$ = $ = $ = $ = $ = $ = $ = $ = $ = $ = $ = $ Intentional Investing Newsletter December, 2004 $ = $ = $ = $ = $ = $ = $ = $ = $ = $ = $ = $ IN THIS ISSUE: 1. Note from Your Editor, Lynne 2. Article: Are You a Maximizer or Satisficer? 3. Resource Spotlight: Choose the Right Financial Advisor: Considering Compensation Resources for Compulsive Buying Disorder 4. Intentional Investing Announcements ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ -=- Note from Lynne -=- Dear Reader, I hope that you had an abundant and joyful Thanksgiving! Doesn't it seem that the holiday season arrives earlier every year? Even before "Turkey Day," stores have been filled with decorations, specials and reminders to buy holiday gifts for those you love - or for yourself. So, do you find yourself contemplating the "perfect" gift for everyone on your list? Are you preoccupied with finding the holiday outfit that you'll absolutely love? Are you thumbing through ads to decide just the right decorations for your house or tree this year? And, does this search feel fun at the beginning, but less enjoyable as time goes on? Then you may be a maximizer -- and the feature article on money, choice, and happiness is written just for you. Perhaps you live with or know someone who fits the description of a maximizer. Read the article, and pass it along to him or her. It may be the best holiday gift they'll get! Since there are so many holiday activities competing for our time and attention, Intentional Investing will be taking a break from teleclasses during December. We'll resume in January, and continue our series on choice and money. In the interim, take some time to read this issue's Resource Spotlight. Three dynamic financial advisors address the question of how compensation affects financial advice. They also suggest key questions to ask about fees and compensation when you interview a financial advisor. If there is a particular question you have, or topic on choice and money that you'd like to read about, let me know. And, do pass this newsletter on to friends who might benefit as well. I wish you a very happy holiday season. Lynne ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ Lynne Hornyak, Ph.D., Editor e-mail: Lynne@LMHServices.com Coaching successful professionals to greater financial freedom and well-being. ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ -=- Feature Article: Choice, Money, and Happiness Part 4, Are you a Maximizer or Satisficer? -=- Do you: * Channel surf when watching TV or listening to the radio to see if something better is playing? * Never settle for second best? * Always keep your eyes open for better opportunities - job, friends, social activities? * Find it difficult to buy gifts for friends, clothes for yourself, or pick out a video because you're searching for the best?** If you answer yes to some or all of these questions, you're likely to be a "maximizer." This term, coined by Dr. Barry Schwartz, describes people who seek and accept only the best. ** You can find the Maximization Scale in Schwartz' book, if you want to best way to assess your maximization tendencies! Realistically, it's next to impossible to always make the best choice, since that would involve checking out ALL alternatives. However, maximizers at least aspire to that goal. And this attitude can amplify the "tyranny of overchoice" that is so prevalent in our society. Seeking and accepting only the best sounds noble, motivated, achievement-oriented. And, there certainly can be elements of that. However, Schwartz' research finds that people with high maximization scores experience less satisfaction, are less happy, less optimistic and more depressed than people with low scores. While unhappiness and maximization are correlated, we don't know whether one causes the other. Nevertheless, maximization comes at a significant personal (subjective) cost. Schwartz also found other differences between people high and low on maximization. 1) Choice-making behaviors Maximizers make more product comparisons before and after making a purchase, take longer to decide, compare their purchasing decisions to others' decisions, and spend more time thinking of hypothetical alternatives to what they just purchased. 2) Subjective experience Maximizers tend to feel less positive about their purchases, savor positive events less, cope less well with negative events and take longer for their sense of well-being to recover after a negative event. Maximizers are also more likely to experience regret after making purchases. So, what does this mean? If you are a maximizer, you are likely to put more time, thought and research into making a decision. And for this extra effort, you are likely to feel less satisfied, and more likely to experience pangs of regret or second-guess your decision. Now, when you are making important investment decisions, it is important to gather and assess information. What is being questioned are the costs of being driven to find "the best" -- and one's assumptions about what "the best" means and how much better that option truly is than other available alternatives. You also might be wondering whether "maximizer" is just another term for "perfectionist." Schwartz thinks that they are different. He views a perfectionist as someone who isn't satisfied with doing a good enough job when they know they can