The week of April 19, 2015

The high-stakes risks and rewards of DIY finance

By Ramon Ramirez

We’ve reached the point where we’re using the Internet to ask our next door neighbors to borrow a cup of sugar.

If you’re stuck with a bundle of eggs on the eve of their expiration date, you can turn to the Web and find a good quiche recipe. If you want to find a more efficient workout or look into workarounds for that leaky carburetor, reliable online testimonials are accepted as low-risk starting points.

Crowdsourcing a personal quandary often leads to an ideal solution. But what if, like an embarrassing majority of Americans, you lack any sense of direction when it comes to finance?

What if you’re an unhappy husband with astronomical student loan payments, or you’re jobless and disabled staring down at an empty bank account, or you’re debating the value in paying off the house before early retirement. Maybe you’re a despondent 16-year-old and having a full-blown existential financial crisis about your imminent future: “My dad is getting old, and I just found out he has no retirement plan, What do I do?”

For the armchair experts on Reddit’s r/PersonalFinance community, weighing in on these questions pro bono is all in a day’s work. They are generally affable, seemingly trustworthy, and largely convincing. The subreddit’s mantra promises actionable advice: “Get your financial house in order. Learn how to better manage your money and debt in both the short and long term. Find out how to save an emergency fund and invest for your future.”

But is r/PersonalFinance trustworthy—even for Suze Orman-esque, common sense-driven advice? For that 16-year-old worried about his dad’s impending retirement, the community offers a bevy of reasonable, level-headed opinions:

“It goes without saying that [the 16-year-old] should also do his best to kick butt in high school as well. Find ways to become eligible for scholarships, grants, and bursaries (basically three ways of saying ‘free money’), and maybe college will pay for itself,” one user offers.

“I don’t know how much success you’ll have helping him directly. Indirectly, you can help just by being self-sufficient,” another adds. “Start working part-time now and save for your own education. Don’t plan on having help paying for rent or tuition once you start college. Also keep in mind that he can start taking social security any time, so he won’t be starving. Though, depending on his lifestyle, he may have to give something up if he is forced to stop working.”

The community is a veritable hive mind of steady, daily finance information. It has a standalone chatroom running on Snoonet IRC. It has recurring segments like “Moronic Mondays” where entry-level questions can be asked without fear. Every day, thousands log on to solicit advice and barter for help. More than 2.7 million people subscribe to the subreddit and receive regular updates of the most popular posts.

For the armchair experts on Reddit’s r/PersonalFinance community, weighing in on these questions pro bono is all in a day’s work.

Make no mistake: This is not r/finance, Reddit’s other financial hotbed, wherein investing enthusiasts talk shop and trade news links. Here, strangers trade applicable advice and go forth into that real life armed with thread-sourced gameplans. That includes the 16-year-old who got advice about his dad’s lack of a retirement plan. For now at least, the community’s faceless expertise is a reassuring nest: “Thank you all for the help I really appreciate it, I was very scared but feel much better at this point =).”

A crowdsourced quandary

As an undergrad, I remember walking by the Drag across the street from the University of Texas campus in Austin and signing up for a credit card. In return, I got a gray T-shirt with the word “college” printed on it in blue letters and a hot, delicious Papa John’s pizza. Honestly, at that point in my life, I probably would have signed up for anything if it came with a free pizza.

Professor Fred Selinger knows knuckleheads like me; he’s seen about 5,000 of them. Selinger literally wrote the book on personal finance. He’s taught the subject for the last nine years to hundreds of undergraduates every semester at the University of California-Berkeley’s Haas School of Business, and he’s helped other universities design similarly drilled-down, aggressively practical courses. He believes that, regardless of background, no one is simply born knowing how to manage their finances, and few people seem to be teaching it.

“There’s a millennial generation out there that believes if they see it on their smartphone it’s probably correct,” he says. “In finance, mistakes are costly and innocence is no excuse.”

At the Kernel’s request, Selinger perused r/PersonalFinance. After 45 minutes, he came away decidedly unimpressed.

“I don’t know what to do. This is why I’m asking.” Selinger says of the examined threads. “Six people suggest six different things to do—now what do I do? First of all, who are these people that are answering this plea? Are they professionals? Are they certified financial planners? Do they have any idea what they’re talking about?”

The frequently asked questions section of r/PersonalFinance declares: “Many FAs [financial advisers] are paid differently depending on what you do with your money, so they will inevitably be biased in favor of investments that maximize their commissions. This is especially true of financial advisors associated with mutual fund companies and insurance companies. For most people investing isn’t more complicated than picking an asset allocation and finding low-cost index-funds, so the best FA in the world will just repeat the same advice we give here.”

But Selinger says that, in the professional world of financial planning, an adviser must go out of his or her way to know the customer. That means questions, and lots of them. He points to a thread about life insurance, then explains the contrast with professional advice. “A licensed professional insurance agent would spend the first 20 minutes asking someone about their own personal situation,” he insists. “Are you married? Do you have children? Are you divorced? What kind of savings do you have? Do you have an inheritance coming? Do you have any life insurance now?”

