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The proliferation of choice in recent years has given consumers more and more financial options, from choosing a 401(k) investment to selecting a long-term care insurance policy, or even identifying a financial planner to work with. While on the one hand the flexibility of choice is appealing, recent research suggests that in reality too many choices may make us so fearful of choosing poorly that it leads us to not choose at all; in other words, the more choices we have, the less likely we may be to select from any of them.

This so-called "Paradox of Choice" has significant implications for financial planners. On the one hand, it presents an opportunity to deliver value to clients by helping to narrow down and simplify the choices, or at least provide them helpful indicators about how to make a selection from amongst a wide array of complex options. On the other hand, it seems that some financial planners may be creating a Paradox of Choice for clients, sometimes by providing them with too many options about how to even work with the planner, instead of keeping the business model simple with a clear value proposition that clients can just take or leave.

The good news is that with some conscious focus, financial planners really do have an opportunity to create value for clients by helping them avoid "analysis paralysis" and drive forward to decisions and actions that improve their financial lives. But getting there may require us to collectively embrace the inherent irrationality we all have, and recognize that in many situations - including what we offer to our clients and how we help them - that offering more may lead to less, and focusing on less may lead to more.

The Paradox of Choice

The concept of the "paradox of choice" emerged from an interesting study published in 2000 by Sheena Iyengar and Mark Lepper in the Journal of Personality and Social Psychology entitled "When Choice Is Demotivating: Can One Desire Too Much of a Good Thing?" In their research, Iyengar and Lepper demonstrate in a series of research scenarios how having a wider range of choice - something we generally assume is a good thing in our society - actually led to a lack of action instead. For instance, students invited to write an essay for extra credit were given the choice of 6 or 30 potential essay topics to consider; in another version, consumers at an upscale grocery store were presented with a tasting booth that offered either 6 or 24 different flavors of jam. In the jam experiment, 60% of those passing by decided to stop by the 24-jam assortment, while only 40% found interest in the 6-jam offering; the variety of choice was appealing. Notably, though, even with more choices, all people from both groups only sampled 1 or 2 jams, regardless of the depth the offering. And in perhaps the most shocking part of the study, when it came time to buy, there was a remarkable difference: 30% of those at the 6-jam table ultimately made a purchase, while a mere 3%(!) of them did so when they visited the 24-jam offering. The bottom line: a wider array of choices may seem appealing at first, but it may have a drastic negative impact on subsequent follow-through.

This phenomenon was dubbed "The Paradox of Choice" by Barry Schwartz in a book of the same name released in 2005. And as Schwartz noted - citing another part of Iyengar and Lepper's research - it's not just that we can find an excessive array of choices debilitating to our decision-making process, but that when we choose from the simpler menu of choices we actually feel more satisfied and less anxious about the decision. The underlying implication is that when presented with "too many" choices, we feel so uncertain about how to proceed and avoid making a "bad" choice, that we'd rather make no choice than risk regret. And ironically, Schwartz suggests that the more focused someone may be on perfectly maximizing the outcome of their decision, the more paralyzing choices can become, as the maximizer feels compelled to evaluate them all before making a decision.

Financial Planning Decisions And Choices

The Paradox of Choice presents an interesting framework to understand why consumers may have such difficulty with many of the financial planning decisions with which they're presented. The research suggests that, despite the fact we find choices and options more appealing initially - the 24-jam table did attract more visitors than the 6-jam table, after all - we may be creating a problematic situation for ourselves by adding in so many (too many?) choices.

For instance, the choices of investment options inside 401(k) plans have proliferated in recent years, even though there's little evidence that a longer list of options is a better incentive for people to participate; in fact, Schwartz notes a study finding that every additional 10 mutual funds in a plan reduces participation by 2% (even overwhelming the benefit of taking advantage of free employer matching contributions!), and the recent addition of automatic enrollment as a form of financial planning "nudge" appears to be driving far more of an increase in 401(k) participation rates than the past two decades' worth of an ever-widening of investment choices. Similarly, changing the default investment option in 401(k) plans to target date funds is proving to be far more effective at getting participants into diversified portfolios than just giving them more diversification options to choose from, where a disturbing number over-allocate to cash or to equities according to recent data from Vanguard (whether target date funds themselves are quite the optimal fund design is a discussion for another day!). And As I've pointed out in the past, it's possible that we won't be able to fix our retirement crisis until we acknowledge these kinds of irrationalities and work within and around them.

