets will keep prices reasonable, and I will not be charged exorbitant prices due to my ignorance in the arts of shoe- and shirt-making. The modern economy has allowed us to ignore many important skills and routinely rely on others to provide goods and services which we cannot do without. Usually, it is a smart thing to rely on others who are more specialized than us. But is this true for all goods and services?
The experiences of many retail investors during the recent financial crisis suggest that the answer is “no”. It has been revealed that investment advisors (IAs) sold retail investors securities that were inappropriate for their risk profiles. For example, retirees were sold Lehman bonds and auction rate securities. The IAs and finance professionals involved were either incompetent, and did not understand the risks involved, or criminal, and did not care about the risks involved. In addition, retail investors lusted after higher yields and deliberately bypassed the more conservative and intelligent IAs, and other less competent but more morally flexible IAs stepped in to satisfy their needs. I remember an analagous situation which happened to a neighbour. She was given a diagnosis of breast cancer from her family doctor, but in a state of shock, she requested a second opinion from another doctor. The second doctor told her that it was a benign cyst, and she was relieved and put off further treatment and investigation. A year later, the cancer had metastasized, and she had to undergo aggressive chemotherapy. In both medicine and finance, human psychology coupled with bad incentives lead to unfortunate results. IAs and doctors are both paid on a commission basis; their income is entirely dependent on the number of trades/procedures their clients undertake. Ironically, if they provided advice that actually improved their clients’ physical and financial health, their income will go down. Furthermore, doing the appropriate things to improve one’s physical and financial health is often psychologically distasteful (think exercise and saving), and the market is always ready to provide painless free-lunch type solutions from less scrupulous practioners. Human psychology and market forces virtually dictate that IAs and doctors will give bad advice.
This is why I strongly advocate self-sufficiency in the areas of personal physical and financial health. You should know whether you are in reasonably good physical shape for your age group. You should understand the main causes of death for your age group (for middle-aged men, the top 3 causes are heart disease, cancers, and stroke), and how to minimize your risks. You should know the amount you require for a reasonable living standard after retirement and to fund your children’s education, as well as how likely you are to get to that amount given current income and expenditure growth rates. These are all important but scary questions, and it is likely that no doctor or IA will take the initiative to broach them with you, because they know that scared clients tend to leave. And that is why you should take matters into your own hands.
