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Value, Advice and Your Wealth Health PDF Print E-mail
Written by John D. Buerger, CFP®   
Thursday, 12 November 2009 10:09
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John Buerger

Price vs Value

Which is more important - the price you pay or the value you receive?

Today's post will explore this question, especially in relation to financial advice.  Here are some of the points that I hope you can take away:

Through the years I have met many bargain hunters who only make purchases when they get a great discount.  These are folks who would probably win in a 21st century version of "The Price is Right" (Hey, Angela ... come on down).  They can often tell you to the penny what they paid for any item and how much they saved.

Of course, in this context, you can't "save" money unless you "spend" money, which really isn't "saving" at all.  It is spending.

This is one of life's connundrums I've never been able to resolve.

The Answer is "Both"

When it comes to whether or not you (should) spend your money on ANY purchase, it all comes down to the value you expect to receive in relation to the money you spent ... at least in a perfectly rational world.

Of course, this isn't a perfectly rational world.  As I say in every workshop I do (and most client meetings), human beings are primarily emotional creatures and behave accordingly.

That is why most people make so many dumb choices with their money even when they know better.

We are all hardwired that way ... but that doesn't mean you're doomed to screw up forever!

Break the Cycle

You can overcome this hardwiring ... if you choose to.

It has to be a conscious choice, though.  It won't just happen.  The whole process of breaking out of the cycle starts with awareness.  You can't fix a problem until you know that the problem exists.  So before we address the "Price vs Value" question, a little background in behavioral finance will be helpful.

You Better Take Notice

Spending money feels good.

Like any reward, the anticipation of buying something you want releases dopamine and other "feel good" drugs in your brain.  The bigger the reward, the more powerful the drug cocktail that comes with the thought of getting it.  This becomes an addiction as your brain is looking for more excuses to release more of the feel-good drugs.

That is why we refer to many spending habits as "retail therapy addictions" and most people have more than one.

It is this constant pursuit of a "fix" that keeps most of us from saving money and building for their future (the thought of which creates a much less potent and completely different chemical reaction in the brain).

As a result, in most cases with most people, if you have more money, you will spend more money.  It is also the reason that most people DO NOT make money on their investments.  The Cycle of Emotion takes over and encourages the average investor to "buy high" when stocks are expensive and "sell low" when stocks are cheap (a good way to lose money and the opposite of what you want to have happen).

Price vs. Value - Financial Advice

The Price vs Value Debate is especially important when it comes to seeking and paying for personal financial advice.  The price tag has a tendency to be significant and the results (value) can range from hugely beneficial to critically catastrophic.

So here are some things to think about regarding your personal finance questions and how you find answers...

1 - Don't Get Hung Up on the Price

There is plenty of financial information available to you - through the web, books, classes, seminars and advice from friends, family members and professionals.  Some of it is good.  Much of it is not so good.  How do you know the difference?

You can't tell by the price.

Sometimes you get what you pay for.  Sometimes you don't.

This is especially true when it comes to "free" offers.  "Free" financial advice from someone who is selling a financial product is hardly free.  You are paying for that advice in the form of hidden fees and loads and that advice is also highly conflicted.  It may be something good for you.  It may not.  In my experience, the more hidden the "costs" of the advice, the more likely that the person who will benefit most from your purchase of the product is the salesperson, not you.

Likewise, I've heard plenty of people complain that they won't pay $250 per hour for financial advice because it is just "too darn expensive."  If the value you get in return for that $250 is less than $250, then it would be pretty silly to pay for that advice.  On the other hand, if the value you get back is worth $1000, then that $250 looks like a nice investment.

2 - Understand the Value You Are Supposed to Receive

The most important person in your life is ... YOU!

It's OK to ask the question, "What's In It For Me?"  You may try to stifle this question in order to be a good citizen or family member or look good to those around you, but your basic, most primary brain functions are processing this very question at lightning speed.

Humans are primarily emotional creatures, not rational.  It is best to accept this fact and appeal to your inner ego.  Look at each situation and ask yourself, "What POSITIVES do I get out of getting this advice?"  Go ahead and ask the advisor, too.  Their response will tell you a lot.

--- Knowledge is good, but it isn't particularly motivating.

--- A specific sum of money at a specific point of time in the future can be easily tracked and progress can be monitored.  This is better, but still is not particularly motivating.

--- Less Stress and Fewer Worries - now there is something your emotional brain can really latch on to.

--- More of the Things That are Important to You - While this does not use the exact same parts of the brain that "retail therapy addictions" or your fight-or-flight centers (less stress) use, focusing on these "values" can have a wonderfully positive effect on your emotional state as well as the security of your family's future.

CAUTION - The most common sales technique is to get you in touch with your pain - to a point that you feel it - and then to position their product as the cure for that pain.  Be very wary of this technique.  Success (and Wealth) come from following a Process, not from buying a Product (the topic of anther blog post).  If a product is being offered as your salvation, you are working with a salesperson, not an advisor.

3 - Determine Your Rate of Return For Each Option

Now you have most of the variables of the Price vs. Value equation.  You know the price.  You know the value you are supposed to get in return.  Compare the two.  If the cost is high but the value you get back is higher, then you are likely in a good place.  If the cost is low, but the value is lower or zero, then don't bother.

If the solution offers intangible but emotional benefits, it is up to you to decide what value you place on those benefits.  Normally speaking, doing more of the things that are important to you and cutting away the things that cause you stress and worry are of benefit.  What monetary value you put on these is function of your current situation, age, health and other factors that nobody understands but you.

4 - Pick the Best Option for You

Hopefully, you will be given choices.  If your advisor knows what they are doing and is really interested in doing what is in your best interests, they should give you multiple options and allow you do decide where you expect to find the "biggest bang for your buck."

5 - Look For a "Risk Free" Guarantee

Sometimes it is very difficult to take that leap of faith and work with someone you don't know or aren't sure about.  This is especially true with financial advisors when you have to pay for that service.  How do you really know you are going to get your money's worth out of the situation?

The answer is to look for a "Risk Free" Guarantee - an agreement in writing that if things don't work out, you will get some or all of your money back.  Usually this trial period covers the first few hours of work.  It gives you a chance to work with the advisor and see how you like their process (remember, financial success comes from a process, not a product).

Most of the time, you will have made a good choice and everything will work out as you expected.  Every once in a while, you will find that it wasn't such a "good fit."  When that happens, both you and the advisor should be able to part ways.  You get your money back and agree not to use or sell anything that they gave to you.

This Risk Free Guarantee is part of every one of our advisor agreements, from the inexpensive Wealth Health Workshops we run all the way up to full-blown financial planning advisor agreements.  It rarely gets exercised, but it does happen from time to time.

And believe me, when it does get exercised it is a relief to BOTH parties.

Good Luck In Your Search

I truly believe that seeking out professional financial advice from a fiduciary advisor is the best decision you can make towards living a richer and more fulfilling life.  Then again, I am biased in that opinion since that is the work that I do.

If you choose to work with a financial advisor, I hope they are professional and do operate under the ethical standard to doing whatever is in your best interests.  If they are doing this, I also hope you will pay them something for their time, education, experience and perspective.  This is how they have chosen to pay their bills.

If you do choose to do it yourself - and for some people that is an excellent choice, may I recommend starting with the books and resources cited on our Bookshelf.  You are still paying for advice, but the costs are lower and the recommendations in these books are viable.

If you would like to make a comment of anything in this article, you are free, welcome and even encouraged to do so below.  Thanks for reading.  Until next week.

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Last Updated on Thursday, 17 December 2009 00:59