For him, that’s the most dangerous element of r/PersonalFinance. The necessity of finding a certified planner is lost on too many Americans. And now, people are turning to hobbyist usernames that cannot fundamentally help their situation.

Common sense advice

There’s still some value in turning to the hive. Explaining legalese from credit card companies, for instance, can turn granular muck into visceral indignation.

“I had a secured CC with HSBC and CapOne bought them out. I gave a deposit of $300 in order to get the secured CC from HSBC. The card converted to a CapOne Platinum when CapOne bought out HSBC,” a typical r/PersonalFinance query begins. “I just called CapOne and they are telling me that since my card ‘graduated’ from a secured CC to a normal CC, they don’t have a record of my security deposit and can not offer it back to me. Is this correct? Anything I can do, or am I out $300?”

Every day, thousands log on to solicit advice and barter for help.

The first response is cutting. “It is not correct,” one redditor charged. “You should be getting back your deposit, assuming you didn’t owe anything on your secured card. Gather any documents you have and call them back.”

Another user just wanted some general life coaching from people who were a little bit older and wiser.

“I need some advice—31 years old, 40k in student debt, stuck in a job I hate and trying to decide whether it’s a good idea to cash out and start over. Would love to hear some advice.”

One Monday morning, I logged into the community’s spiraling chatroom. One of the moderators, who goes by “zoninantion,” is adamant about the space’s vitality.

“There is also a great knowledge base from some members here,” he wrote. “It’s kind of like Wikipedia, in the sense that people will contribute and build on the knowledge of the community, often with nothing expected in return. Kind of an ‘If you build it, he will come’ sort of thing.”

The self-proclaimed experts are everywhere. But Wikipedia runs on verifiable expertise and outside citations. This hive rarely shows its work. Another user, who preferred to remain anonymous, spoke about her apprehension toward the hub.

“There’s also the part where you can get advice from people that have been in the same situation… Which can include ‘For the love of god don’t do what I did,’” she wrote. “There is a risk in it though, for sure­­­—almost everyone will recommend Vanguard funds, for instance, because everyone else does. They’re good funds, but the hive mind can be strong.”

But despite the groupthink’s wisdom, zoninantion sees that very point as conducive. “I often see Fidelity and Schwab though too. There is also good reason behind the hive mind for now.”

He’s not inherently wrong. Both finance giants have highly rated consumer report ratings. But while collective wisdom from smart people with ties to the industry can be beneficial, the burden is still on the user to substantiate those recommendations. On this thread that involves a 23-year-old and his apprehension toward investing, commenters speak in absolutes about what to do (“stick to mutual funds”). We can’t see how the hive mind is evaluating its decisions, and it’s a staunchly “buyer beware” arena.

Understanding the basics

Some professionals are in favor of this type of this relatively low-pressure crowdsourcing. Bay Area consultant Corey Quinn, who does not work in finance but is transparent about his identity and thus waging his professional reputation, is a particularly affable advocate.

“There’s a concept of peer review at work here. Compare this to a traditional financial advisor. If you’re in here asking about what to invest your retirement into, and I’m suggesting funds that personally enrich me, I’ll get called out on it,” Quinn says via chat. “There’s also the embarrassment factor. If you’ve got $80K in credit card debt like I used to, it’s hard to admit that to people face to face. The anonymous aspect of the internet helps in that respect.”

“There’s a millennial generation out there that believes if they see it on their smartphone it’s probably correct.”

There’s a lot to unpack here, and it’s the kind of logical, affable, direct advice that is easy to accept at face value. But peer review occurs prior to the publication of scientific papers. And as Professor Selinger points out, even if colleagues call you out on the subreddit, it’s just one comment in a half-dozen anonymous sources, and there are no potential legal penalties for terrible advice the way there could be with a professional financial adviser.

The advice you might receive on r/PersonalFinance varies wildly, but there are some basic principles to investing at work. “I despise the idea of being in debt, so I’d prioritize paying off a mortgage before investing after tax dollars, and many would disagree,” Quinn says. “That said, nobody’s going to disagree on fundamentals, such as ‘get rid of the damn payday loan.’”

For his part, Selinger has some investment tenets as well, which he rattles off like he’s reciting the alphabet: “Stocks can be a great way to accumulate wealth over time. When it comes to stocks: If you don’t understand the investment, don’t buy it. If a supposed investment professional can’t provide you with a clear presentation of the product, don’t buy it. Never borrow money to buy stocks. Never buy stocks with money you might need in the next five years.”

When I relay expert skepticism about the very existence of r/PersonalFinance later to Quinn, he’s confident and steadfast. “Academics whine and cry about Wikipedia in the same vein,” he says, “but it’s on par errors-wise with Encyclopedia Britannica.”

This evolving honeycomb of information—sometimes contradictory, disputatious, or questionable—has a great deal of archival value. It’s a database of ideas, sourced from smart people. But it’s not a sit-down appointment with a professional in business casual attire, which is dangerous.

In the end, free advice is worth what you’re paying for it.

Illustration by Jason Reed