May 26, 2012

INSIGHTS FROM CARL RICHARDS AND HIS NAPKIN DRAWINGS (@behaviorgap)

Carl Richards live (click to enlarge)"It only takes one big, bad mistake in a decade to blow your returns."
--- Carl Richards


Have you seen those nifty napkin drawings with profound insights? They are by Carl Richards. You may have seen them in the New York Times or his book, The Behavior Gap.

Carl was on his first Canadian tour this week. PWL Capital sponsored it. I got tickets from blogger Canadian Couch Potato, who attended in person along with Preet Banerjee. Carl spoke at The Academy of Spherical Arts.

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I've seen too many presentations on investments over the years. That's a downside of being an insider in financial services.

The content tends to present a world view that's biased to what the sponsor sells. That might be commercial real estate, undeveloped land, foreign exchange, green, oil or an investment philosophy.

The risks get downplayed. The speaker is essentially giving an infomercial and saying nice things about the sponsor. Buyer beware.

Different

Carl is different. He talked about investing but gave no investment advice. That's refreshing. Instead, he helped us understand basics that get in  the way of results. How we behave, for instance.

Carl has a knack for making things simple. As his drawings show, he takes out as much  as possible. This takes skill and skill takes practice. He said, "People like to argue about the numbers and miss the point."

His solution is to remove the numbers.

Complexity

Carl understands the power of simplicity. He said:
We have a complex in our industry. We think complexity is a sign of an intellectual gift. When you propose that advisors should make things simpler, they sometimes get lost and wonder "What am I for"? They don't realize that people would rather pay to have things simplified. 
The old sales model said: I'm going to dig you a hole and throw you a rope so that you can get out. Sometimes advisors are uncomfortable with this idea that making things really simple is really valuable. It takes some time for them to get their heads around that.
I’ve observed the same tendencies towards incomprehensibility, especially from the advisors with no meaningful designations. They think adding complexity shows their intelligence. If they’re that bright, why couldn’t they first earn professional designations and then learn how to simplify?

As Einstein said, “If you can't explain it simply, you don't understand it well enough.”

The Wrong Questions

During the question period and afterwards, some audience members asked for investment advice (e.g., signals for when to sell a mutual fund, how to identify the top/bottom of the market). Unlike children, adults like being told what to do even when there are no foolproof soundbite-worthy answers. Unfortunately, we can only spot the right investments in hindsight. Unfortunately, there are advisors who look convincing even to the non-gullible.

Trust

No one asked how to pick an advisor you can trust. I asked Carl privately. He said this is the most common question he receives at the New York Times. Maybe that's not surprising. He said that people want checklists but there aren't any.

Not everything can be made risk-free and drawn on a napkin. At least not yet.

Links

Podcast 170


direct download | Internet Archive page | iTunes

PS I've glanced through Carl's book, The Behavior Gap. It looks like a great read.

May 19, 2012

KEEPING PROMISES WHEN NO ONE’S WATCHING

Cat and goldfishWhen I ran a department, my team of 10 met every second Friday morning with whoever was present. I wanted the meetings to continue when I was away unavoidably. Instead, they would get canceled. Perhaps my staff saw the meetings as an imposition they wanted to avoid.

At work, we don't have a choice.

When you voluntarily join a small nonwork group that meets regularly, you do. There will be temptations to cancel meetings when a member is unavailable. The reasons vary: sickness, holidays, weather, conferences, clients, ...
Sometimes the reasons are unavoidable. Sometimes canceling is due to laziness or "not feeling like it".

Commitment

A meeting is a commitment and a commitment is a promise. That promise is to you as the promisor and to the rest of the group. Break a promise and you break a chain. Trust decreases.

I look for ways to keep promises, even when that's inconvenient. I sometimes go to a meeting even if other attendees cancel. If you show up, you've achieved a victory. You've planted another sequoia acorn in the forest of your character.

Zig Ziglar said, "If you do what you ought to do when you ought to do it, the day will come when you can do what you want when you want to do it."

Going to a meeting may not be the most enjoyable thing you can do at the moment, but maybe that's what you ought to do?

Fellow Victors

If some of the others show up too, you've strengthened a bond. The discussions are invariably better than with full attendance. There's more time for each participant to speak. The discussions go deeper. There may be unexpected tangents. You might get to know more about each other's personal lives. You build trust.

The "show up" pact works in public (e.g., blogging regularly). It also works in private when no one else know. In both cases, you know. And you're worth it.

The Others

Problems arise when others break promises. Say your advisor. You know they've failed you but in their minds, they not even know there's a problem. Maybe they're consistent in failing to deliver. Maybe you learn the pattern and make allowances. Isn't that rewarding misbehaviour? What will that get you?

If the offender is a family member or boss, you've got complications. Even then, you can focus on your Circle of Influence (yourself). By keeping your own promises to yourself, you'll build a habit that helps you keep other promises. Maybe you can nudge others to keep theirs. Or ditch the promise breakers.

