Why We Have Insurance

Can we be safe? Really?? I wonder. I have noticed the Lac Megantic rail tragedy, the Calgary flood, the 777 crash in San Francisco that Sheryl Sandberg missed by a fluke, and the untimely deaths of James Gandolfini and several children left in overheated cars.

Events similar to these have happened before so to that extent they were foreseeable, but they were all unforeseeable as to specific people, specific places and specific time.

That is the nature of risk. There are not many things truly unforeseeable. In physics there is the thought that unless something is specifically prohibited, it will eventually happen.

It is the time, place and people uncertainty that creates our idea of risk. On an individual basis in a particular time and place things are unpredictable, even unforeseeable. In collective society, the same things are certain.

That certainty taken over all of society, and that uncertainty for an individual is the philosophical underpinning for insurance.

An example. There is a small but non-zero probability that my house may burn down. Similarly yours might or maybe that of any of the thousands of people we know or know of. Individually there is a small probability, but for a large group, it is certain.

For example, if the probability of a house burning is one in 10,000 then for a group of 7,000 people there is a 50-50 chance that a house will burn within a year. The risk relates to which one. Over a 5 year period there is only a 3% chance that all 7,000 will survive unscathed.

Here is why we have insurance.

One house burning down is not the same thing as each one burns 1/10,000 down. If it is your house, it either burned or did not. There is no gradation. So we say to ourselves, I don’t like the all or nothing nature of the outcome, even though it is improbable that I will have a loss. If it happens I lose large.

Suppose each of the 7,000 members of our society decide to share the risk. Fortunately, each house in our group is worth the same. $350,000. Each of us throws $50.00 into the pot and when a house burns down, the unfortunate takes out the money and rebuilds.

Here in the real world, your fire insurance is not $50 a year. There are reasons.

  • You buy more than coverage for a total loss. Things like partial loss, like theft, like vandalism and like personal liability.
  • The insurer has overhead
  • There could be more than one loss in a year and none in others
  • The odds might be higher than 1 in 10,000 or they may be growing more adverse.

Regardless of whether we use a skilled intermediary like an insurance company, the point of it is the same. Individually we do not want the all or nothing risk of a loss. We know it is certain somewhere, and we are willing to pool resources. We accept the premium as being a controlled and affordable way to avoid the unaffordable, near random loss.

When you think about insurance do you first think about the premium or do you first think about the magnitude of the potential loss?

If you think about the premium and then avoid the insurance because the loss is so improbable, then you are not being fully rational. Good plans deal with all the facts.

By refusing the insurance you are choosing to believe that you have a way to manage the loss if it occurs and you can do so for less than the premium the insurer wants.

At this point, you need to consider that insurers know the odds. As in know precisely. You do not. Self insuring does not change the risk. It remains the same. Only the method of paying for it will change. A little now or a lot later.

Choose wisely.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

don@moneyfyi.com | Twitter @DonShaughnessy | Follow by email at moneyFYI

Think About Critical Illness Insurance

Critical illness insurance is a conceptually simple insurance product.  If you are diagnosed with one of stroke, heart attack or cancer, the insurer will write a check to help you deal with the problems that have arisen.  Of course there are some definitional things like what do you mean by stroke, heart attack or cancer and how long do I need to live after the diagnosis and things like that, but nonetheless pretty straightforward.

Where it gets more subtle is in the options.

Some are familiar.  Waive the premiums if you are unable to work, say from an accident?  You have likely seen this idea in a life insurance policy.

Another uncomplicated choice is the definition of a covered condition.  Most carriers offer an extended definition that picks up about twenty other illnesses and “loss of independent existence.” Again fairly straightforward and most people opt for the expansive definitions.

Would you think it smart to pay for a “second event” something like cancer after a heart attack?  Again you could discover the definitions and conditions, think about it and decide.

That is about where the easy part stops.

