Advice is a delicate topic.
We’ve all received both good and bad advice during our lives. The challenge is knowing when the advice is good or bad, and then knowing when to act. Money is no exception to this notion: financial advice can be both good and bad. The advice rendered depends on the receiver, as each person’s needs, risk tolerance, time frame and financial objectives are different and should drive the actions. It is entirely possible that advice given to one family is excellent and appropriate while that same advice to another family may be completely unsuitable and inappropriate.
For example, the recommendation to be more aggressive in a portfolio. This may work for someone who is financially independent and can withstand a substantial loss of value without impairing their lifestyle or financial goals. However, the same advice for another, who cannot afford to sustain portfolio losses, could turn out to be disastrous. Remember this at the next water cooler conversation or brother-in-law tip heads your way.
With some advice, you may not know for years whether it was good. Consider the acquisition of long term care insurance. The short term impact is that you will spend money on premiums. If those premiums are affordable, and will not impact your ability to maintain your lifestyle, you may never second guess your purchase because you lived with the comfort that a catastrophic health care event will not mess up the lives of your loved ones and that you can afford quality care if you need it. But if you are stretching to pay the premiums, then this may cause you to run out of money too soon, and cause you to reduce your spending or tap into home equity to sustain your lifestyle.
Context is another concern about whether advice is fitting or not. This context is applicable in two ways. The first is within the limits of your personal situation and finances. The second level of context is whether the advice you have received is considered in the context of any other financial areas that it may impact.
An example of good advice that turns out bad because of the context is an elderly person’s gift of their home to the children now in case something happens to them. The flaws here may be many. First, what’s “in case?” Bad health and death happen to older people.
The second could be taxes. When the recipients sell the home, they may have a huge income tax bill because of Mom’s low tax cost. And third may be the new owners. Perhaps your three children owning the home equally causes other problems with respect to chipping in for home maintenance or a child’s pending divorce.
Also, consider the source. A trusted advisor who knows you well and has a handle on the bigger picture and context should be ok. But just because you like or respect someone does not make their advice always right for you.