Reducing Spending

How Banks Fail in Helping You Save Money You may not realize it, but our financial lives are shaped by a great divide: banking vs. investment managers. In between lies most people’s pinnacle challenge: saving for the future. I have the good fortune of being able to question the institutions that shape my financial life. I studied economics in school. I earned a CFA credential while working in consulting. I started a financial tech company when I found problems that the industry seemed content to leave unsolved. But not everybody can afford to question the institutions they work with. To most Americans, the bank is the bank. It’s where you put your paycheck, who you talk to for a car loan, what form you look at when you file your taxes. Your 401(k) is your 401(k); who provides it, what the investments are, what fees are charged—these are questions that most people only get to ask on occasion, if they ask them at all. Today, I see millions of people tied to two kinds of institutions often misaligned to their needs. The first is banking. Neither banks nor credit unions have a fiduciary duty to put their clients’ interests first. Instead, they have a proclivity for charging extra fees and an unjust ability to earn profit on the rates loaned out by the Federal Reserve as their clients lose their savings to inflation. The second is investment managers. Whether a 401(k) plan, an advisor, or a broker, investments are still designed mostly for institutions and the wealthy, and the managers are often far too focused on asset allocation when Americans’ real financial outcomes are most determined by savings. While I have critiques for each group, the greatest problem to me is the fact that there are two. Somewhere in between their bank and their investment manager, Americans lose out on the most important element of finance: Saving their cash. Make no mistake; your savings is what matters. It’s what matters when paying down debt. It’s what matters for starting a business. It’s what matters for securing a healthy retirement. And yet, banks typically don’t help you become a better saver; they encourage holding cash at the ready for spending and sell you loans when you don’t have enough. Meanwhile, most investment managers pay little attention to your saving; they focus on larger deposits, like retirement money withheld from a paycheck. Between working with a bank and an investment manager, we, as a nation, fail to save enough for the things we need. The everyday American deserves a cash advisor. The truth about the future is that saving is all we have. Younger generations can’t count on Social Security the way Baby Boomers still do. And the pension plans of yesteryear are gone. Not only that, students today are graduating with more student loan debt than ever before, and no other part of life is becoming cheaper. Houses, cars, kids—they’re all becoming more expensive, not less. The average American aged 35-44 has $133,100 in debt according to Money. As a nation, we’re mostly deep in the red, not the black. To avoid debt, to save enough for retirement, to successfully navigate inevitable emergencies, Americans need a partner who has their best interests at heart not just in investment advice but for managing their cash. For helping you manage the day to day, so that, at the end of the month, you’ve actually saved more for the future. We need a cash advisor perhaps more than any other kind of financial advisor. For years, RIAs have encouraged their clients to outline their financial goals, to set a budget, and to save enough to fund each of their goals. But what have we been able to do to help ensure our clients’ success? Coaching, support, suggestions—yes, RIAs have led in this arena. But is it working? Americans today are saving less than they ever have. And even worse, they’ve seen limited wage growth and increasing inequality at the same time. Forget budgeting. Cash advice must automate the act of saving. What investment managers and banks silently have agreed on is that saving each month is the client’s responsibility. It’s the client’s money, and so, it’s theirs to set a budget. To me, the suggestion to “set a budget” is a failure of advice. It implies a lack of empathy for how a wallet really works or how human minds decide to spend. These are the facts: The world gives us many reasons to spend, and it offers far fewer reasons to save. Store sales. Credit card rewards. Low interest rates. The world creates many reasons to buy things. Meanwhile, no part of the industry solves saving. Banks and investment managers leave it to their customers to solve. The solution is having an advisor that puts the work in to do what real humans struggle with: Automating your savings. Helping to keep your spending in check. And nudging you toward your long-term goals. Ask any financial engineer and she’ll tell you that predicting the right level of cash you need each month is no great feat. As predictive modeling and advanced technology goes, your cashflow isn’t a big mystery. The choice to build that business so that everyday Americans can live better? Now, that is a different story. America’s future depends on how we save cash. Who will solve it? You can look at national debt, student debt, Social Security insolvency, or growing income inequality. As a country we need ways to help people save, and so far, the answer I see suggested most is Mint, a budgeting tool from Intuit that only helps if you’re already good at budgeting to begin with. And if you’re not, it mostly serves to sell you credit cards or investment apps. And I don’t blame Mint; it’s great for budgeting, just not for the reality of saving. Will you trust a bank to help? Maybe one of the new online banks or app-based banks? Banks have every opportunity to change how we save for our goals, and yet, they won’t. They thrive when you’re using your debit cards and taking out loans. They love it when your savings sit growing at less than 1% while they’re loaning your money at 4%. When we, as a nation, need every ounce of the risk-free rate we can get to save for our goals, banks prove again and again that they’re not problem-solving, they’re taking advantage. So, who would you rather work with? The solution I see is that we have to turn to those whose interests align with our own. I want to see fiduciaries get into the business of managing cash and savings. I want registered investment advisors and CFP® professionals to become true cash advisors. To use innovative technology at scale. Yes. To drive empirically better behavioral outcomes. Absolutely. To make a profit. It’s a must. But, at the core, we need advisors acting in their customers’ best interests; not just for already-wealthy individuals, but for everyday Americans looking to save their way to wealth.