December 19, 2009

The Gift of Networking

It isn't just what you know, and it isn't just who you know. It's actually who you know, who knows you, and what you do for a living.
--- Bob Burg

No cost. No pollution. No limits. Networking makes a perfect gift. As with gardening, you harvest what you plant and nurture.

Are you committed?

Our son wanted a pet chinchilla when he was three. We got him a Tamagotchi (a digital dog on a keychain). Like a real animal, this pet required food, cleaning, rest and attention. Too much work for him. The digital dog soon died of neglect. Lesson learned. No pet.

It's easy to start networking online
  1. join: pick LinkedIn, Facebook or Twitter, your choice
  2. lurk: see what others do so you'll blend in
  3. participate: help your network now and into the future
The challenge is sticking with it.

Like an Elephant
Like an elephant, the Internet never forgets. Your online activity leaves a permanent trace. So you're wise to think of the implications of your messages
  • don't say something that would offend you, a family member, a potential client or a potential employer
  • don't send something unless you're in a proper frame of mind; it's too easy to misinterpret others and too easy to be misinterpreted
When You Mess up
Despite your best efforts, you'll make mistakes. Some people go out of their way to find ways to get offended. If you've established a history, you'll have credibility with the rest. They'll be more forgiving. Plus the volume of your activity will bury the inappropriate statements.

The Science of Giving
The currency of real networking is not greed but generosity.
--- Keith Ferrazzi, Never Eat Alone
Give for the sake of giving. Give to make the world better. Your generosity will change you forever. If that's not reward enough, give because your network will reciprocate if you need help. Is that hard to believe?

Dr. Robert Cialdini explains why reciprocity works:
It becomes possible for one individual to give resources to another without giving them away. What you get instead is a credit. When you need something, you can call on other members of the group who you have helped in the past and they are very willing — in fact, they are waiting — to help because the saddle of obligation weighs heavy on us.
We want to repay our debts. We want to give back to others who have given to us.
--- Dr. Robert Cialdini
Caution: Build Then Invite
How would you feel if you visited a new store with empty shelves? Build your destination before opening the doors. On Twitter, this means having several tweets. On LinkedIn or Facebook, have a reasonably complete profile with your photo and the basics about you. Be sure to add the details later. You'll now make a stronger impression when it matters most: the first time.

Now find out who else you may know on the network. This is easy. Just upload your contacts and inform suitable ones. If they don't respond, be patient. You gain nothing by pestering them or feeling offended.

The best way to network is to start. Now. You don't need to wait for spring.

Final Post of 2009
The best to you and yours during the holidays.
May 2010 give you what you yen!

Podcast Episode 48 (4:46)

December 12, 2009

The Three Ways to Make Money (Without Winning a Lottery)

You can be young without money, but you can’t be old without it.
--- Tennessee Williams

There's more to life than money but money is an important part of life. How can you make more?

Here are the three ways
  1. be efficient (catch more fish)
  2. be effective (catch bigger fish)
  3. be creative (keep more of each fish)
We'll explore each.

Be Efficient
A rich man is nothing but a poor man with money.
--- WC Fields
Do more of what you're already doing and you'll get more of what you're already getting. Picture an assembly line.

You can work more hours. Your rewards won't grow in exact proportion but will improve until you're not getting enough sleep or spending enough time with your family. If you're on salary, you can still work longer but won't get much for it. Would you get better returns by investing the extra time in improving yourself?

You can also do more with less. Maybe you can reduce your costs by using more technology. Picture Wal-Mart.

Be Effective
Money can't buy happiness, but neither can poverty.
--- Leo Rosten
You can specialize. You target specific markets and discard what doesn't fit since those are distractions. Your costs may increase but your revenue goes up even more. If you're after a particular kind of fish, you must return other fish, no matter how they tempt you.

Think of Ghostbusters. Who you gonna call when only the best will do?

When you invest in yourself, you multiply your financial rewards when you push through the dip and apply the 10,000 hour rule.

Each of the approaches above has merits. One is not better than the other. Each works alone or together.

Be Creative

Money frees you from doing things you dislike. Since I dislike doing nearly everything, money is handy.

--- Groucho Marx
Keep more of each fish. Reduce wastage. Can you keep more of each dollar you earn? Financial literacy and tax planning helps. You can't change the tax rates but maybe you can increase your tax deductions to achieve the same result.

Podcast Episode 47 (3:12)

December 5, 2009

The Power of Redundancy

It looks like being a busy weekend on the ferries, particularly Saturday and Sunday.
--- Peter Powell

Go see it and see for yourself why you shouldn't go see it.
--- Samuel Goldwyn

What do you do when things break? Without a "Plan B", you're stuck or subject to expensive rush repairs. Even if you buy extended warranties, you'll pay in time lost. Enter redundancy.