For the harder part, would you like coverage to 65 or 75, or maybe 75 with only 20 premiums due, or lifetime with premiums only to 100  (Nice deal if you can get that last one to work for you.)  Maybe decreasing coverage or increasing premiums would work for you.  It gets confusing.  Too many options make it harder unless you know the future with certainty.  Not common in my experience.

You should try to think about how much and when your money needs protecting against an unforeseen and urgent drain.  If you don’t see problems after you retire, then to age 65 or 75 will likely work.  If drawing down savings late in life would be a problem then lifetime may make more sense.  Maybe more for a shorter time when you are younger and less later on.

The coverage should reflect how you see the risk.  The premium is just a byproduct of that observation.

Now the challenge and how sales people address it.  Return of premium.

The insurer offers you a choice.  Pay more premium and get your money back if you don’t have a claim.  There are several options for how to structure that.

Here’s how return of premium works.  Suppose you are a 45 year old male in good health, with a good family history who would like $100,000 of coverage.  You decide you would like to have coverage to age 75 with premiums for only 20 years.  You also like the wider definitions, second condition and waiver of premium in disability.  The premium is about $2,350 annually.  If you have a claim you will receive $100,000 and the very most you could pay for that is 20 times $2,350 or $47,000.  Not foolish.  It could happen in the third year instead of the 23rd.

Then I offer you this choice.  How about we GUARANTEE that you get a check from the insurer?  If you will pay about $3,700 annually instead of $2,350 you will get one of three possible checks:

  1. You are diagnosed with a covered condition and the company pays $100,000
  2. You die before 75 and the company pays you whatever premiums you have paid.  Maximum of $74,000
  3. You make it to 75 with no claim and the company gives you the premiums back.  $74,000

Case 2 and case 3 might reduce the cost of owning the right to claim in 1.  If you have a claim you win financially, but against that is the possibility of losing the premiums.  People mostly don’t like losses.  With the return of premium option and with no claim your cost for the possibility of collecting is the loss of investment income on the extra premium you voluntarily paid.  You get the capital back but lose the income.  You are essentially paying an extra $1,350 for a chance to get back $3,700.

Described this way, the return of premium option is about a 2.50% investment.  In today’s world, reasonably attractive.

Other return of premium options for other policy structures could run into the 9% range.  These are the ones that are making hard for the government to decide if it is taxable or not.  But that is not really the point.

The point.

If you would refuse to buy the coverage at $2,350 because you think it is not a risk you care about, then consider the return of premium option.  It may be a good enough deal that you can justify owning the coverage.  Even as a long shot risk, it might not be too expensive.

If you accept that the risk is important, and could pay the $3,700 premium the question is should you buy return of premium and $100,000 coverage or should you buy more coverage ($157,500) for $3,700.  You can get honest opinions on both sides of this debate.  It does not matter who is right, but you need to think it through.

You may recall that there are two times when you can be insurance poor.  A) When you are paying premiums that are too high for the problem you are trying to solve, or B) when you get the claim proceeds, if any, and they are too little for your needs.  A good adviser can help you towards a proper balance between your needs and the premiums you must pay.

Coverage matters more than you might think.  Even smallish amounts are useful.  Recently on Twitter, David Bourke in Australia (@dbourkebfs) posted this sad and not so uncommon story.

Select an adviser who can help.  It matters.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

don@moneyfyi.com  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

Chasing Madoff

We watched “Chasing Madoff” on TMN last week. While Bernie Madoff is a well documented disgusting person, it is even more disgusting that, when he brought Madoff to their attention, an honorable and courageous man like Harry Markopolos met resistance from the SEC, the nominal protector of financial markets in the United States.

It started in 1999. When asked to design an options portfolio to compete with Madoff, Markopolos decided, after less than 5 minutes, that the Madoff fund had to be a fraud.

The options market is extremely volatile. There is no real-world situation that can give an options fund the regular returns Bernie Madoff was showing. “Such a distribution simply doesn’t exist in finance.”