Fortunately, until we "fix" the system, dealing with the paradox of choice is something the financial planner can help with quite a bit; in fact, arguably one of our key roles is to help clients simplify the potentially numbing array of choices, assist them in understanding the potential trade-offs from a reduced list of options, and finally work with clients to implement whatever the decision ultimately is. On the other hand, when viewed from this perspective, it's important to note that planners themselves may need to be cautious in presenting too wide an array of choices or decisions in front of their clients, as doing so - especially in a high-stakes situation like "your financial future depends on these financial planning decisions" - could ultimately get clients stuck in "analysis paralysis." At the least, if the planner is going to present a series of choices, it may be important to not only help illustrate the potential trade-offs, but guide clients in what factors should be considered most important in crafting a decision and help them prioritize; in other words, don't assume that in a situation with complex choices, that clients will automatically know the right factors to prioritize in coming to a decision.

Choices in Your Financial Planning Business Model

The paradox of choice is not only an issue in the context of helping clients to make financial planning decisions; it's also relevant in the choices presented to them in the process of hiring a financial planner in the first place. 

For example, planners should be very cautious in presenting to clients a wide array of choices about how to work with or pay for the planner. While it might seem appealing to offer hourly planning, and a comprehensive financial plan fee, and an AUM option, and a retainer option, and perhaps a partial commission or commission-offset choice as well, the paradox of choice research suggests that this may actually reduce the likelihood that the client picks any of the choices; instead, the client may be paralyzed in the process of trying to analyze each option to figure out which, exactly, will turn out to be the cheapest, and if the decision is too complex it may just be easier to move on. Or viewed another way: adding more choices for ways a client can work with you may get you fewer clients than just giving them one simple choice to take or leave!

However, this doesn't necessarily mean that you have to offer only one precise service for one precise type of client (although as noted previously, such a niche focus may actually further help attract new clients). Segmentation of the business; offering distinct and different services/models for different clients doesn't introduce paradox-of-choice concerns, because a particular client still only has a simple choice whether to take or leave a particular model/service. For instance, you might offer comprehensive financial planning and investment management on an AUM model for all clients who meet your asset minimum, and a modular hourly-financial-planning-only offering for those who don't meet your AUM minimums; but clients below the minimum can only choose the hourly option, and clients above the minimum can only choose the AUM model.

Notably, the rising popularity of simplicity extends beyond just the financial services world; Google is notorious for insisting in simplicity and avoiding a confusing array of choices and decisions to make when utilizing their products, and the success of Apple and most of the devices they've created in the past decade similarly support the theme. In point of fact, a common refrain from many planners is that one of the primary reasons their clients work with them is specifically to simplify their lives, especially for those transitioning into retirement.

Yet notwithstanding the role that planners can play in simplifying their clients' lives, we also have a tendency to celebrate greater choice in all its forms; understandable to some extent, as from our perspective a wider range of choices means greater flexibility in crafting solutions for clients. Which means we need to be very cautious to find a balance between choices for ourselves and clients, and figuring out how to translate those choices into actionable decisions and craft effective recommendations that recognize sometimes our clients aren't exactly paragons of rationality. Otherwise, we run the risk of just adding to the paradoxes of choices our clients face, rather than helping them solve it.

In the meantime, if you want some further food for thought on the Paradox of Choice itself, how to make better decisions and minimize regret and unhappiness, check out Schwartz' "The Paradox of Choice" book, and/or his TED speech below. 

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  • Jim Davis


    Very good points. Along these lines we tell prospective clients up front that there are literally a 1,000 combinations of how their finances could be affected and our job is to narrow it down to the 2 or 3 best scenarios for that client and then put a gameplan together to make it so.

    They get it and understand the process in this light and are willing & able to move forward.

    jim davis

  • financial planning Melbourne

    Financial planning is the base of financial freedom for the life after certain point of life. People have different choices for that and it also depend on the situation as well as the liabilities of the person and that is the challenge among people to do a proper financial planning while taking care of their responsibilities so well.

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Michael E. Kitces

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.

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