These days you can get cheap peace of mind by having an extra fridge (mini or full-size). You may not have an extra washing machine but can use a laundromat. If your dryer breaks down, you can air dry your clothing. If the microwave oven breaks, you can use a regular stove --- if you remember how.

What about technology? Let's look at your phone, Internet access and computer. How can you reduce the stress of them breaking down?

Your Phone
If the wire-to-your-home phone line doesn't work, you can use your mobile phone. Even kids have them these days. If you're single, you may not even have a home phone. What happens if your mobile phone breaks or gets lost? I feel you shudder. Have you got your contacts backed up?

Maybe you can redirect calls to voicemail or another number. Skype can help you make calls. For $2.95 US a month, Skype Unlimited gives you 10,000 minutes of calls to phones in the US or Canada (landline or mobile). There's a limit of 360 minutes per day. This is also a cheap long distance plan.

Internet Access
We just cancelled our cable since we watch so little TV. We don't have satellite either. Last time we did this, Jeevan was about six years old and the service ended abruptly during a rerun of Scooby Doo. He was so angry. Tears poured and fists flew. This time, no one cared.

We wouldn't dare cancel Internet service. If anything, we'll upgrade from 10 Mbps to 25 Mbps. Maybe even to 50 Mbps.

If your Internet service stops working, what do you do once you stop convulsing and colour returns to your cheeks? You wait. Maybe you can get by with Internet access on your mobile phone. For a home office, that won't do. We had WiMax as a backup. More recently, we switched to a mobile Internet stick from a different provider. That's double redundancy.

Your Computer
When you get a new computer, why not keep the old one? The old equipment can easily handle simple tasks like accessing the Internet. You can even use different computers for different purposes. Here's my setup using notebook computers:
  1. work (14"): to be replaced
  2. home (17"): workhorse
  3. mobility (10" netbook): go anywhere and for most email
Older computers can be cascaded to other family members. An older 12" notebook is used for web surfing.

With all this equipment, there's plenty of redundancy. We're functional if anything breaks down. Data is backed up on a home LAN, encrypted portable hard drives and now online too.

Rather than worry about breakdowns, you can get cheap insurance by having extras. After all, you probably have more than one slotted screwdriver.

Podcast Episode 46 (4:15)

direct download | Internet Archive page


November 28, 2009

What happens during a paramedical exam for life insurance?

When you apply for life insurance, your health (both medical and financial) gets evaluated. This process starts with data gathering.

What's needed depends on your age and the amount of coverage. The requirements usually show on the life insurance projection you signed when you applied. Depending on your answers and test results, more investigations may be required.

The Nurse
A nurse came to my home at the appointed time to conduct the tests. She was pleasant, efficient and experienced. She also works at a hospital. She asked many questions throughout. The process took about 40 minutes.

Sometimes, the insurer requires that your examination be conducted by a doctor of their choosing. To prevent conflicts of interest, you can't use your own doctor.

The Requirements
As with a normal medical checkup, the nurse collected the basics
  • measures your height
  • checks your weight on her scale
  • checks your blood pressure
  • asks about your use of alcohol, tobacco and drugs
  • asks about you use of prescription medication
  • asks about changes in your health
In addition, I provided blood and urine samples which go all the way to Kansas City for analysis. Why there? Who knows. You'd think local testing would be faster and cheaper.

I also gave
  • proof of identity with my driver's license, which has a photo
  • the name/address of my doctor
Past health affects future health. So you're asked many questions about yourself and some about your family.
Tip: When answering questions, pretend you're on the witness stand or at border security. Be truthful. Be concise. Be quiet. You gain nothing by continuing to yak.
A final question asks if any relevant information was not provided. Clever.

An EKG was also required because of the amount of coverage I was requesting. This does not take a visit to a clinic for testing with a huge machine. Now a small device the size of a paperback novel suffices. Ten electrodes were connected over my chest. I sat comfortably with my feet resting on a chair. The results were converted to sound and communicated to the analysis centre by telephone. The squeals reminded me of dial-up modems connecting. Or R2D2 in a foul mood.

Had the EKG identified problems, the test would have been repeated.

Ouch! The EKG sensors attach to your body like bandages with metal probes on the back. The application is easy but removal stings if you have a hairy body like mine. The nurse asked me to remove the three most toughest probes.

Initial Results
The initial results look good and mirror my executive physical four months ago. If the insurance underwriters don't agree, you face
  • more tests, or
  • higher premiums (a poor health rating costs you just as a poor credit rating does), or
  • no offer of insurance (you're uninsurable)
There's no charge for the examinations to you or your advisor. The insurer covers the entire cost even if you are declined for coverage or you decline to purchase the coverage.

Each party loses if you don't get insured. You don't get the protection you wanted. Your advisor doesn't get paid. The insurer doesn't get revenue to cover the costs incurred. Even so, the insurer would rather lose a small amount now than to pay out a large death benefit for which you paid too little. (See why insurers won't insure you.)