Being thorough it took Harry another 4 hours to prove it to his own satisfaction. You might wonder why the fraud lasted until late 2008.

Between 1999 and 2007 Harry delivered increasingly well supported cases to the SEC. They did nothing. He talked to journalists and others, again nothing. He thought there might be risk in trying to bring down someone who had stolen $50 billion. He got a permit to carry a gun because he feared for his life. He became obsessed. I personally know of no person who would have put up with what he did just because it was the right thing to do.

As for the SEC, perhaps we could argue that they did something but the fraud was so cleverly disguised that they missed it. While I am not privy to the details, I know that in this sort of audit, when you see something that is patently impossible, you look until you find why. Sometimes it is your own misunderstanding. I once spent 4 hours looking for a fraud because an entire day’s sales receipts had gone missing. Turned out to be Good Friday.

All strings have two ends. If you find one end, like the impossible record of earnings, you need to look for the other. Apparently it is possible at the SEC to have a string with only one end.

Had the crash of 2008 not appeared, it is possible that Bernie would still be in business. Only the drying up of new money, the fuel for a Ponzi scheme, caused the situation to come to light. The SEC had nothing to do with it.

Harry has written a book about it. No One Would Listen We should all pay attention. Here’s why.

It is certain that Madoff did not run the only fraud in the US in those years. There are likely some running now. Possibly large ones. The SEC did not find Madoff, probably the biggest and one that was dropped at their door with a well constructed brief. What would their likely success be with a more clever and smaller fraud?

Brooklyn Congressman Gary Ackerman is magnificent on this point, I doubt you would believe it, if it was fiction. See YouTube Worth a look at the comments following too.

There is a simple reason they do not fix this sort of thing.

They are a bureaucracy and bureaucracies value the process over the results. Agencies like the SEC are counterfeits They look like the real thing but they are not. Many of the senior people value their positions more than their duties.

The really bad news. The SEC is not alone. There are a lot of agencies and departments with the same attitude at the top and not just in the United States. They don’t actually want to do anything, especially something inconvenient. After all Bernie was very prominent and powerful. They like the prestige and the pay more than they like the dirty work of making things right. That needs to be addressed.

Bernie was sentenced to 150 years and will be eligible for parole in 2129. Given the difficulty of prison life, I suspect that there are many of his clients, friends, associates, employees and even family praying a familiar Jewish blessing for him. “May you live to be 120.”

Retributive justice.

As an investor pay a little attention. Things that are too good to be true should be avoided. People do not pay high yield because they are nice guys, they do it because they have to do so to get your money. You might wonder about that.

We need more stand up guys like Harry Markopolos. Help them when you can.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

don@moneyfyi.com | Twitter @DonShaughnessy | Follow by email at moneyFYI

Do You Make Notes?

By notes, I do not mean a to-do list. I found this article on July 3rd. While it seems self-evident to me, I am informed that not everyone sees the world this way. I am a compulsive note taker in meetings. Even one on one meetings. I think there is value in notes. You might want to read the article “If You Aren’t Taking Notes, You Aren’t Learning”

I agree with its premise and would add that if you aren’t taking notes, you probably are not listening well enough.

I have occasionally ranted about the difference between learning and being taught. Learning is active. Being taught is passive. You learn better the things with which you are active because active helps to fit the new thoughts into your existing understanding of the world. You can see more opportunities and revisions.

You forget teachings because you never assimilate them. ADD doesn’t help either.

Taking notes and reviewing them works.

I have tried recording meetings and phone calls. This works even better when it comes to composing the report or the letter, but until I can find a universal voice-to-text program it takes too long. I can read about 10 times faster than most people speak so recording is for now, not a viable choice. Someday though.

BTW most clients have no objection to the recording as long as you are clear about the reasons.

Taking and reviewing notes is an edge and any edge is worth owning. Read the article.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

don@moneyfyi.com | Twitter @DonShaughnessy | Follow by email at moneyFYI

What Is Insurance For?

