How something you might not know costs you thousands, and what you can do about it

By William Cowie

Published: Wednesday, Feb. 12 2014 4:33 p.m. MST

It’s no surprise that, after a decade or two of following this system, America has one of the highest-cost health care systems, with one of the worst in terms of outcomes. It’s also no surprise that their combined lobbies pushed for Obamacare, which simply takes that system, offering the same policies as before, but forcing everyone to buy.

But wait, there’s more

Speaking of CEOs and their skyrocketing compensation packages, that’s another face of agency theory in action. Boards are supposed to represent stockholders and keep compensation to CEOs to the minimum needed to get the job done. However, CEOs stock the board with other CEOs and together they embark on a strategy of back-scratching: “I’ll approve a raise for you if you do the same for me.” Again, the agents look out for themselves first, at the expense of the people they’re supposed to represent.

Well, this is interesting and fine for a good after-dinner rant or two, but how does it affect you (other than paying more for your health care)? In a general way, it’s a warning to beware of assuming others will do well by you just because you pay them to protect your interests.

Take real estate agents, for example. When you sell your house, your Realtor will tell you that your interests are aligned: He gets more money if he pushes for the maximum price for your house. That’s good theory, but it doesn’t necessarily work in practice.

Here’s the math:

Let’s say you want $400,000 for your house. Normal Realtor commission is 6 percent, split between two agents. If your agent works for an agency, they will usually take half, more or less. That means your agent makes 1.5 percent, about $6,000 on the sale of your house. Another $10,000 for your home would only put $150 more in his pocket, but it would take a lot of extra work to get that $10,000 for you. Which do you think he’ll push for: a quick sale so he can move on to the next $6,000, or the heavy pursuit of another $10,000 for you … for $150?

You may do better if you:

  • Stick to your guns on your price, especially in the seller’s market we seem to have today.
  • Pick an agent who’s a one-person show and, therefore, gets to make $300 extra for that extra $10,000.
The bottom line is if you totally abdicate, it most likely will cost you tens of thousands of dollars. They may make it sound like they know everything and you know nothing; but if you get involved, you might learn enough to make sure they don’t trample all over your best interests.

Another example comes from the world of financial planners. Nothing against them as individuals or as a group, but their best interests are not always directly aligned with yours. It is tempting to hand your money to someone else and expect them to get the greatest possible return for you, or at least more than you could earn yourself. You have to know that, although they may indeed pursue good returns for you, their first priority will be their own well-being … not yours.

Abdicating responsibility for your money can be very expensive, without your even realizing it.

As stated in the opening, we live in a society where we parcel out almost everything we do, from mowing the lawn to selling our home. In ivory-tower terms, we use agency theory every day.

If you understand agency theory, you may be surprised at how many ways you can make or save money. (Oh, and by the way, it is always better to invest than to complain. After the passing of the ACA, I shifted some of my investments into health care stocks. They’ve outperformed everything else in my portfolio.)

You have the option of involving yourself to a greater or lesser degree in all areas affecting your wealth. The point of this post is understanding that your cost for subbing out a service may be more than the cash you pay for the service.

In general, the more you involve yourself in anything, the bigger the payoff. That time and effort can put cash in your pocket.

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