If the underwriting process uncovers medical issues, your advisor never gets the details. To protect your privacy, the results go only to your doctor and you. You can then see if you can take steps to restore your health through treatment or changes in lifestyle.

Podcast Episode 45 (4:48)

direct download | Internet Archive page

November 21, 2009

Get Results with the Process System for Planning Simply

Is it a process?
Is it a system?
It's the Process System!

Unless you love details, planning quickly gets boring. Especially as you dive down into the depths and turn the murky details into visible steps.

Planning can feel like a treadmill, but guess what? The better exercise treadmills have Quick Start buttons. You can get moving without selecting a program, confessing your age or admitting your weight. Why? Because moving forward matters most. The fine-tuning is not essential to start. A shark must keep moving to keep breathing. We must keep breathing to keep moving.

Enter the Process System for Planning Simply (PSPS). I've it used again and again year after year for many purposes. Don't take the name too seriously or worry about complexity. All you need is a blank page and a pencil. There's nothing to buy and no one to pay. We'll look at two examples: weight loss and saving for retirement.

Three Simple Steps
With the Process System, you answer three questions.
  1. What do you want?
  2. Where are you now?
  3. How do you get there?
These questions are great for consultants because they can be used in many situations. Let's dive deeper into each.

1. What Do You Want?
You start with your goal. In The Seven Habits of Highly Effective People, Stephen Covey calls this Habit 2: Begin with the end in mind.

Here's the dilemma: you can't know what you want until you know what's available (i.e., what's possible, even if it doesn't currently exist). For now, let's assume you know or can easily find out what you want.

2. Where Are You Now?
This is easy to answer because you look at cold, concrete facts. Example
  • for weight loss: factors like weight, blood pressure, cholesterol
  • for finances: factors like assets/liabilities, income/expenses
3. How Do You Get There?
This is the toughest part. The steps may look simple
  • reduce calories by a specified amount per week
  • increase savings by a specified amount each month
Knowing and doing are very different. This is where the nasty details enter. This is where discipline becomes required. You may be able to act on your own but getting support from a coach or others often helps.

When you're sailing, conditions change and you make adjustments to reach your goal. You do with the Process System too. Change is simpler when you're already in motion. How do you plan? Could the Process System help you?

Podcast Episode 44 (3:26)

November 14, 2009


Wed, Nov 11: Remembrance Day
Thu, Nov 12: unemployed

Fri Nov 13: Friday the 13th
Sat Nov 14: pack up and depart forever

On November 11, we look back to past heroes. On Friday the 13th we worry about bad luck. So what happens on Thursday, November 12? We look to the future and hope for good luck. Even if newly unemployed.

November 12
The day started early in Cambridge, about an hour west of Toronto. The Benefit Guys were hosting a half day seminar on The 21st Century Consumer. I was presenting How To Succeed With Entrepreneurs Part 1. I left early, skipped lunch and raced through highway/city traffic for 70 minutes to get to my downtown Toronto office for a must-attend meeting on the annual retirement roadshow. Since I have no involvement with retirement products, I didn't know why I was needed. Minutes later, I found out.

Shortly after 1pm, a Senior Vice President led me to the Rogers Room just next to the President's office. In this cosy room with a gorgeous view north to the Ontario Parliament Buildings, sat a representative from Human Resources. Uh oh ...

I was reminded that sales through National Accounts were low, expenses were high and profitability was poor. There were no prospects for a quick turnaround. So I was losing my job effective immediately. I asked if anyone else was affected but they would not say. I figured I was the only one, which was not a pleasant feeling.

National Accounts have offices across the country and include the places most people bank and invest. I spent most of my time supporting independent regional firms but was part of the National Account support team.
I was left with the HR representative to review a two page summary of statutory benefits and additional severance. The package looked reasonable for 18 years and 5 months of employment. After she left, an outplacement consultant came in to explain the services they would provide.

My emotions were jumbled but I felt optimistic about the future. Although I didn't pick the timing, I was glad to have a financial cushion while searching for new opportunities.

Then There Were None
I went back to my office to pack up. That's when I learned the whole National Accounts division was shutting down. [Update on Nov 18: officially, these are structural changes and the division continues to exist] The 1pm meeting time allowed synchronized terminations from coast to coast. In my office alone, five people --- including my boss --- lost their jobs. In a strange way, it's comforting to know that others are going through the same thing.

Unaffected employees were being told the news in a meeting. I was advised to leave before returned. I did. In the confusion, I forgot to bring my package with me. I tried phoning home but my Blackberry had been wiped clean and disabled. That's efficient.

What You Think
A lot goes through your mind when an unexpected shock hits. Deep down, I was optimistic about the future since I've invested in learning and honing portable skills. We are in the information age and knowledge age are we not?