People often do not own a proper insurance portfolio because they do not know what insurance is for. I own casualty insurance like car, house, liability and group health but I don’t know as much about those as a specialist would. You should review these periodically to be sure you know what is covered and are getting value for your premiums.

The purpose of any kind of insurance is to replace an asset that is lost because of some event. The triggering event. The problems arise when you fail to insure something that you did not think of as an asset. In other situations people insure for the wrong period of time. In some ways insurance is like finance. It is not smart to have the useful life of the asset you buy financed with loans or leases that last longer than the asset will last.

The following is about life insurance and various kinds of disability insurance.

A competent adviser needs to personalize the actual plan. In this piece I want to deal with only a single question. What is it for?

Life insurance protects a value lost as the result of the death of a person.

  1. The value lost is frequently the worth of the person’s ability to earn income. Their career if you will. This asset is quite valuable early in life. It can be calculated and it should not be overlooked or replaced by some number that is bigger than you can understand. Someone who expects to earn $20,000 per year, (about minimum wage) with no inflation for 30 years, has a career value around $350,000. Inflation, if present would increase that present value to about $500,000. You may earn more and if so you can calculate value. Learning about how net present value works will help you understand many kinds of financial products, not just insurance. Please learn a little.
  2. Life insurance can prevent the loss that would occur if a non-liquid asset had to be sold to meet estate needs. The cottage, the business, the rental property, the art collection, the jewelry and the farm. These usually are sold to pay taxes, repay debt or meet other cash needs. Fees, commissions, and discounts can be material. If you see a sign that says “Estate Sale” do you expect to buy at a low price. Cash prevents forced sales.
  3. Life insurance can provide a tax preferred vehicle to accumulate investment assets. In Ontario and some other places, properly designed it will be immune to creditor’s claims. Other than assets you use, from a tax standpoint, life insurance assets should be the last money you spend.

Disability Income Insurance protects accumulated assets and reduces the stress of being unable to work. It protects your health when you need it most.

If you cannot work because of illness or accident, your living costs do not go away. Your career value is still there, but you cannot withdraw any of its value because its value requires that you work to get it. Disability insurance provides an alternative way to draw the money you need to live. Disability insurance protects your assets from forced liquidation. If you have no insurance, you will draw your needs from accumulated savings or the sale of other assets. Neither will help you recover. Design is difficult. Seek competent help.

Office Overhead Expense Insurance protects what you have accumulated. It is to pay specific fixed business expenses while you are disabled. Even if you have Disability Insurance, it will not pay much more than your cost of living. Office overhead coverage pays expenses that will allow the business to be there when you return. Rent, leases, staff, loan payments and other expenses will be reimbursed upon payment. There will be something to return to when you get better and your savings will still be intact.

For young professionals, this is a key coverage. Most cannot get a lot of disability income insurance because their income is still low. Office overhead is not tied to income. Get all you can justify.

Critical Illness Insurance protects savings. It provides a lump sum usually 30 days after the diagnosis of specified and serious diseases. As with other disability coverages, people own this coverage to protect their savings and to provide them with the capital for treatment that may not be readily available otherwise. It can buy time to make other arrangements that suit their life better. Even smallish coverages have real value. Most serious conditions have costs you have not thought about even beyond special drugs and exotic treatment.

Long Term Care Insurance protects savings in the event of your needing facility or home care. A specified amount will be paid for each day of such requirement. As one client has said, “If I need home care, after a year or two I won’t have a home to have it in.” This coverage is attractive to people who have income assets like pension but not much in the way of financial assets.

Insurance can be a rational choice but because people misunderstand it, it tends to become emotional. Try to avoid that condition.

Recall that insurance poor means that someone does not have enough money when they need it. It could be you now because you bought too much or the wrong kind or it could be you or your family in the future because you had too little.

A skilled adviser can fit the coverage to your specific circumstances.

These too made add some value to your thinking.

