by My daughter recently received her doctorate in psychology and has worked with patients.
Having never gone to a therapist, I asked her what the process was to encourage your patients to make rational decisions. She said “Dad. All I do is listen, and try to ask the right questions at the right time I don’t have the answers to their problems. They do.”
Sounds like good advice. So is the secret to helping my clients that simple? Ask the right question at the right time and presto a rational decision is made.
Consider a hypothetical example, for Harry. The decision Harry is wrestling with involves his expensive whole life insurance policy. As we come to understand together his options were three fold;
1- Continue the payment of premiums, keeping the policy in force
2- Surrender the policy and pocket the $137,000 in cash value
3- Exchange the policy for lower premium with higher death benefit
Here are the questions I asked, with his answers.
Me- Please tell me the purpose of the insurance?
Harry- When I first purchased the policy it was for wealth replacement for my wife. Now I’m not so sure.
Me- What are your concerns?
Harry- I’m not sure if I will continue to have the means to pay the annual premium.
Me- What’s your best option
Harry- Take the $137,000 and invest it long term for my legacy for my wife or children.
Me- Tell me how long your time horizon will be and what after tax annual return your hoping to achieve.
Harry- 20 years, 7% after tax.
Me- Taking out my trusty financial calculator, I tap on the keyboard and I say that if everything goes according to plan you will grow the funds to about $530,000 after tax.
Harry- That sounds good.
Me- Based on your insurability, you might wish to consider transferring the $137,000 cash value into a new policy, zero out the premium and based on your age, you will have a death benefit of approximately $560,000.
Harry- What’s your point?
Me- What’s your view of the current state of world affairs and how that may impact your investments?
Harry- The world is looking more scary to me every day.
Me- So in other words, you would prefer to take a chance on achieving a pre-tax market return and hopefully realize $530,000, instead of creating an immediate $560,000 asset in the event of premature death, or when you pass at a ripe old age.
Harry- Hmm. That’s something I have to consider. Let me think about this.
Me- Was this helpful.
Harry- Yes thanks.
Conclusion-Perhaps in the field of psychology, listening and asking the right question at the right time may eventually create insight and more rational decisions. In the field of wealth management, it is just as important, because often when we add money into the equation, goals turn into fog and irrational decisions become the norm.
It’s been said that the difference between fog and a cloud is that fog lacks the will to fly. Today a Wealth Manager needs to be part financial advisor, and part psychologist to help our clients soar above foggy mind fields. It looks like my daughter is following in her father’s footsteps after all.
“This is a hypothetical illustration only and is not suitable in all situations. Each individual’s situation is different and must be reviewed specifically for their own financial objectives and needs. Certain types of insurance policies may not allow you to withdraw from cash values and in the early years of the policy there are significant penalties for early withdrawals.
Withdrawal (if permitted by your policy) are generally tax-free up to your basis in the policy. Your basis is the amount of premiums you have paid into the policy, minus any prior dividends paid or previous withdrawals. Earnings grow tax deferred inside the policy, but are subject to income t ax when withdrawn. Please note that this illustration is not intended to provide legal or tax advice. Seek advice from your qualified tax professional.
“The cost and availability of life insurance depends on such factors as age, health and the type of insurance purchased. Before implementing a strategy, make sure that you are insurance by having the policy approved. All guarantees are based on the claims paying ability of the issuing insurance company.
“All investments involve risk and may not be suitable. Investments carry the risk of loss of some or all of the principal investment and interest returns will fluctuate, especially over the long-term. Investments offering higher rates of return will also carry a higher degree of risk. Additional risk (dependent upon the type of investment) will include credit, inflation risk, etc. All investments should be discussed in detail on how they affect your personal situation
“Policy replacements will result in additional charges and commissions. Make sure that you discuss any withdrawals and policy purchases with a licensed insurance agent in your state of residence before making any decision.