Leaving forever isn't easy for practical reasons. If you work in a corporate environment you face the challenge of extracting your personal information from your office, computer and smartphone. Thing like
  • files
  • contacts
  • calendars
  • emails
  • subscriptions to print publications
Since you're likely required to leave corporate equipment when you exit the building, plan ahead. The company probably has a backup of all your files. That helps them but not you. In my case, my company notebook computer was in my car and I took it home without thinking. What a blessing.

Getting Personal Files Off Your Work Computer
As a precaution, I already had backups of my personal files on a portable hard drive and home LAN. Each day, I followed a multistep synchronization process: work computer to portable hard drive to home computer to home LAN. And vice versa. At most, I'd lose one day's files.

Online offsite backups are worthwhile too. I have yet to investigate options but will soon.

If you have a desktop computer, a USB memory key works well (unless it's blocked). Ideally, you'd keep no personal files on company equipment. That was a key reason for getting a netbook computer recently.

You can probably find instructions for copying personal information by searching online. However, you should already have a scheduled backup strategy in place.

Backup Your Contacts
As I left the meeting, my Blackberry had already been reset. The contacts, calendar and emails were all wiped out. The phone still worked but I didn't realize this until the next day.

Synchronizing contacts was a bigger problem because the Outlook Import/Export feature was disabled. It only seems to work when connected to the corporate LAN. I found this out when exporting my contacts to LinkedIn months earlier. Luckily, I routinely scan business cards and store them in PersonalBrain (reviewed earlier).

Backup Your Calendar
Calendars are a problem. Mine are entirely electronic, which meant no paper backups. While Outlook synchronizes with my Blackberry, that's of no use when you leave your equipment behind. Luckily, Google Calendar Sync can help if you use Gmail.

Change Your Contact Information
Your contact and employer information is probably in more places than you recall. Here are some:
  • LinkedIn
  • Facebook
  • professional directories
  • groups and associations
  • email mailing lists (if you can remember which they are)
When you're ready, post a quick status update to let your connections know you're now self-employed. For dramatic effect, I waited until the next day, Friday the 13th.

Since all my future work commitments were now cancelled, I alerted the parties affected in the near future. Why not make your exit easier on them too?

Now it's time for a sabbatical before deciding on a future direction.

Podcast Episode 43 (7:26)

direct download | Internet Archive page

November 7, 2009

Three Reasons Why Financial Literacy Eludes Us

Although I am almost illiterate mathematically, I grasped very early in life that anyone who can count to ten can count upward indefinitely if he is fool enough to do so.
--- Robertson Davies

Yes, we want to make good financial decisions. Yes, we have the capability. However, universal financial literacy remains beyond our grasp for three reasons
  1. trouble reading
  2. trouble perceiving
  3. human frailty
Let's examine them.

Trouble Reading
About one in seven Americans can't read. About 40% of Canadian adults can't read at the level of a high school graduate. Of this group, 15% have serious problems dealing with any printed materials. Maybe they can handle Dr. Seuss, but that won't get them far in life.
Do not worry about your problems with mathematics. I assure you mine are far greater.
--- Albert Einstein
While literacy result are bad, numeracy is even worse. According to the 2003 International Adult Literacy and Skills Survey (IALLS), 55% of Canadians have inadequate math skills. Other countries have issues too. BusinessWeek reports that "Americans are functionally illiterate". The University of Michigan found that only 18% of boomers could solve a simple question involving compound interest. Unfortunately, I can't find that question to share with you.

Even if you're comfortable with words and numbers, you may make the wrong decisions.

Trouble Perceiving
Let's look at snack food and fast food. You're overwhelmed with layers of flavours and sensations: smooth/crunchy, sweet/bitter, hot/cold, hard/soft. This makes food harder to resist. We eat based on the size of the plate. If it's on the plate, we think it'll fit in our bellies. Our bellies expand to accommodate us.

Financial products are hard to compare, which complicates our decisions. What is the cost of a floating rate mortgage compared with a fixed rate mortgage? How much does your credit card really charge you in a year: annual fees, surcharges on exchange rates, interest penalties for late payments? How would this compare with other credit cards? I met someone who pays annual fee of $400 for a credit card because of perceived rewards.

We're better at perceiving change that's linear than geometric. The pattern 1, 2, 3, 4, ... makes more sense than 1, 2, 4, 8, 16, ... but the latter is closer to real life. Compounding interest works for us when saving and against us when borrowing. An interest rate of 1% compounding monthly is higher than 12% a year.

If a mutual fund earns 9% over a year and charges a Management Expense Ratio (MER) of 2%, you'd expect a net return of 7%. You'll get something different because the fund value fluctuates daily and the MER is typically deducted daily a compounding effect).