do better. For example, a perfectionistic person may not be satisfied with how they are investing because they know that they can always learn more, resulting in more informed choices with more complex investment strategies over time. Like a maximizer, a perfectionist wants the best. Schwartz believes the difference is that perfectionists have very high standards that they don't expect to meet but will continue to strive towards; maximizers also have very high standards but they *expect* to meet them - frequently resulting in dissatisfaction and frustration. The good news is that most maximizers don't tend to maximize in every situation. For example, you may maximize in the domain of clothing or cars or schools for your children - nothing but the best will do. However, you may not maximize in other areas. For example, it may not be important to have the very best computer or read every financial magazine on the stands. So, it's important to assess how generalized your tendency to maximize has become and the resulting consequences for you. Schwartz proposes that the alternative to maximizing is to cultivate a "satisficing" attitude. Satisficing refers to choosing something that is good enough and not worrying about the possibility of something better. This term actually was introduced in the 1950s by Nobel Prize- winning economist and psychologist Herbert Simon. To a maximizer, satisficing may sound like having low standards. To Simon, the ultimate maximizing strategy IS satisficing. His point is that when you figure in all the costs (time, money, stress, effort) of researching all your alternatives, the best option is to go for what's good enough. Satisficing is one solution to the tyranny of overchoice. Tips for Maximizers for Greater Satisfaction with Financial Choices What can we learn from the research on maximizers and satisficing that can help those of us who maximize in financial areas to feel more satisfied with our choices? First, realize that maximizing is not lowering your standards. It's checking your expectations of yourself and your options. For example, you might aspire to carefully investing your retirement funds to maximize your returns while protecting your principal. Yet, it may mean that you won't always have *the* highest performing stocks or mutual funds in your portfolio. However, you'll be more likely to make a decision and begin accumulating returns on your investment. Second, to be a satisficer you have to know yourself - your goals and aspirations - and to define your standards of what's "good enough." For example, you may decide it's good enough to interview three financial advisors recommended by friends rather than interview every advisor in your local area. You may decide that it's worth your time to research investment products for your IRA but that going to every store possible to price a new computer isn't worth your time. Third, remember that few of us maximize in every area of our lives. Look at the areas in which you currently satisfice. How do you make decisions in those areas? To what other areas of your life can you apply that decision making process, to reduce the burden of exploring all alternatives? And, which areas are you going to continue to pursue the best by researching all your options? For example, you may decide to apply certain standards, such as "if it's not broken don't fix it" or research the top three alternatives. Fourth, focus more on what makes YOU happy. When your mind wanders, for example, to wondering how your investments compare to your best friend or brother or neighbor, gently remind yourself that it really doesn't matter. Refocus on your financial goals and review what you're doing to reach them. Finally, learn to adopt an "attitude of gratitude." This means taking some time each day to reflect on what you've done well, to appreciate what you've accomplished - rather than focusing on what *could* be. Reference: Barry Schwartz. The Paradox of Choice: Why More is Less. HarperCollins, 2004. ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ Like what you're reading? Then send this newsletter to friends, family, and colleagues who are interested in moving toward greater financial freedom and well-being. They can subscribe at www.lmhservices.com, or by sending an e-mail to Lynne@WLMHServices with "subscribe newsletter" in the subject line. ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ =- Resource Spotlight: Choosing The Right Financial Advisor: Considering Compensation -=- Intentional Investing received an email from a financial advisor in response to last month's Resource Spotlight. We had published several questions and answers following up on our October teleclass Choosing the Right Financial Advisor with guest Stacy Feiner. Amy Lampert of WomensWorth wrote: "The criteria for choosing an investment advisor misses one key and fundamental point. How an advisor is compensated has EVERYTHING to do with the decision yet is not mentioned as one of the questions to ask. Furthermore, in my 30 years in the business, I can count on one hand the financial consultants in major firms who will advise a client to re-direct assets to investments that exist OUTSIDE the boundaries of the firm.... they simply will not release assets that will then be unavailable to generate fees. Unfortunately it is one of the key flaws and conflicts of interest in the traditional financial services industry, and I think your readers are under-served by not understanding this. There are of course advantages to doing business with a traditional firm, but the consumer must be aware of the intrinsic conflicts of interest. Ms. Lampert has an excellent point. And, as Editor of Intentional Investing, I realized my oversight. We had discussed compensation in the teleclass but it was not one of the follow-up questions that we published. So, I asked several financial advisors to give their response to two questions: 1) How does\can the financial advisor's form of compensation affect their financial advice? 