Rob Berger is a financial influencer. He’s a great communicator and highly telegenic. To me, he’s the Mr. Rogers of personal finance. You listen to Rob and find yourself nodding regardless of what he’s saying. I’ve had Rob on my podcast. He’s a lovely person and I’m keen to have him back to compare MaxiFi and Boldin in full detail.
Rob is a securities lawyer by training, an author of books on personal finance, and a prolific blogger whose newsletters and podcasts can be found at robberger.com. What Rob is not is a trained economist — someone with a PhD in economics. Nor is Rob versed in finance, which is one of economics many subfields.
Rob, like other money gurus, including Suze Orman and Dave Ramsey, offers common sense advice. Keep track of your spending, budget, save, buy life insurance, pay off your credit cards, diversify your portfolio, …
Such general directives are of real value to the remarkably large segment of the population that needs someone to scream — SEE A DOCTOR! — when they’ve been coughing like crazy for a week
But telling someone to see a doctor is very different from playing doctor. We don’t let lawyers prescribe antibiotics for a reason. There are over 100 such medications. Take the wrong one and you may not wake up the next day.
Rob doesn’t prescribe specific financial moves. But he does recommend specific financial tools — tools that, in some cases, promote financial behavior and decisions at odds, often total odds, with economic fundamentals.
Rob is a Huge Fan of Boldin. I’m Not.
Since you’re reading my blog, you know that I’ve spent the last 32 years developing, with my company’s engineers and other colleagues, MaxiFi Planner. MaxiFi does economics-based financial planning. This means it simultaneously delivers consumption smoothing — sustaining households’ living standards — subject to cash-flow constraints, does lifetime budgeting, calculates life insurance needs taking into account survivor-contingent plans, properly values annuities, including the most important annuity — Social Security, prices out life-style decisions, like retiring early, in terms of their sustainable living-standard impacts, compares investment strategies via expected lifetime utility maximization, robo-maximizes lifetime spending over Social Security decisions, the level and timing of Roth conversions, and the choice of start dates for non-Roth retirement account withdrawals, properly focuses on users’ maximum, not their expected lifespans, and makes internally consistent tax, spending, and insurance calculations.
As far as I can tell, Boldin does few if any of these things. In particular, there is no recognition in the tool or, for that matter, any other conventional planning tool, that a household’s spending path is a) not a question of what they want to spend, but what they can afford to spend and b) what households can afford to spend depends on what future taxes they face, but what future taxes they face depends on what future spending they do, and, yes, this is a complex chicken and egg problem. More fundamentally, Boldin, like every other conventional planning tools, flat out ignores a century of economists’ scientific work on optimal personal-financial decision making.
Scientific-Based Personal Finance
The mathematical framework underlying economics-based financial planning was developed by Irving Fisher, John von Neumann, Oscar Morgenstern, Harry Markowitz, William Sharpe, James Tobin, Menahem Yarri, Paul Samuelson, and Robert Merton. All held/hold PhDs in economics except von Neumann, whose PhD was in math.
Fisher, the world’s leading economist in the first third of the 20th century, worked out the principals of intertemporal consumption smoothing. von Neumann (an incredible polymath who made enormous multifaceted contributions, including to the Manhattan Project) and Morgenstern developed the economics of uncertainty and its mitigation via expected utility maximization.
With the exception of Yarri, each of the others received the Nobel Prize in economics. For his part, Yarri unified the mathematics of life insurance and annuitzation, i.e., insuring against early death and prolonged life. Markowitz, Sharpe, Tobin, Samuelson, and Merton all made major contributions to optimal portfolio choice. In several cases, these contributions were cited by the Nobel Committee in their prize announcements.
The contributions of this Who’s Who of finance were all mathematical. They posed tough financial problems, including personal financial problems, in mathematical terms and used mathematics to derive answers. The set of highly non-linear equations underlying their personal finance solutions comprise economics-based personal finance.
MaxiFi’s contribution to and acknowledgement of this powerful body of work is making it operational. Specifically, MaxiFi utilizes a computation algorithm — iterative dynamic programming, conveyed in this patent, that jointly and instantly solves the economics-based planning equations.
Don’t Take It From Me
Peter Coy penned a recent column for the New York Times that discussed MaxiFi’s Roth Conversion Optimizer and quotes Boldin’s CEO, Steve Chen. In preparing his column, Peter contacted Robert Merton for his views on MaxiFi. Merton doesn’t endorse financial products. But he did email me the following statement for transmission to Coy.
“I assign MaxiFi Planner in my asset management course at MIT's Sloan School of Management as an outstanding science-based lifecycle and retirement management platform.”
Solving the Right Equations
In using the term “science-based,” Merton references solving the right equations. My beef with conventional planning is that it doesn’t solve any equations. It simply projects end of life assets based on users’ desired retirement spending, no matter the affordability of that spending. Doing so helps Wall Street advisors show clients that they need higher investment returns to meet their spending goals — returns the advisor can produce. As discussed here, Wall Street’s bait and switch is perfectly designed to produce more AUM — Assets Under Management, which translates into higher fees.
Because conventional planning comes with a sales pitch — Invest with Us! —, it’s fundamentally conflicted. MaxiFi Planner has no sales pitch. My company doesn’t offer to manage your money or hook you up with an advisor or push you to buy particular insurance products. It offers personal financial education — that’s it.
Influencers who are paid for making product recommendations are also conflicted. Rob’s signup page for his newsletter contains the following statement, in small print,
Some of the links in this article may be affiliate links, meaning at no cost to you I earn a commission if you click through and make a purchase or open an account. I only recommend products or services that I (1) believe in and (2) would recommend to my mom. Advertisers have had no control, influence, or input on this article, and they never will.