Try these challenges from earlier posts
Human Frailty
Businesses make money from our weaknesses. Naturally, they propose their products as the solutions. Napoleon Hill identified our six basic fears in 1937 and they're still with us.

Education helps us fight temptation. Discipline keeps us on track.

Financial planning involves immediate pain for long term gain. We feel the pain of saving now but have difficulty visualizing the benefits of secure retirement income decades later. We think we can start saving later, which means we lose the substantial benefits of compounding growth.

Get Smart
Ontario students will learn financial literacy from grades 4-12 starting in 2011. That's great since habits start young. However, we can change at any age. This video from accountants gives helpful basics.

You can also learn from financial bloggers, your advisors and others you trust. You just need the spark of desire to start.

Podcast Episode 42 (5:41)

direct download | Internet Archive page

October 31, 2009

Why Insurers Won't Insure You (H1N1 anyone?)

You can't always get what you want.
--- The Rolling Stones

You've got the money. What you want is legal and widely available, but you can't buy it. Who would turn you away? An insurer.

This isn't because of supply and demand. After all, an insurance policy is just a printed promise. The quality of the promises varies, but there's plenty of paper to print them.

Why Refuse Motivated Customers?
Conventional wisdom says that insurance is sold, not bought. If you're interested in getting coverage, you're viewed with suspicion. Who wants to buy insurance? Maybe you know something you think the insurer won't find out.

We're self-motivated to buy insurance when we think we're likely to get a higher-than-normal payoff. If we win, the insurer loses.

Underwriters classify risks. Bad risks pay more if they can even get protection. You undergo a similar process when you apply for a mortgage. The higher your creditworthiness, the more you can borrow and lower the interest rate you pay. Similarly, insurers look at your health rating and your finances.

Asymmetry Of Information
What if you know something the insurer doesn't? You stack the odds in your favour. Insurance spreads risks among large groups with similar characteristics. Smokers die younger and have more health problems. Suppose a smoker pays the same price as a nonsmoker. By overpaying, the nonsmoker is subsidizing the smoker. That's unfair. Insurers try to assess each risk fairly and charge accordingly.

Fear Motivates
Since we're attentive to bad news, the media gives us plenty (unless you live a low noise life). Take the current "swine flu" (2009 H1N1 Flu). In previous years, we've warned about West Nile virus, SARS pneumonia, mad cow disease and avian flu (H5N1).

If you've had a bout with a disease, you may want to buy insurance and find you can't --- especially if you were hospitalized. The insurer may require that you wait months to show that you've recovered. By then, you may forget or lose interest. The insurer would rather turn away business than take on an unexpected risk.

Podcast Episode 41 (3:04)

direct link | Internet Archive page

October 24, 2009


If you don't know where you're going, any road will take you there. --- Lewis Carroll

Do you plan before you start or start before you plan?

When discussing finances, some advisors feel you must have a comprehensive financial plan but most recommend piecemeal solutions. You'll find background on Million Dollar Journey where a financial planner laments that Most Financial Planners Don't Plan Finances. Read the comments too.

Some financial planners get overzealous. They feel their way is the "right" way and look down on other advisors. You see similar divides in the Mac vs PC camps and the Microsoft vs Google groups. How unproductive.

Can you save for retirement without knowing how much retirement income you need? Certainly. You might not save the "right" amount but you're moving in the right direction.

Planning To Fail
Here are the problems with financial plans
  • they are expensive
  • they are boring
  • they are wrong
But they are better than nothing. You'll guess wrong on critical assumptions like investment returns, inflation and how long you're likely to live.

No Customers
You'll find financial planners who would eagerly prepare financial plans for a fee. They have trouble finding paying customers. A financial plan typically costs $750 to $5,000 plus ongoing maintenance plus tax . Do you get your money's worth?

You wouldn't pick a laser eye surgeon solely on price, but what about a financial planner? Are you paying for the expertise of the planner, as you would for a surgeon or are you paying for the hours they spend developing the plan? How can you judge the quality and relevance of the plan?

Slow and Painful
Financial planning is much like visiting your doctor for a physical. You answer questions, submit to tests and then get told to eat better, sleep more and exercise more. You already knew that. Will your behaviour change even if you're heading for trouble?

To get a financial plan, you sit down with a financial planner and perhaps an assistant who takes notes. You answer questions for what feels like hours ... and is. You leave your financial records (e.g., tax returns, bank statements, insurance policies, investment statements, etc). The assistant inputs the data into financial planning software (generally an Excel spreadsheet) which the planner reviews. Weeks later, you come back to review the plan, which may induce drowsiness. You'll find out what's wrong with your financial life and get recommendations in a thick, nicely bound report. By coincidence, your financial planner can often sell you the suggested products (their main source of revenue). You'll likely buy because you've already spent so much time and perhaps money too.