2) What questions would you advise someone interviewing financial advisors to ask about their compensation? I received three responses in time to publish this newsletter edition. The following responses were submitted by Peg Downey, CFP of Money Plans, Inc, a fee-only financial advising firm; Stacy Feiner, Financial Advisor with Merrill Lynch, and Amy Lampert of WomensWorth. (See their contact information below.) Question 1: How does compensation affect advice? Peg: I have often felt that fee-only advisors - who sell their advice but who do not sell products - are in a totally different business than those individuals who sell financial products. Basically, I am free to have my sole piece of advice be "Go spend your money!" - as it was for a client recently - and to be paid for my time, expertise and wisdom. Moreover, the clients know how I make my money and do not have to be concerned that I am telling them something just so I can make money. Since I am unbiased, without the potential for a conflict of interest, that means my only job is to look out for my clients' overall financial well-being. The client comes first and I have a fiduciary obligation to that client. As I see it, the job of a financial planner is to focus on the life goals of the client. I see my role as organizing an individual's financial life to get the life (s)he wants. This work does not necessarily focus on investments; most important is helping the client clarify what will give them a full, rich, rewarding life. Then, with clear goals in mind, cash flow, titling of property, adequate insurance coverage, may be some of the issues that need attention. Stacy: Compensation should reflect an approach to investing that best suits the client. Determining what "best suits" the client involves a comprehensive assessment of dreams, goals, risk tolerance and time horizon. On a micro level, clients who are geared towards a buy-and-hold strategy may best be served by a "wrap fee account" which pays the advisor on the total value of the portfolio annually. Here compensation is tied to the performance of the portfolio. Clients who are geared towards trading individual equities may best be served by a type of account that allows unlimited trading for a set annual fee. Here compensation is tied to transactions, but transaction fees are capped. On a macro level, clients are often seeking advice on issues that extend beyond their investment portfolio. They are needing Educational IRAs for their children or grandchildren, insurance coverage, loans and lines of credit, charitible giving and other tax strategies, and tangible investments (art, antique cars, etc). Financial Advisors may either receive compensation for these services when a particular product is used, or based on consultation fees. Amy: There are basically two different types of compensation models on Wall Street, with a third emerging: 1) the traditional approach is a commission model otherwise known as a transaction model. The investor pays by the transaction. This is a decent model when the investor knows what they want to do or transact in the way of business. It does not lend itself to a holistic approach or strategic advice by the advisor but rather a series of discrete transactions with little if any attention paid to the whole, ie., the broader context or goals of the investor. It does have its place, but can be fraught with conflicts as the broker/advisor only gets paid when there is a transaction, so the advice can sometimes be driven by the broker's need to generate a commission. Most broker/dealers traditionally paid their brokers - now called financial consultants - this way. 2) The costs of transactions, in great part due to the advances of the internet and technology, have become very commoditized, so firms as well as advisors are turning to the second, fee-based model in which the client is charged a fee as a percentage of assets. This has many advantages for advisors (brokers), clients and firms: it reduces the necessity of generating transactions (good for client), increases service level because the advisor/broker has to continue to earn their fee year in and year out (good for the client),and is good for clients needing advice on an ongoing basis. However, it is not necessarily good (ie, more expensive) for the investor who does not need a lot of advice and service. 