Kotlikoff: Conventional Investment Advice Is 'Bait and Switch'

“Conventional investment advisory is dangerous to your financial health. The whole exercise is bait and switch. These people are selling snake oil,” argues Laurence Kotlikoff, the Boston University economics professor who served on President Ronald Reagan’s Council of Economic Advisors, in an interview with ThinkAdvisor.

Kotlikoff blames firms that “force” financial planners to sell products, which, when coupled with giving advice, is “a major conflict of interest,” he holds. 

Nor does the professor spare criticism of the Federal Reserve, which is spouting “largely cheap talk” about inflation — “and the market, by and large, is drinking the Kool-Aid,” he maintains.

As for the Fed’s said intent to sell back into the marketplace the assets it purchased, Kotlikoff asserts: “The Fed is very clever in disguising what they’re doing. It’s trying to keep [us from] understanding what it’s up to” about printing money and selling those assets.

He continues: “I’m not totally sure what’s really associated with printing money to pay [our] government’s bills and how much is dedicated to portfolio transactions.”

The bestselling author’s new book is “Money Magic: An Economist’s Secrets to More Money, Less Risk, and a Better Life” (Little Brown Spark, Jan. 4, 2022). It contains what the professor calls “tricks” and “shockers” to help investors to a rosier financial future and life.

One of his many provocative secrets: “How to Make Divorce a Win-Win.” In contrast to conventional financial planning, Kotlikoff’s advice pivots on economics-based planning, which focuses on consumption smoothing.

The professor, named by The Economist one of the world’s 25 most influential economists, is director of the Fiscal Analysis Center and has been a consultant to the International Monetary Fund.

In the interview, the Social Security expert, co-author of the bestseller “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” argues that the U.S. is “bankrupt on a fiscal basis” owing to its excessively high debt. He then outlines a proposal for getting the country’s “fiscal house in order.”

The former consultant to Merrill Lynch and Fidelity Investments, among other firms, noted that conventional financial planning’s emphasis on the probability of retirees’ running out of money is “ridiculous.”

“The magnitude of the downside,” he says, is what “people really care about.” 

Here are highlights of our Dec. 21 conversation:

THINKADVISOR: In your new book, “Money Magic,” you say: “Conventional investment advisory is dangerous to your financial health. It recommends patently absurd financial behavior.” Please elaborate.

LAURENCE KOTLIKOFF: Conventional advice is based on a Monte Carlo simulation that assumes four things that no intelligent person would do:

No.1: Put savings before retirement on autopilot.

No. 2: You’ll be able to set a target for how much you spend in retirement that’s exactly correct. If you can’t come up with a spending projection, you’re given this replacement rule that’s correct for nobody and generally far too high for most.

No. 3: The methodology assumes you’ll keep spending exactly the same amount no matter what happens to your assets and to the demographics of your household. 

No. 4: The focus is on the probability of success; [that is,] not running out of money. But it isn’t focused on the impact of any of this on your actual living standard — the downside — and that’s what people really care about.

No. 5: People never adjust their portfolio even if their stocks go down the tubes.

All this is simulating crazy behavior.

Why did it become conventional advice, then?

The value of the whole exercise is just [for FAs] to convince people: “Hey, invest with me. You’re going to do better.” 

That’s a bait and switch. It’s baiting people by getting them to go along with a set of assumptions that are wacky and inappropriate and then saying, “If you do it my way — invest with me in my high-yield investments — yes, you’ll have a higher load, but it’s going to pay for itself.” 

That’s the switch — the product sell. These are people selling snake oil.

What are the implications?

The advice that Wall Street is conveying is not independent of their vested interest in selling product. They’re conflicted, and that’s a major problem. 

They shouldn’t be giving advice if they’re selling product; they shouldn’t sell product if they’re giving advice.

Are you referring to financial advisors across the board?

It’s not that I have a gripe with financial planners, per se. They, in general, are being forced to use tools in product sales from the company they’re associated with. They don’t have any choice.

Where does FAs’ knowledge and savvy about investing enter the picture?

They apply their common sense to what these tools [indicate] and give the best financial advice they can, given the crappy tools they’re taught to use. 

So my beef isn’t with them. It’s with TIAA and other major companies that are using this methodology. 

I’ve spoken to the TIAA board and [a past] president about the problems within that methodology and made it crystal-clear that it’s very dangerous for people — that it’s all connected with selling products.

There’s no response, except: “It’s working for us. Let’s keep at it.”

Moving on to the problem of rising inflation: What are your thoughts?

It’s partly the bottlenecks, the supply chain issues. But it’s also that there’s no tethering of information to any particular policy of the Fed.

It’s largely cheap talk: It’s good just till it isn’t good.

The Fed is telling people, “Hey, we’re going to be able to keep the inflation rate low through time.” And the market, by and large, is drinking the Kool-Aid.