Because the process is painful, you probably won't get a plan from another advisor for comparison. You're less likely to switch advisors later. So financial plans are an effective business tactic.

Financial plans can be tough to grasp and we're in a world where financial literacy is a concern. Basics like how compound interest works aren't well understood. We're not known for making rational decisions either.

Ways to Pay
You can pay for financial plan in several ways
  1. money: which may be refunded if you buy the recommended products (like a refundable deposit)
  2. no fee: the advisor gets paid for selling the recommended products (which creates a potential conflict of interest)
  3. free: as a reward for being a large customer (you're already paying for other services and this is a way to coax you to buy even more)
How Plans are Developed
Like tax returns, financial plans are developed using software. You'll find three categories
  • sophisticated commercial grade: e.g., FP Solutions, Naviplan (can be difficult or cumbersome to use)
  • simplified: generally point out deficiencies with your insurance or investments (which the planner can help you rectify); might be unique to the firm
  • proprietary: developed by the planner but not as well tested as commercial grade software
I've had FP Solutions Business Edition for years. This is extremely sophisticated tool costs $1,335 a year (plus tax). Since I didn't know how to develop financial plans, I got training (live, webcast and prerecorded). I rarely use it, though. I offered to develop free financial plans with advisors but got no takers. Zero.

Evidently, life goes on without financial plans.

Financial planners boast about their financial plans, but they're reluctant to show them. They certainly don't want competitors to see. Why this fear? A finished plan doesn't look distinct. I've seen dozens. They're generally
  • printed in colour on nice paper (though internal drafts may be in black & white on cheap paper)
  • include graphs and tables
  • in nice binders or bound with Cerlox or wire spines
  • have an executive summary because of the length
  • dozens of pages (though most of the content is generic)
You can't see the wisdom that went into developing the plan. You just see the printed result and wonder about the value.

The Real Reason
In the classic book Selling The Invisible, Harry Beckwith points out that our "financial" matters are private and sensitive. Also "planning" sounds tedious and difficult. Acting on the plans shackles our freedom. Now combine "financial" and "planning". Is it any wonder that financial planning and financial planners get ignored. What do you think?

October 17, 2009

Why You Can't Know What You Want

Don't it always seem to go,
That you don't know what you’ve got
‘Til it’s gone.
--- Joni Mitchell,
Big Yellow Taxi

You can't get what you want
Till you know what you want.

Joni and Joe are both correct but there's another aspect: You can't tell what you want until you know what's available.

Some people try but they're cheating themselves. This is often when they're looking for the cheapest price today. In the prior post, we looked at why you can't (and don't) buy on price.

You can't decide without knowing your options.

An Example
Let's look at a concrete example: buying a computer. Here's a page from a old Best Buy flyer. Click on it to enlarge and take a look. Using only this ad, which computer would you pick?

You might buy based on
  • price: low, medium or high
  • brand
  • features or benefits
  • screen: size and resolution
  • performance: CPU speed and memory
  • portability: weight and size
  • intended usage: might pay more for business-grade
  • product life: more expensive might reduce the need to replace the computer
As you look at the ads, notice what's generally missing: weight, battery life, thickness and screen resolution.

What you think you want, may not be what you buy or what satisfies you. That's what happened when I bought one of those new-fangled all-the-rage netbooks.

Case Study
I thought netbooks were interchangeable and bought primarily on price (not from Best Buy).

I got an HP Mini 110 for $50 off. The price was fair, but I quickly found that what I got wasn't what I wanted. I got annoyed by the bilingual keyboard (a pet peeve), trackpad buttons on the sides instead of the bottom, the lack of Bluetooth, the weak wireless antenna, and the poor resolution anti-glare screen (1024x576).

Next, I spent a bit more for a Dell Mini 10v. This eliminated the problems with the HP but added three new ones
  1. wrong screen resolution: 1024x600 glossy instead of the advertised 1366x768
  2. a three hour battery instead of the previous six hours (assuming one hour per cell)
  3. heat: runs too hot, which can't be good for the components or your lap
Finally, I got the Dell Mini 10, costs the most but eliminates the issues above:
  • screen resolution: 1366x768 (a real joy)
  • battery: 6 hours (estimated)
  • metal case: more rugged
  • low heat: uses a more expensive Atom Z chip in place of the usual N processor
  • no moving parts: more durable
The Surprise
Here's the big surprise with the Dell Mini 10: complete silence. Portable computers are generally quiet but the spinning hard disk and cooling fan make some noise. I paid an extra $130 for a 32 GB solid state hard disk (SSD) made from memory chips instead of the usual spinning 160 GB magnetic hard disks. Frigid winters, humid summers and foreign travel are tough on delicate mechanical devices. Even if nothing goes wrong, there's the worry that something could. What do you do then?

The multi-touch trackpad is a "free prize" that did not affect my purchasing decision but is very satisfying to use.

Lesson Learned
The point here is not to keep spending more because your needs are probably different. The lesson is that I didn't realize how much I valued silence before. There's no way I would have bought the Mini 10 at the outset because I didn't know what I wanted or how much I'd pay for it.

You've probably had similar experiences. We don't know what we want until we know what is available. We can't know.

Podcast Episode 39 (5:42)

direct link | Internet Archive page

October 10, 2009

Why You Can't (and Don't) Buy On Price

Today we're looking at prices from free to crazy.

The High Price of Free
We're getting the Toronto Star newspaper free for six weeks. This isn't a gimmick where you pay for Saturday and get Monday-Friday for free. We're getting the paper Monday through Saturday with no obligation. What a hassle. We glanced through a few issues but now the paper piles up in the recycling bin unread. Free has a price: time.

You probably get lots of free email that you don't read but which doesn't annoy you enough to unsubscribe. You probably gave away personal information to get the freebies. The Internet is basically free, but your behaviour gets tracked anonymously through cookies.

You can get library books free but popular titles have a waiting list and a seven day nonrenewable loan period (at least in Toronto). You pay in time, again. Television is free with commercials or ad-free with paid subscriptions.

There's nothing wrong with free, but you pay in some way. If lunch is free, count on listening to a sales pitch.

Different Prices For Nearly The Same
Have you noticed netbooks, the cute, light, inexpensive portable computers? Most models have nearly identical specifications thanks to pressure from Microsoft and Intel to cap the capabilities. For instance, Microsoft is chopping the maximum screen size from the current 12.1" to 10.2" for Windows 7.

Despite the similarities, you'll find surprisingly large differences in usability, design and quality. Unless you buy solely on price.

Think about macaroni & cheese. Prices differ when the ingredients differ. Real cheese costs more than simulated, powdered stuff. You'll also pay more in a restaurant than at home.

The Same Price For Very Different
Houses of the same price differ too. One place may have plenty of washrooms but use cheap carpet instead of hardwood. Or the kitchen may wow you but the guest bedroom may be the size of a large walk-in closet. Or the house may be perfect but on a major, noisy street.

Advice differs because the advisors vary in quality. Professional designations and experience are often measures of quality. But not always. Either could be dated or irrelevant.

It's very difficult to identify the best advice since you're dealing with an intangible. Better ingredients usually mean better results, but some people can burn water.

Water Water Everywhere
Tap water is essentially free. That's the source of Coca-Cola Dasani and Pepsi Aquafina, but those brands cost more. Often more than soft drinks, which have the added cost of additional ingredients. If you like spending even more, there's Fiji natural artesian water and glacier water (which we drank free atop the Athabasca Glacier in Alberta).

It's all H2O but if the choices were placed in front of you, which would you pick? Which would you want to pick?

Even if you normally drink tap water, what do you do when you're parched and there aren't any water fountains around? Price matters but so do many other factors. We don't always pick free or the cheapest.

Podcast (4:11)

direct link | Internet Archive page

October 3, 2009


No one wants to get audited. Not even the tax auditors. But they get audited too.

The Auditor General, Sheila Fraser, looked at how the Canada Revenue Agency (CRA) audits Small and Medium Enterprises (SMEs). Despite 5,600 staff focusing on these businesses, earlier problems remain. As taxpayers, we want compliance with the rules to ease our tax burdens, which vary considerably by province, especially for entrepreneurs.

We're talking about big dollars. The CRA estimates there aren't many tax cheaters but those abusers cost us plenty. About $12.7 billion in unpaid tax according to their 2006-07 Annual Report. Of that, about $2.5 billion relates to SMEs.
Overall, the Canada Revenue Agency (the Agency) has made unsatisfactory progress in addressing the recommendations we selected from our previous reports for follow-up.
--- Auditor General, March 2009 Status Report
Sheila found the "taxman" fares poorly in
  • taxing the underground cash economy (targeted by 1,000 CRA staff): "about half of its underground economy audits over the past five years did not detect unreported income"
  • auditing too many low-risk files
Auditing The Wrong Files
The CRA "has difficulty demonstrating that it is selecting and auditing small and medium enterprises of high risk or priority."
--- Auditor General, March 2009 Status Report
The CRA uses computerized risk assessment to classify tax returns by the potential tax recovery into four categories from low to high. That makes sense.

However, the CRA focuses on low-risk files where they expect a $0 tax recovery. This is like targeting drivers going 0-10 above the speed limit but ignoring drivers zooming past at 50+.

