Sunday, January 23, 2011

CHOICE - The Advisors Perspective

As a child my familys menu consisted of two choices: take it or leave it. - Buddy Hackett

In an article, The Tyranny of Choice, in the December 16th edition of The Economist magazine, the authors cite a number of interesting statistics, including the following:
  • The average American supermarket now carries 48,750 items, more than five times the number in 1975, according to the Food Marketing Institute.
  • Even the professions experienced enhancements. Take medicine for example. America in 2008 alone saw 2.5m Botox injections, 355,671 breast implants, 341,144 liposuction treatments, 195,104 eyelid lifts and 147,392 stomach tucks, according to the American Society for Aesthetic Plastic Surgery.

The investment industry is not immune from this phenomenon. Consider that (according to the ICI Factbook), there were 7,691 mutual funds in the US, an 18 fold increase from the 426 available in 1975). That doesnt begin to address the explosion of alternative investment solutions, and the continuous evolution of more open markets globally, all contributing to a geometric increase in the number of possibilities for investments and the complexity of picking the right ones for you.

The result is sometimes we settle for picking rather than choosing. The distinction (as identified by Barry Schwartz in an excellent book, The Paradox of Choice: Why More Is Less) is that picking is a reflexive activity grabbing something and hoping for the best as opposed to taking the time to own some thinking behind a decision.

I dont know about you, but when I consult with a client on an investment decision, I certainly want them to have (at least some) ownership of the decision, even though they may have relatively limited underlying knowledge of the details.

The Economist article also cites research that has become known as the Jam Studies by Sheena Iyengar and Mark Lepper. Perhaps expectedly, when shoppers were provided more choice (24 jams versus 6 at a sampling table), more stopped by to sample. However, when it came to buying, 30% of those who stopped at the 6 jam table bought the product versus only 3% at the table that had 24. Thus, more choice seemingly inhibited the shoppers decision making capability.

This article reminds us (as advisors) that

  1. Know your client goes beyond a regulatory rule. It is fundamental to our ability to serve them by understanding their preferences and decision making styles. We only get there by continuous client discovery in conversations and periodic psychological probing.
  2. Less is more in that fewer choices and concise representations enhance their ability to choose.
  3. Less (for clients) requires more (from advisors) in that distilling the boatload of information we want to cover into the half dozen or so decisions for each meeting requires a good bit of mental grappling. We need to allow ourselves sufficient processing time to prepare for meetings including some analysis of why each alternative is uniquely appropriate from the clients perspective. (consider the questions available on our Financial Values Questionnaire).
  4. Annual engagement planning allow us to deliberately sprinkle and pace decision sessions over time, thus more adroitly drive the education and focus on priorities for each meeting such that specific decisions might be reached more efficiently.

Happy choosing


No comments: