Beyond Rates of Return

Interest-rate-liesIn my conversations with advisors, I get all kinds of questions relating to the potential returns of financial vehicle “A” (investment, savings vehicle, insurance policy or property) versus financial vehicle “B.”

Of course, that's what financial software DOES, yet sometimes, it seems we don't have all of the factors – numerical and otherwise – in the equation. At times, advisors become too focused on the trees to see the forest. (This is especially important when there is a threat of a forest fire!)

Truth Concepts calculators excel at helping advisors compare the numerical returns of various investments. For those who want “the whole truth” about money and how financial strategies really perform – all things considered, such as taxes, fees, even opportunity costs – our calculators are invaluable.

Still, any financial software is limited in scope. And often, we're not comparing apples to apples, especially when we're trying to compare financial vehicles from different asset classes. This is why investors need good financial advice… and good financial ADVISORS!

Are you (and your clients) seeing the BIG PICTURE?

Calculators can compare the historical or anticipated returns of an investment, but they aren't effective when it comes to:

  • comparing the potential risks that an investor may be taking;
  • measuring the liquidity of an financial vehicle – or the value that liquidity holds for the investor;
  • explaining the difference between saving and investing – and why both are essential;
  • predicting future political events and the impact they may have on a market or investment;
  • measuring the impact of stress on the well-being of investors whose assets are subject to volatility;
  • evaluating the amount of control an investor may – or may not- have over their dollars in any given environment;
  • advising a client why “return on investment” isn't everything.


The ROI Illusion

Businessman dollar visionMy wife, Kim Butler, refers to “The ROI Illusion” in a blog post, which she defines as “a mistaken belief that nothing matters except for rate of return.”

The ROI Illusion leads to the advice that investors should always pick the investment they believe will get the highest returns, and everything will work out.

After all, if nothing matters except for rate of return, then fees, taxes, liquidity, control, safety, the ability to leverage and other considerations aren’t understood to be as important as ROI.


But advisors know this is not true.

Focusing on ROI alone leads investors to feel they “must” risk their assets in the stock market. Of course, this is another area where a good advisor comes in very handy… to show how little benefit – if any – risky investment behavior might be bringing them.

In a article by Michael Markey, “The dangerous lie Dave Ramsey tells about cash value insurance,”  we learn that our favorite anti-hero considered neither the ROI nor the big picture when telling a couple to cash out of their life insurance policies and put the money in the stock market. (Why am I not surprised!?) Even if the money succeeded in earning 12% every year (Dave's often-quoted over-optimistic assertion of what people will earn in the stock market) they would not quite match the guarantee of the insurance company.

We've got to help our clients SEE the Big Picture of their finances. It's the second principle of the 7 Prosperity Principles of Prosperity™, which Kim uses to help clients change the focus of the conversation to factors besides just ROI. (She explains all seven in this interview with Steve Savant, “The New Prosperity Economics.”)

Of course, ROI is also important, it's just not “everything” – especially when it is based on speculation, or when the client does not have adequate savings in place.

Don't be like Dave (I know you won't), and don't fall for the ROI Illusion – or let your clients do the same. As we crunch numbers, let's all keep the big picture in mind.