In the last two fiscal years, the CRA audited 87,000 SMEs. Of these, 13% were tagged as high-risk and brought in 41% of the total tax recoveries. However, 56% of the audits were on zero or low-risk files and brought in 39% of the total tax recoveries.
"Available auditors may lack the experience necessary to do complex high-risk files and therefore audit lower-risk files."
--- Auditor General, March 2009 Status Report
What's going on? Among other explanations, CRA says their auditors are better suited to doing low risk audits. Also, audits do turn up problems even where tax recoveries are low. This is like a "broken windows" approach: tackle minor crimes like speeding and littering to prevent bigger crimes.

The CRA does not know why high-risk files bypass audits because the human screeners who make the ultimate decisions aren't required to document their reasons. Screeners favour their own judgement over computerized risk assessments. Human judgement leads to inconsistencies.

The Right Staff
During the Tax Roundtable in the 2008 CALU conference, a CRA official reported difficulties filling two senior vacancies in the Ontario audit unit. Why? The pay scale starts at $40,973 and caps out at $110,779. The private sector pays better. Also, tax auditors would rank among the least prestigious professions. Want proof?

At a party, announce that you're an actuary and people will leave you for fear of boredom. Say you're a tax auditor and watch them bolt even faster and go further away.

The study found that most people know little about the implications of tax cheating, and concluded that more communication would encourage better compliance.
--- 2007 public opinion research by the CRA
Honest taxpayers suffer. Cheaters prosper and encourage others to follow. Until they're caught. Let's see what happens.

September 26, 2009

Three Steps To Keeping Financially Solvent

It is hard for us without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.
--- Joseph Cassano of AIG on their credit default swap business (Aug 2007)

Well, a house of cards was never built for shock
You could blow it down in any kind of weather.
--- Dire Straits,
Solid Rock

Julie Dickson addressed a sold-out audience at the Actuaries' Club of Toronto this week. She's the Superintendent of Canada's most important regulator, the Office of the Superintendent of Financial Institutions (OSFI). Her remarks were informative, interesting and have relevance for you. OSFI oversees the federally-regulated banks, trust companies, insurance companies and pension plans.
Julie was accompanied by my first actuarial boss, Stuart Wason, now a Senior Director at OSFI. We haven't met in years. During my summer job at Crown Life, I learned plenty from Stuart and Henry Essert. They inspired me to pursue my actuarial career. I'm in their debt and haven't thanked them enough.
Offend the tax department and you can appeal all the way to the Supreme Court. Offend OSFI and your company risks swift intervention. Don't expect much sympathy either.
Actuaries would be well served to sit up and take notice of the speed at which risk management expectations are changing.
--- Julie Dickson
OSFI's mandate is solvency: ensuring that financial institutions have enough capital to weather financial storms. How? By predicting the unthinkable, setting high standards, and intervening early. This process works wells in protecting the public and the politicians. Here only one financial services company cuts dividends (but they cut them in half).

You can protect your own financial solvency as you follow the four steps in wealth management. Let's look at three ways
  1. predict the unthinkable
  2. follow high standards
  3. forget bailouts
Predict The Unthinkable
Your challenge as actuaries is to learn from the past but like your motto says, you need to "see beyond risk".
--- Julie Dickson
We underestimate risk, especially during periods of stability. Also, we fear the wrong risks. So we don't prepare for storms and get shocked when the tide reminds us that our castle was made of sand.

We can't predict and prepare for every disaster but we still benefit from planning.

We can look at different "what if" scenarios, especially the bad ones we like to ignore.
  1. Suppose a car accident confines you to a wheelchair for life. What happens to your savings, your ability to work and your future earnings?
  2. Suppose you're forced to retire five years early due to a layoff or ill health. What happens to your retirement income?
  3. Suppose you live an extra 10 years or earn lower returns after tax and inflation. Would your money last?
You can examine your current and projected financial situation more regularly with your financial advisor. Ideally one who know how to stress-test your plans. Maybe you're following simple "rules of thumb". Changing conditions can make them obsolete. In Dumb Money, Daniel Gross identifies four simple but incorrect assumptions that leading to the financial crisis in the US.

Yes, we can over-prepare but we're more likely to do too little.

Follow High Standards
Life is going to be more challenging for "experts", and a premium will be placed on how well you can explain such things as actuarial reserves and capital.
--- Julie Dickson
Raise the bar on your risk management. Picking better quality investments does dampen the returns (the perennial risk vs reward quandary) but the chances of potential problems drops too. Diversification helps diminish risk too.

Canada trusts actuaries to apply principles, which requires judgement. The US prefers rules, which makes compliance easier to monitor. Since rules don't change quickly, companies can follow the letter of the law without following the spirit.

Forget Bailouts
You can take on extra risk if you've got someone to bail you out. Maybe you've got a kind rich aunt. The financial sector turns to us taxpayers. Without market discipline, companies can take undue risks with impunity. That's where we rely on the regulators.

We face four key financial risks: outliving your savings, dying too soon, getting sick and getting disabled. What are you doing about them now while you can? You are your own regulator (unless you have a spouse).