What to insure.

What HENRY Insured

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

don@moneyfyi.com | Twitter @DonShaughnessy | Follow by email at moneyFYI

A Conclusion So Bad It Is Not Even Wrong

If you give someone an exam, especially a standard exam, that requires that the student repeat the right answers, then, based on the results, you will decide that today’s students are inept compared to their predecessors. While that is a possibility, it is more likely that the thinking behind such a conclusion would need to improve before it was even worth discussing. It is not yet even wrong.

Why then the weak results? The test scores show a significant decline and the tests have been validated. They are not harder than they once were. What else other than lazy, indulgent and undisciplined young people can explain the difference? Assuming they are not really stupider.

Well, here’s the news. Young people today process information differently than we geezers. They don’t make an effort to remember things. They don’t need to do so. The world of knowledge is in their hand.

Knowing where the circular saw is, what it is, what it does, and what other variations there are, will likely get me through the exam. Knowing how to build a deck is not quite the same thing.

Today you do not need to know any fact or detail so long as you know where to get it when you do need it. People who know things this way do badly when they are required to draw a fact from their memory. It probably is not there in detail. But how to use it probably is.

Young people use their smart-phones and tablets in place of their local memory. For the past year or more, I have been referring to mine as my exo-brain. External memory.

There is almost nothing I cannot know within a few seconds. What is the temperature, right now, in Beijing? What time is it in Brisbane? What is the square root of 17? How many American Constitutional amendments have never been passed? How tall is Hugh Grant? Who won the 1947 Stanley Cup? How much would a used iPhone 4 sell for? What is the mathematical representation of the Bell Curve?

How well would young people do on a fact recovery based exam if they used their exo-brain? Probably quite well compared to the old guys.

The question that matters is, what do we really want to know from the testing?

If I am testing for the ability to apply information, and I submit that we should be, then does it matter whether I recover the fact in 3 seconds or 10 seconds? With a device or without? Old style testing tells us too little. Knowing things used to correlate with the ability to do things. Proficiency is no longer well correlated with possessing facts in local memory. People should want to use information; they do not need to possess it.

Is it possible that the answer that Google found was actually better?

Likely. It might also have some links to other important facts on the subject. I’ll bet your memory does not have many hyperlinks to the newest information or discussions of why the old information has been supplanted by something different. Thinking involves connecting, it is not a point.

All in, I think the use of the exo-brain probably improves the answers and the people who know how to use it are likely more competent.

But, there is another aspect that is not yet clear.

What about the situations where instinct and creativity are required? Google is brilliant but it is not especially good at creativity.

Will our young people be able to connect the dots when many pieces of information, possibly from several fields of study, are needed to complete the picture? How will they handle the unknown unknowns? Will they know how to create the right questions? Google and even more specific programs respond poorly to queries that look like, “Tell me about the things I don’t know yet.”

People who are educating young people today need to get away from ancient test and teaching methods. Smart phones and tablets have supplanted memory. We need new ways to improve creativity and the creation of results from complex fact sets.

Let’s help people learn how to best use information. Knowing and remembering is not worthwhile. Assigning meaning to information is valuable.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

don@moneyfyi.com | Twitter @DonShaughnessy | Follow by email at moneyFYI

A Different Future

Lakefield Ontario sculptor, Don Frost, shared this image a few days ago. It is from “Imaginary Foundation” a purveyor of T-shirts and other items. You should take a look at both sites.

I think the image is brilliant.

the beginning is near upa93An interested and probably objective person, in an entropic world, looks over the wall at possibilities.

The thought on the wall “The Beginning Is Near” is so much more hopeful than the more common “End is Near” caption. We should all adopt it as our personal mantra.

People overcome obstacles, and perhaps the point is the end of one thing is the beginning of another, or perhaps while entropy cannot be reversed, it may just be a station along the way, or perhaps you see what you expect to see.

Who knows?

You should adopt this image if your financial plan looks more like the foreground.