Links

Podcast 169


direct download | Internet Archive page | iTunes

PS This is the May long weekend but this post still shipped …

May 12, 2012

WHY INSURANCE ADVISORS ALSO SELL INVESTMENTS

Don't pass the buckWould you go to a doctor who also does dentistry, or an accountant who also prepares Wills? Their professional bodies may protect you by banning the overlap.

Investments and insurance are very different but cross-selling occurs. Many insurance advisors also sell investments like segregated funds and perhaps mutual funds. This puzzled me. How can one person master such different product category?

These generalists don’t want to "leave money on the table". If markets are bad, they focus on selling insurance. When markets are good, they earn nice trailers from the investment portfolios they administer. They are also "building walls around their clients" by becoming a one-stop shop. Some go further and offer even more services.

What about investment experience? Financial literacy is a problem for advisors too, but recommending balanced funds doesn’t take much skill.

Cross-selling makes business sense for an advisor but you as a client lose. You're paying a premium for advice that a generalist doesn’t have.

WHOLESALERS

Insurers hire wholesalers to entice advisors to sell their products. Insurers tried to save money by having insurance wholesalers promote investment products too. This flopped. The products were too different and difficult to learn well. Also, compensation structures tended to favour one product line (typically insurance).

Insurers then hired investment-specific wholesalers. This worked better. The challenge was to get these investment people (who may have worked at mutual fund companies) to understand and cross-promote insurance.

Are you with me? Insurers decided that investments and insurance are so complex that different wholesalers promote them … to advisors who usually sell both.

FINER

Even within insurance, there are vast product differences. Advisors are often more comfortable with life insurance (term, whole life and universal life) than living benefits (income replacement, critical illness, long term care). The wholesalers had similar issues.

When I was designing critical illness plans in the 1990s, I felt out of my depths (having focused primarily on life insurance). Luckily, I was able to assign the work to an actuarial associate who had experience from a previous employer. My wholesalers were clamoring for critical illness plans ... but had difficulty understanding the products when launched. In turn, they had trouble explaining to advisors who then had trouble explaining to you. Other insurers had the same problems.

Sales of critical illness insurance languished and you didn't get valuable protection. The pattern repeated with Long Term Care insurance.

Why not have wholesalers who specialized in living benefits? Sun Life tried this. These specialists --- often nurses --- could do much of the work for the advisor. This seemed ideal but last year, Sun Life disbanded this initiative.

Consequences

Your advisor might sell investments, life insurance and living benefits. And extras like group insurance. And more. I met one last week who also does free insurance reviews. He didn’t have a single designation, though. Maybe that’s because he’s busy sending spam. The next day, I got an email with poor grammar and weird formatting.

Who helps advisors understand and select suitable options for you?

Any advisor can get support from insurers but that's limited to the products that company sells. Some advisors get specialized support from their connections or the intermediaries through whom they sell insurance. This support is much better than what an insurer can provide. As independents, these specialists are not confined to using products from a specific company.

Blend

You could choose to have separate advisors for
  • investments (maybe you self-manage)
  • life and health insurance (backed by separate specialists in life insurance and health insurance)
  • employee benefits (also called group insurance)
  • other products
Using specialists doesn't cost more but you get more expertise working for you. Isn't that good value?

Links

Podcast 168


direct download | Internet Archive page | iTunes

PS Insurance advisors may work with investment advisors to give you a one-stop option but dealing with complete independents may be better.

May 5, 2012

THREE POWERFUL PROTECTORS AGAINST CORPORATE MISCONDUCT

ProtectionWe don’t live in a perfect world. On any given day, you’ll find reports of businesses behaving in ways that are less than noble. We have reasons to be cynical. We can’t rely on superheroes to save us. Litigation is risky, expensive and slow. We aren’t powerless though.

We're protected against corporate misconduct by the combination of
  1. Regulation
  2. Competition
  3. Publication
This trio isn't perfect but can be effective. We’ll use financial services as an example

Regulation

The regulators focus on keeping financial institutions solvent. They set rules and specify minimum capital requirements. When capital gets set aside, it's typically invested in conservative investments for security. There are likely restrictions on the types of investments permitted, which means lower (but safer) returns. Tying up capital is not attractive for investors but protects buyers.

Canada escaped the financial meltdown and the regulations were certainly a reason.

Competition

In the world of gadgets, market share is an important consideration. When there’s a clear market leader like the iPad, it’s tough for competitors to charge more (or even the same price). Lowering prices also increases the size of the market.

In financial services, profits seem more important. When I was designing insurance products, there was always pressure to boost profits but without losing market share. That’s virtually impossible. At any given time, some competitors will be more interested in market share.

Overall, competition is your friend and augments regulation.

Publication

Regulations may be followed and competition may be effective. There can still be problems. For instance
That's where publication comes in. The media can investigate and report. Bloggers can bring scrutiny too. Wikipedia is a living repository reminding us of what happened. You can do your part through social media too. Your messages reach the world instantly.

Awareness helps everyone who pays attention make better decisions. You’re still free to make mistakes you later regret but you can avoid them too.

What’s stopping you from buying from a good company? When you do, you punish a bad one at the same time. That’s an ideal win/lose.

Links

Podcast 167


direct download | Internet Archive page | iTunes

PS What do you do if you see misconduct?