Originally published on Evidence Based Advisor Marketing
There’s a lot of miscommunication between you and your clients. That’s because you let your head dominate your heart. The numbers do tell a story, but not always the whole story.
Here are two common examples.
Rent vs. Buy
The decision whether to rent or buy a home is complex. Based on the data, many people who buy would be better off renting.
I’m one of them.
We own a condominium in a high-rise building, outside of Naples, Florida. While it has appreciated nicely in value since we purchased it over twenty years ago, we would have been far better off renting and investing in a broadly diversified portfolio of stocks.
Do I have regrets? No. Here’s why.
- I probably would have spent all or a portion of the money I used for a down payment and my monthly mortgage payments, instead of investing it.
- We own our condo mortgage free. Our housing is secured. It’s a nice feeling.
- We have significant equity we could tap into if we ever needed it.
- We have something of value we can pass on to our heirs.
- We don’t have to deal with a landlord who could arbitrarily raise our rent or even kick us out.
It’s hard to quantify these benefits, because they relate to peace of mind and reduction of anxiety.
I can tell you this: They’re meaningful to us.
Term vs. cash value insurance
Most people would be better off with term insurance. I also agree with those who believe cash value insurance is not a good investment.
I own a lot of cash value insurance. It has accumulated a significant amount of cash value. Here’s why it was the right decision for us (although everyone advised us against it at the time).
- As with the decision to rent or buy a house, I doubt we would have “bought term and invested the difference.” We probably would have spent most of the difference.
- The dividends and returns on my policies have outperformed Treasury bills significantly, with only marginally more risk, since my insurance company is very highly rated.
- I can take more risk with my other investments because I have the cushion of my cash value, which I think of as the bond portion of my portfolio.
- I am comforted by the fact that the death benefit of my policies would support my wife for the balance of her life, without diminishing the quality of her life.
- I can spend more money on experiences we both enjoy, without worrying about the amount of her inheritance.
- At this stage in our lives, the cost of term insurance would be prohibitive. I don’t have that issue with my policies.
With both these examples, I’m not suggesting the decision I made is right for your clients. My concern is you might not present them with these options, because the data leads you to recommend only one option.
Sometimes, the bottom line isn’t (and shouldn’t be) what drives decisions.
Resource of the week:
This blog post about how we make decisions provides insight that will help you improve communications with your clients.