Why There's No Financial Advice for Most Americans

America's middle class needs a lot of help managing its finances. The financial industry isn't providing much.

The latest failed experiment in bringing affordable financial advice to the masses is online platform Nestwise. The startup was shut down on Sept. 1, despite backing by the U.S.’s largest independent broker-dealer, LPL Financial Holdings Inc. A statement by LPL said its resources “can be more effectively deployed in other areas of the business.”

In May 2012, then-LPL senior executive Esther Stearns, 53, launched Nestwise; she left the company last month. Stearns, who says she can’t discuss the decision to close Nestwise, agreed to talk about the lessons learned from the startup and whether eventually there will be cost-effective ways to get advice to those who arguably need it most. Here are edited excerpts of her conversation with Bloomberg’s Ben Steverman.

Steverman: What were you trying to accomplish with Nestwise, and how far did you get?

Stearns: We set out to create a financial services firm focused on meeting the needs of middle-class Americans. Most financial advice is really only available to people who have amassed over $250,000 in investable assets -- a very small percentage of the population.

It was important that we helped people understand the risks and potential benefits of investing. When people don’t understand the risks of investing, they invest money they ought to save. Our industry has a tendency to focus on producing the absolute biggest investment return. What middle class people need is predictable outcomes.

We didn’t get very far into the process. Our pilot phase lasted until February 2013, so we really weren’t in the market for a full year. We hired advisers and trained them, and we acquired clients and served them. [Customers communicated with financial advisers online and over the phone.] But we had a lot of things left to learn and develop.

Do you think it’s possible to provide valuable financial advice that middle-class people can afford -- and that makes business sense for financial services firms?

Personally, I think the answer is absolutely, yes. I know there are people who disagree. I would say to them: As an industry, we haven’t tried hard enough [to be able] to declare failure.

People’s financial lives are not getting less complicated. We’re not turning back the clock. Society isn’t going in the direction of restoring pensions. The need continues to be there. I’m not 100 percent sure the answer will come from within our industry. We are an industry ripe for disruption. The solution might come from some place we haven’t thought about yet.

Can financial literacy efforts help the middle class improve its finances?

Nobody is against financial literacy. But it’s not enough. When it comes to money, knowing and doing are two entirely different things. Exercise and eating probably fall in that category too. I know how I should eat. I just don’t always do it. Knowing what a bond is doesn’t solve anyone’s problems. In fact, I’ve met dozens of people who know a heck of a lot about financial instruments and yet feel very incapable of managing their own finances.

How do you get people to move to the “doing” part?

At Nestwise, we developed programs that helped people build new financial habits.

For example, through our work, I identified I’m a real sucker for sporting goods stores. I don’t spend a lot of my life shopping, but boy, every time I go into a sporting goods store I leave with something. I once bought a $110 baseball bat for my kids, who don’t really like baseball. Now when I go to sporting goods stores, I don’t bring my credit card. That’s the kind of individualized planning that really does make a difference.

Another example of a behavioral change: People don’t like to lower their level of spending, but they might agree that the next time they get a raise, they’ll commit half of it to their 401(k). We have to develop these programs that help people solve their problems and address their financial needs in ways that are realistic.

How does technology help?

The most important use of technology was to develop behavioral programs. We had a program called “90 Days to Reduce Your Spending.” That program was built around videos, e-mails and other activities, all funneled through a system where your adviser could see your progress. That’s a relatively inexpensive way for you to get support in making behavioral changes without the adviser having to spend hours and hours with you. Technology is the key to making financial coaching efficient.

A big question is how to get customers to pay for advice. There are fee-only advisers who typically get paid based on the assets they manage. They often criticize the conflicts of interest inherent in brokerages that get commissions for selling certain products.

I don’t think either model serves the middle class particularly well. The problem with fee-based is: As long as my compensation is based on a percentage of assets under management, I can only help people with large asset bases. What the middle class needs is a model for paying directly for advice.

At Nestwise, you paid $250 for a financial plan and then $575 per year for ongoing advice — paid monthly, quarterly or annually. Which is very affordable. People had no problem with our upfront planning fee, although a lot of people did find comprehensive financial planning overwhelming. However, it was a little hard for people [to pay the ongoing fee]. They thought: “I don’t think I’m going to want to talk about my money every quarter. So why do I pay you quarterly?”

So we were starting to look at other models, like in legal services, where you pay a retainer and you burn off that retainer through use.

There are several new financial advice websites that ask people to upload their portfolio information and then make recommendations based on algorithms. No human adviser is involved. Could they work?

Most people aren’t going to pay for someone to coach them every day on every financial decision -- but most people do want someone they can talk to.

A lot of these sites are just too numbers-oriented. Spending, saving, money – it’s the currency with which we build our lives. It’s not just math. There are great tools out there. I don’t think they’ve been shaped into a suite that the right kind of coaches can use to help people cost-effectively and consistently. I think that’s still to be invented.

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