Tuesday, July 10, 2012

Fear about Large Sums of Money

There is a curious paralysis that hits people when they are forced to make decisions about large sums of money. Very frequently, they end up making the default choice that involves no action at all. But these same people will throw themselves into decisions about small amounts of money with zeal.

The most frustrating example of this for me occurred in 1994 when the government eliminated the $100,000 lifetime capital gains exemption. The government was allowing people to file an election with their 1994 taxes to treat capital assets as though they were sold so that they could use up some of their capital gains exemption before it disappeared. By doing this, the adjusted cost base of the assets would be higher and less tax would be owing in the future when the assets were sold (or deemed to be sold).

Three elders in my extended family shared ownership in a cottage. I carefully explained all this to them. I even tossed in some emotional stuff: “if you don’t do this, when you pass on the cottage to the next generation, they may have to sell it to cover the taxes owing.” They all seemed to understand what was at stake and the fact that it would cost them nothing right now.

I learned later that none of the three of them ever filed the election. Tens of thousands of dollars were at stake and they did nothing. Yet they continued to squabble over who had paid how much for various trivial cottage repairs.

I saw another example of this odd behaviour when I worked for a small company that was being spun out of a larger company. At an all-hands meeting to discuss all forms of compensation, there were no questions about the biggest parts of compensation: salary and stock options. Even the savings plan generated few questions. The bulk of the discussion was about the dollar limit on eyeglasses coverage in the benefits plan.

It’s no wonder that the bulk of financial advisor time goes into chasing down prospective clients. It must be difficult for advisors to make time for working on financial plans when they have to spend so much time making people face up to big financial decisions.


  1. I realize you wrote that last paragraph tongue-in-cheek, but sometimes it has taken almost two years to get prospects to finally move on their finances. In fact, I now have a situation where a business owner is sitting on $6 million in CASH (earning zero interest). At the very least this cash could be invested in GICs or a high-interest savings account. Talk about paralysis!

  2. @David: $6 million in cash is an extreme case, but it doesn't surprise me. From what I'm told, financial advisors really do spend the bulk of their time looking for clients and persuading them to act.

  3. @Michael: That is correct, but it's probably limited to advisors who have been in business for only a few years. A first-class advisor should have a large, happy client base that constantly provides introductions to friends and family.