Planning is an imperfect science and an unreliable art. No financial plan survives long contact with the real world. A plan requires change, it requires new insights, it requires moving on and leaving the wreckage behind.

The wreckage is not completely your fault unless you like to blame yourself for things that were not within your control. If that is the case, then it is your fault. There, feel better?

Pay attention to what you can change. Use outcomes only as information for future decisions. Learn the lesson and use it to make better decisions in the future.

Perhaps you have been trying to fix your financial plan. Many plans were seriously wounded in 2008-2009 and some have not recovered. If you have become discouraged, take heart. It is just the beginning of something new and, What??? Interesting, special, exciting, fabulously enriching.

Use the image to remind yourself that despite the disorder you have at hand, there are ways to construct a new and better future. Certainly better than the present chaos. Blame and anger won’t cut it. You cannot remain in the wreckage.

Your best move is to address your resources, your time and the personality quirks that may have contributed to the fall. Assuming you have learned a little from the experience it is time to regroup.

The Man From Mars is completely objective about every situation. He advises, “It matters where you are and what your options are now. How you got to be here is not part of what you need to know.”

Don’t let the past restrict your future. Perhaps it is time to enlist the services of a guide.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

don@moneyfyi.com | Twitter @DonShaughnessy | Follow by email at moneyFYI

What Is Money For?

The article that follow appeared in Seth Godin’s Blog on Sunday, June 30th. I doubt the points are in a particular order and if they are I might disagree with it. If I tried to think up a list like this, I would not improve on this one, so details like order, matter little.

Number 6 is one that I have not thought about before and I think it is important. If you are a “money is security” person, read Number 12 and Number 13 twice. If you are a “something for nothing” person reread 10.

The gist of it is – You better know what money is for and what money means to you.

When you have those points clear, planning what to do about it becomes easier. Please always remember that money is not life, and financial planning should support your life plan not dominate it.

Money cannot buy happiness, but it will buy chocolate and that is pretty much the same thing.

Thanks for this Seth.

Thinking about money

Many marketers work overtime to confuse us about money. They take advantage of our misunderstanding of the time value of money, of our aversion to reading the fine print, of our childish need for instant gratification and most of all, our conflicted emotional connection to money.

Confusing customers about money can be quite profitable if that’s the sort of work you’re willing to do.

A few things to keep in mind:

  1. The amount of money you have has nothing to do with whether or not you’re a good person. Being good with money is a little like being good with cards. People who are good at playing cards aren’t better or worse than anyone else, they’re just better at playing crazy eights.
  2. Money spent on one thing is still the same as money spent on something else. A $500 needless fee on a million-dollar mortgage closing is just as much money as a $500 tip at McDonalds.
  3. If you borrow money to make money, you’ve done something magical. On the other hand, if you go into debt to pay your bills or buy something you want but don’t need, you’ve done something stupid. Stupid and short-sighted and ultimately life-changing for the worse.
  4. To go along with #3: getting out of debt as fast as you possibly can is the smartest thing you can do with your money. If you need proof to confirm this, ask anyone with money to show you the math. Hint: credit card companies make more profit than just about any other companies in the world.
  5. There’s no difference (in terms of the money you have) between spending money and not earning money, no difference between not-spending money and getting a raise (actually, because of taxes, you’re even better off not-spending). If you’ve got cable TV and a cell phone, you’re spending $4,000 a year. $6,000 before taxes.
  6. If money is an emotional issue for you, you’ve just put your finger on a big part of the problem. No one who is good at building houses has an emotional problem with hammers. Place your emotional problems where they belong, and focus on seeing money as a tool.
  7. Like many important, professional endeavors, money has its own vocabulary. It won’t take you long to learn what opportunity cost, investment, debt, leverage, basis points and sunk costs mean, but it’ll be worth your time.
  8. Never sign a contract or make an investment that you don’t understand at least as well as the person on the other side of the transaction.
  9. If you’ve got a job, a steady day job, now’s the time to figure out a way to earn extra income in your spare time. Freelancing, selling items on Etsy, building a side business–two hundred extra dollars every week for the next twenty years can create peace of mind for a lifetime.
  10. The chances that a small-time investor will get lucky by timing the stock market or with other opaque investments are slim, fat and none.
  11. The way you feel about giving money to good causes has a lot to do with the way you feel about money.
  12. Don’t get caught confusing money with security. There are lots of ways to build a life that’s more secure, starting with the stories you tell yourself, the people you surround yourself with and the cost of living you embrace. Money is one way to feel more secure, but money alone won’t deliver this.
  13. Rich guys busted for insider trading weren’t risking everything to make more money for the security that money can bring. In fact, the very opposite is starkly shown here. The insatiable need for more money is directly (and ironically) related to not being clear about what will ultimately bring security. Like many on this path, now they have neither money nor security.
  14. In our culture, making more money feels like winning, and winning feels like the point.
  15. Within very wide bands, more money doesn’t make people happier. Learning how to think about money, though, usually does.
  16. In the long run, doing work that’s important leads to more happiness than doing work that’s merely profitable.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

