On radio recently I was asked “what’s a good investment”. I’ve been asked that a lot because of my background*, so it doesn’t faze me. But this time I’d spent the previous ten minutes explaining that it was the wrong sort of question!
Which can be an issue with coaching – do you try to direct clients (or interviewers), or do you let them find out for themselves (eventually)? And does giving direction (when you’re trying to be non-directive) include answering questions that you know are too general that try to get you to tell them what to do?
It’s about getting people to ask ‘smart ‘ questions!
Direction, direction, direction
It’s not that being directive with a coaching client is never appropriate. It’s just that immediately directing them to an answer is fraught with problems. General answers are usually wrong, and even (actually, especially) with expert knowledge, it’s easy to give a correct answer to the wrong question.
It’s better to do a lot of definition, then to direct them to the right questions. It’s not that the right answers are necessarily “inside them” so they have any chance of finding the best solution for themselves, or that your expertise and direction isn’t required.
It’s that many smart questions are about what they really want, when, what resources they have (which affect how), who they are and how they operate and most of all, why they are asking and what they hope to achieve. When you know all that (and so do they), then giving them direction about possible answers to key questions might be the best thing you can do.
Examples of this question dilemma!
As with “what’s a good investment”, clients can ask for a value judgment in a vacuum such as “how can I be better” or “what’s the best way to do X”.
That sort of question assumes that there is a single direction of “bad, tolerable, good, better, best”, a universal Likert scale.
It’s tempting to answer, particularly if you are a subject expert. Everybody likes to be asked their opinion and feel respected. But it’s dangerous.
Because my “specialist subject” is finance, I’ll use examples from finance, but you can substitute anything, sport, relationships, business, whatever the topic on which clients ask you to give absolute, directive answers to vague, context independent questions.
Example 1. What’s the cheapest way to borrow money?
This is a corollary to the common “expert” statement that nobody should take out a payday loan. The cheapest way to borrow money is probably the bank of mum and dad, but that may not be an option. Cheapest might be to extend the mortgage because secured lending is usually cheaper. But it depends.
So I could give the “expert” answer and talk about mortgages, secured and unsecured loans, APR (and between APR and AER) and sound knowledgeable. But that doesn’t help the client, who doesn’t realise their question is meaningless and that they won’t remember any of the three hour lecture I could give them about their options.
So I’d point them to the questions such as, what is the money for and why do they want to borrow. Maybe they don’t really need it, or if they do, don’t need to borrow, they can save up or economise on something else. If they do need it, and need to borrow it, when do they need the money, can they pay by interest free instalments, defer payment etc. The point is that the context is all, so until I’ve asked why, what, where, when, who (and pretty well any other question I can think of), I’ve not really got a good picture of the context, so any answer I give is likely to be wrong.
What I’m trying to do is generate options. I may not need to give answers at all, the client works out what to do. For example, most people, given enough context and the right questions, can work out for themselves not to take out a payday loan – but still millions take them out each year despite admonitions not to. If I do need to give an answer, I can give one based on the precise requirements of what cheapest means in the context of the actual situation.
Example 2. Should I save more for pension?
The answer’s probably yes! Again, an “expert” will answer with “80% of people don’t have enough for pension”. They might even quote statistics about how little the average person will have to live on in retirement. But the client isn’t an average person (for a start they don’t have 1.8 children, live in a 2.6 bedroomed house or earn precisely £26,679 p/a).
In order to save money, people have to avoid spending it. Sounds simple, and it is. And a common saying is, “save first, you can spend what you’ve got left after you save, but you can’t save what you have left after you spend, because there will be nothing left”.. We all know it would be good to put away money for a rainy day, that’s a no-brainer. But when we’ve got cash in hand (or that substitute, a credit card) the money just goes and we’re surprised that it’s gone.
So you follow the advice to expert “set up a standing order to savings for the day after your salary hits your bank account”. Which is fine, in theory. But theory doesn’t give the right question. In reality, the savings money goes out, then the bill payments and then normal spending takes place. And the account goes into overdraft. The theory is that after a month or two, the spending decreases, but the fact is that the spending continues, but on credit card. So we get the situation of several thousand households in the US in 2002 with average savings of $5,000 and average rolling credit card bills of $3,000. Sure, they’ve saved money for a rainy day. But they’re getting 3% on the savings and paying 23% for the borrowing, so it’s costing $600 a year to feel that they’re smart for following the guru’s advice!
The question isn’t, “should I save more”, that’s a pretty easy one to answer (whether you’re an expert or not). It’s questions like why, how, what, and what for, about the money that’s going to be saved, and why, what, when etc. about the purpose of the saving that are relevant.
Example 3. Is property a good investment?
An “expert” answer could be, yes, it’s got a potentially great return. It could be, no, try selling a property over a week-end if you need the money in a hurry. So it’s a meaningless question, but every presenter on the apparently endless collection of identikit property programmes is keen to give the answer.
And on your specialist subject, it’s easy to get sucked into giving a context independent answer. The reality is, like just about anything, property as an investment has good and bad points** So the key is to ask about the specifics to find out why, how, when, what and so on.
But wait, I hear you cry. What about your own house as an investment, surely that’s great, it has tax advantages as well, so much so that most of the property programmes are about making money on your home.
Imagine your client intends to follow the route of maximising their mortgage to buy a bigger house than they really want as an “investment”. There’s no downside, if they can afford the payments, is there? OK, try these.
It’s more expensive, so it’s bigger than you need, it has local schools you don’t use as you don’t have school age children, it has things that you don’t really want, but other people do so the demand has pushed up the price. What has made it expensive is non-essential for you. You’re paying a bigger mortgage than you need to buy a house you won’t use fully, so if you are ill, lose your job etc., you’re in trouble.
You figure it is making you money. By the time you sell it to realise your profit (assuming it has gone up, a potentially big and questionable assumption) you’re used to having the extra space, the convenient shops and schools, the location etc. (the things that made it more expensive than you needed) and you can’t bear to part with it (humans adapt quickly to change going up and slowly going down). So you’re locked in. You can’t sell it fast if you need to realise any profit you have made, so even if you cut the price by a huge amount, you’ll still be lucky to complete within a few months – fancy waiting that long for an expensive operation? You decide, or need, to move, just when the next Northern Rock happens, and house prices have plummeted, oh dear, so much for property prices can only go up.
And of course if they have gone up, everything else has gone up too, so you can’t get as much profit as you thought, unless you go and live in a tent.
Does that suggest any potential downsides at all? And does it suggest any useful questions to edge towards how directive you should be?
Which is where your expertise in your field (sports, management or whatever) really comes in. It’s not in answering the questions the client asks and directing them to a generic answer. It’s in knowing the pros and cons, and being able to direct them to the right, smart, questions to help them decide on the right question, and answer for them.
Coaching, at its best, gets to the heart of this issue. As long as the Coach is also committed to getting the Coachee to ask the smart questions. And the Coach can resist the temptation of setting the agenda!
To connect with Kim:
Kim is a former financial advisor and an Associate of the Chartered Insurance Institute (hence the interest in costs, ROI etc.) and now a Chartered Psychologist, coach and tutor/assessor in neuroscience. He’s written two books on the psychology of personal finance and can be contacted on firstname.lastname@example.org or via the website, www.tamingthepound.com.
- I used to be a financial adviser and the exams I did in 1993 only became compulsory for advisers in 2013 – I just like being good at what I do!
- Finance is Personal http://www.amazon.com/Finance-Personal-Making-College-Beyond/dp/1440834369 has a chapter on investment, showing the pros and cons of different options.