3) Many firms are now promoting a migration to fees to smooth out revenue in times of bad markets and fewer transactions. Question 2: What Key Questions Should I Ask a Potential Financial Advisor? Peg: I would recommend that everyone go to www.napfa.org and get a copy of the "Financial Planner Interview" form. It will give all the questions to ask in a nice, easy, "check the box" format. The blank form can be photocopied and sent to any planners you are interested in. You'll get questions about competency and compliance, as well as compensation. Stacy: Here are several questions. * How do you receive compensation for the services you provide for me? * How is this different than a bank, or investment firm, or independent practitioner? * Would you advise that I get a second opinion if I am uncertain about a particular recommendation you may make? (Remember, how they respond is as important as the answer itself.) * How many clients do you work with? * How many have my level of wealth? How many with more or less? * How often do you plan to meet with me or speak with me about my portfolio? And can I have that commitment in writing? Amy: * How do you get paid? * Please fully disclose all fees and/or commissions on any particular transaction or solution that you or your firm receives (especially on managed accounts and mutual funds) And most importantly, after knowing how an advisor/broker gets paid: * What ongoing service and advice do you provide? Do not be lulled by the response that "I get no commissions" because in lieu of commissions there is almost always a fee. Sometimes it is disclosed, sometimes it is not, as in the case of a "commission-free-transaction" in which the fee has been embedded in the purchase price. My appreciation to Peg Downey, Stacy Feiner and Amy Lampert for providing us with information from their perspectives, as well as to Amy for stimulating this discussion. Contact Information: Peg Downey, CFP, NAPFA Money Plans 8701 Georgia Ave., Suite 710 Silver Spring, MD 20910 301-589-4250 PDowney740@aol.com www.MoneyPlans.com Peg is past chair of NAPFA (National Association of Personal Financial Advisors) Dr. Stacy Feiner Financial Advisor Merrill Lynch Cleveland, OH 216-363-6603 stacy_feiner@ml.com Amy Lampert Registered Investment Advisor WomensWorth alampert@womensworth.com www.womensworth.com ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ =- Resource Spotlight: Resources for Compulsive Buying Disorder -=- Compulsive Buying Disorder is finally coming out of the closet! April Lane Benson, Ph.D., a New York based psychologist who specializes in the treatment of compulsive buying disorder, published a cutting-edge book "I Shop, Therefore I Am: Compulsive Buying and the Search for Self" in 2000. This text brings together the most important thinking about this significant problem in our consumer-oriented society. Since that time, Dr. Benson has expanded her services to include the following resources. Please share them with those in need! For Overshoppers in the New York area: Stopping Overshopping, a 10-week group treatment program to help eliminate problem buying behavior. The next group begins Winter '05. Individual work with problem buyers is also available. For Overshoppers outside the New York area: Stopping Overshopping teleclasses and individual phone consultations available. For Therapists: Understanding and Treating Compulsive Buying, conveniently taught online, is available through PsyBC.com. Supervision and study groups now forming. For further information, please visit the website www.StoppingOvershoppping.com or call 917-885-6887. ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ If you are interested in coaching, contact me for a free half-hour consultation at Lynne@LMHServices.com. or (202) 387-5923. Please include your name, e-mail address, phone number and brief description of your interest in being coached. ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ -=- Intentional Investing Announcements -=- $ Free Teleclasses $ Due to the signficant number of competing commitments during the month of December, Be Intentional! and 4Love+Money teleclasses will resume in January, 2005. Happiest of Holidays to You!! ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ Have you been to the Intentional Investing webpage lately? Go to www.lmhservices.com and click on "Changing your Relationship to Money." On the Intentional Investing webpage, you can take a self-quiz on Your Relationship to Money, participate in a survey on gender and money, access articles written by Lynne as well read previous editions of this newsletter! ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ PLEASE NOTE: Intentional Investing [TM] is intended for informational and educational purposes only. It is not a substitute for financial, legal, accounting, psychotherapeutic, or other professional advice and consultation. ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ Copyright 2000-2004 Lynne Hornyak. All rights reserved. The above material is copyrighted but you may retransmit or distribute it to whomever you wish as long as not a single word is changed, added or deleted, including the contact information. However, you may not copy it to a website without my permission. Reprint permission will be freely granted upon request. Advance written permission must be obtained for any reprinting of this material in modified or altered form. ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ $=$ CONTACT INFORMATION $=$ Lynne Hornyak, Ph.D. LMH Services Coaching and Consulting 3818 Klingle Place, NW Washington, DC 20016 Phone: (202) 387-5923 Fax: (202) 244-3373 e-mail: Lynne@LMHServices.com Web: www.LMHServices.com