don@moneyfyi.com | Twitter @DonShaughnessy | Follow by email at moneyFYI

Are More Choices Good For You?

More choice equals more freedom, therefore “Good!” seems like the self-evident answer. As with all other self-evident answers, this one is wrong. That wrong result has significant impacts on financial advisers and on their clients. Reality is that the more choices you have the more dissatisfied you will be, and the more dissatisfied you are the more changes you will make, and the more changes you make the poorer will be your outcome. And you will make the changes even when the outcomes are good enough, even very good.

Consider my friend Eugene. He is a super-organized master of detail. Many years ago, in July of that year, he paid off the mortgage on his home and as the result had money to invest each month. His investment vehicle of choice was a Registered Retirement Savings Plan, (RRSP) which would give him both savings and a tax advantage. But which one?

Being super organized, he prepared a spreadsheet. (Actually a lot of large paper sheets taped together on the dining-room table with inked columns and rows.) Each column was a possible RRSP plan and each row was a characteristic of that plan. The detail in each box he derived from an almost infinite number of brochures that he acquired from every bank, trust company, credit union, insurance company, stock broker and fraternal organization that he could find.

It was to be a supremely rational decision, but choices impaired rather than helped.

As the end of February deadline approached, he became more frustrated. According to his wife, at one point there were 174 plans in the matrix. What should he do? What did he do?

He made an excellent choice. He took the money he had set aside and they went to Hawaii for two weeks.

Why was that a good choice? Because it did not deal with the RRSP decision.

By having many choices, he guaranteed eventual dissatisfaction. No matter how good his first choice might have been he would have found in a year or two that there was a better one he should have made. Dissatisfaction leads to weak decisions in future. By choosing Hawaii he avoided the choice/dissatisfaction problem.

Eventually he accepted “good enough to get what I want” as a reasonable option.

For advisers, offering many options seems like a good idea. It makes you look impartial. Pick what you like, I can do it. But it does not work. You are the expert, the client is the one who knows the least technically so why should they make the decision.

If a doctor treating you for serious disease #7 said, “There are four choices for treatment. Here are the risks and probable outcomes for each, which do you want?” you would be appalled. You would likely say, “Which do you think is best?” or, “If you were me, which would you choose?” You would not be accepting of, “But I am not you and you need to decide.”

Marketing folks believe that clients value choice, it is a part of their differentiation approach. The evidence, from author and professor Barry Schwartz, is that while clients value choices, they don’t want to make them and when they pick from many they tend to be more dissatisfied with the outcome. That makes for poorer client relations.

When there are fewer choices, people expect less. There is room for a pleasant surprise. Today, with all the choices, people expect too much and are dissatisfied when it does not appear.

How do you manage expectations and performance successfully when perfect is the minimum?

