Can, Should, Must

New rules from the Municipal Securities Rulemaking Board (MSRB) require brokers who sell municipal bonds to retail investors to disclose the markup or markdown.* Investors will likely have a strong emotional response: Are you being proactive in the conversation?

The Problem with Procrastination

Some advisors are doing nothing, hoping that the regulations are reversed or in some way reduced. They’re procrastinating: putting off an action that should be done today. In many cases, procrastination is harmless, and waiting for greater clarity or until you’re closer to an event is an appropriate strategy.

Other times, waiting can reduce a person’s options and increase the likelihood of bad outcomes. Think of it as the forest-fire problem: many homeowners choose to put off evacuating until they’re certain an approaching fire will impact their homes (Display 1).

If the fire remains at a distance, the brain focuses on more immediate matters. As the fire moves closer, the brain shifts gears and stimulates protective activity. This shift is like crossing a threshold: nothing happens until the fire gets too close for comfort and the brain signals an urgent need to act.

Nobel Prize–winning economist Daniel Kahneman’s research revealed that the human brain does a poor job of making these kinds of decisions. In his 2011 book, Thinking, Fast and Slow, he notes that “the decision weights that people assign to outcomes are not identical to the probabilities of these outcomes.…Outcomes that are almost certain are underweighted relative to actual certainty.”

This explains why many advisors prefer to wait, hoping that the new regulations will be reversed: their brains haven’t crossed the threshold that demands action.

An Ounce of Prevention Is Worth a Pound of Cure

The right time to act is when you still have a lot of choices, not when you must act and have fewer options.

The new transparency regulations can have a devastating impact on client relationships. Think about their implications proactively and analytically. The prudent decision-maker will cross the decision-making threshold much earlier in the process, at point A, not point B (Display 2). She will act when the future is uncertain but there’s still time to act.

President Theodore Roosevelt offered a good rule of thumb for avoiding flawed decision weighting: “In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.”

*Municipal Securities Rulemaking Board, New Disclosure Requirements Under MSRB Rule G-15 and Prevailing Market Price Guidance Pursuant to Rule G-30 Effective May 14, 2018 (November 29, 2016).