I have no idea if Rob receives a commission for recommending Boldin. But his comparisons of MaxiFi and Boldin should make clear, at the point of comparison in his podcasts, whether he is or is not.
Disclosing My Own Conflict of Interest
Here is my comparison of MaxiFi and Boldin and here is my critique of Boldin’s Roth conversion methodology. And yes, these writings are self-serving and conflicted. But they are no more self-serving and conflicted than the dozens of similar articles I’ve written over the years about conventional planning, in general, and specific conventional planning tools, in particular. Here, for example, is a comparison of MaxiFi and Fidelity’s Retirement Income Planner.
Having a conflict of interest doesn’t mean that what one writes or says is wrong or biased. But one needs to clearly acknowledge such conflicts, not place them in small print, particularly when they aren’t immediately obvious.
Now to Rob’s objection to my criticism of Boldin.
Rob’s Response to My Critique of Boldin’s Free Roth Conversion Tool
Rob indicates that my criticism is “very much misplaced.” I disagree. Boldin’s free conversion tool collects only three pieces of data and then purports to tell you your tax savings from Roth conversions. Since the tool leaves out so many critical factors, it can’t possibly deliver correct answers for many/most users. Rob says one shouldn’t focus on it because Boldin has more detailed conversion tools if one purchases a license. Ok, but why then is Boldin providing the free tool?
Next Rob objects to my criticism of Boldin’s Monte Carlo simulations based on my statement that one needs to know precisely what risky assets a household is holding and their associated variance-covariance matrix before one can run such simulations. Rob says that’s unfair — that Monte Carlo simulations simply require knowing the average return on the household’s portfolio, which Boldin solicits. Rob says that Boldin infers the portfolio’s standard deviation from the user’s inputted average return.
There are at least three problems here. First, there are many different combinations (portfolio shares) of a household’s assets that can produce the same mean. Suppose the household holds assets A, B, and C with mean returns of 3 percent, 5 percent and 7 percent. Further suppose the household tells Boldin its overall mean return is 6 percent.
A 6 percent mean return is consistent with the household putting 20 percent in A, 10 percent in B, and 70 percent in C. It’s also consistent with the household’s putting 10 percent in A, 30 percent in B, and 60 percent in C. These different portfolios will have different standard deviations. Clearly, Boldin is, as I wrote, making extremely strong assumptions about users’ portfolios — assumptions that may be miles off the mark and assumptions that aren’t, unless I missed it in which case I apologize, being disclosed.
Second, portfolio distributions can be skewed, in which case one needs to know more than the value of a distribution’s mean and standard deviation. Third, Boldin asks about mean returns on an account-by-account basis. If the accounts are invested differently, one needs to incorporate the covariance between the returns on the different assets in the different accounts. As a simple example, consider two equal-sized accounts with the same average return and standard deviation. If the two accounts’ returns are perfectly negatively correlated, the portfolio’s standard deviation will be zero. Hence, I stand by my statement. Rob, in contrast, says Boldin’s Monte Carlo analysis is “perfectly fine.”
“MaxiFi’s Roth Conversion Results Were Crazy”
Next Rob says that he ran MaxiFi’s Roth Conversion Optimizer on his own case and that the results MaxiFi produced were “crazy.” Why did Rob reach this judgement? Because MaxiFi found that converting all his IRAs in the short-run and, consequently, paying top dollar in terms of taxes, was the way to minimize lifetime taxes and maximize lifetime spending. I guess Rob didn’t read this column, which points out that finding the optimal amount to convert and precisely when to do so is a mathematically highly non-linear problem. The solutions to such problems can, for many households, be Go Big or Go Home. Rob’s implicit suggestion to Roth-convert gradually is akin to his prescribing penicillin in minute doses over many months when the right protocol is to take a very large dose each day for a week.
So Many Factors
Rob’s ends his discussion of Roth conversions by listing the large number of factors involved in considering Roth conversions, implicitly suggesting that it’s all too complicated to worry about. What he fails to say is that MaxiFi considers or can consider all of his listed factors simultaneously.
Unfortunately, Rob doesn’t get the non-linear nature of Roth conversions, he doesn’t seem to appreciate the magnitude of the potential tax savings, he seems to think that marginal tax rates are well defined. They aren’t. And he believes that filling in federal tax brackets is the right conversion strategy. It’s not.
Rob’s Bottom Line
Rob concluded that my analysis of Boldin is “misguided” and criticizes me for criticizing other company’s tools. To be clear, I first learned about Boldin from a podcast in which Rob strongly criticizes MaxiFi, without, in my view, merit, while strongly praising Boldin, without, in my view, merit. Rob does so with no indication (unless I missed it in which case I apologize), in the podcast as to whether he is being compensated for sales of Boldin emanating from his site.
As for my criticizing Wall Street’s tools, I started my company to improve financial planning when I saw how Wall Street was preying on the public. This was back in 1993, years before Boldin was even a twinkle in its owners’ eyes. During the ensuring 32 years, I’ve worked for free, plowing every penny I could back into improving the software. I felt then and feel now an obligation to publicly express my concerns about conventional financial planning. The public needs to know why no top economics or finance department teaches conventional financial planning. The public needs to know that no CFP, CFA, RIA, or CPA program teaches economics-based planning. The public needs to know that giving advice while either selling product or referring clients represents a serious conflict of interest. The public needs to know that conventional planning is a well-honed sales pitch, not a serious attempt to provide financial advice in accord with economic science.
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PS, Rob, I’m sure you’re reading this. Let’s get together on your podcast or mine and have a friendly discussion of economics-based planning versus conventional financial planning. I won’t mention Boldin if you don’t. I’ve said my piece.
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My pleasure. best, Larry
Many thanks, Peter. best, Larry