Make recommendations. Accept some responsibility. Do not try to dump the decision risk to the unknowing client. If you are concerned about the liability find another client. One who gets it.

No matter the choice someone makes, it will never be the best one. It does not need to be the best. It merely needs to be good enough to reach the goal.

Decide that “good enough” easily implemented and easily monitored for management and easily monitored for connection to your plan is what gives you freedom.

More choice increases risk because it expands the reasons for dissatisfaction. (With a lot of choice there is an implicit opportunity cost.) When dissatisfied, you change something. Change hurts outcomes because change costs and so you cannot afford to do it very often. By having more choices, your risk of loss increases even if all the choices are good ones.

When you think about it, how badly served would you be if you put all your money into a balanced portfolio with a manager who had a decent record. They study the market and select investments. They reallocate to keep the predetermined ratios. You do little other than check to see if they are still investing as you expected them to do and supply the capital.

I have never checked to see if an average, or a little above, balanced fund is the answer but my instinct is that over a long time, I would be ahead both money and satisfaction.

The best satisfier is getting what you want.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

don@moneyfyi.com | Twitter @DonShaughnessy | Follow by email at moneyFYI

A Dozen Beliefs That Lose and One That Wins

Each of us hold beliefs that get in the way.  Some are common to all, others are uniquely our own.  We do well to find them and at a minimum know when we are using them.  Here are some that I know about.

  1. Patience is a virtue.  It is in the circumstances where you cannot tell yet if a decision or action has matured.  It is not a virtue when it becomes an excuse for failing to admit that whatever it is will not work.  Judgement call.  Could go either way.
  2. Waiting.  Never wait for things to change back to the way they were.  For the others, work towards parallel solutions.  Serial solutions are too expensive of time.  For example, if you need to send out 50 resumes to get a job, send them out almost all at once.  If you send one and wait for the reply it will take years to get 50 distributed.
  3. I believe in miracles.  That is okay as long as you don’t rely on them.
  4. Overwork.  You can work 10 hours a day, 6 days a week indefinitely.  Once you go by it by much, a first month intern could make better decisions.  With fatigue, higher brain functions go first.  Value rest and recreation.
  5. Believe in experience.  Like “I know that already,” experience and some knowledge is contextual.  Some of it is obsolete because the context that taught it no longer exists.
  6. Micromanage.  This always fails.  If you don’t trust them, you should not have them.  Give them some room and reap the benefits.  Learn to delegate better.  If you need to check, it is your own fault.
  7. Misunderstanding risk.  Not everything you don’t know is risky.  Be proactive.  Insure what you can and manage the circumstances of the rest.  Learn about reducing exposure and about improving capability to deal with it.
  8. Seek perfect answers.  Perfection is a trap. It is worth looking for the magical silver bullet in case there is one, but don’t look long.  Try some more common variety of bullet.  Learn how good is good enough and go there first.  If you want to evolve to perfection, fine.  But don’t aim there.  Perfection – procrastination – paralysis is a known problem.
  9. That is how we do it.  Probably a good way once upon a time.  Examine everything from time to time.
  10. Failure to address small obstacles.  Stress is about small things.  Look after them.
  11. Procrastinate.  Doing things quickly frees your head space.  The Procrastinators Self Help Group Meeting has been postponed until Tuesday.  What to do in the interim gets in the way.
  12. Accept no disrespect.  Sue if necessary.  There is no such thing as winning a lawsuit.  The mental cost is not worth it.  Lawyers say, “You never litigate in vain if the client pays.”  Litigate in vain happens to clients all the time.  I have been told, but have not investigated, that in commercial lawsuits, legal fees on average are just under 75% of the average award.  Better to invest your time and money elsewhere.  Like business promotion.  Remain vigilant for repeat offenders however.  No point being a patsy.

The winning belief.

If you think you can you might; if you think you can’t you’re right.

Enthusiasm works.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

don@moneyfyi.com  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

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