What we want to be true doesn't become true because we want it (to be true).
Twittercounter says that @riscario (twitter.com/riscario) has 18,000 followers. That's the Twitter channel that accompanies this blog. Sceptical? Take a look at this screen shot.
Now do you believe? Me neither. The normal audience is several hundred.
An audience of 18,032 followers would make @riscario #12,178 on Twitter according to the screen shot from twittercounter.com. Click on it for a larger version.
There are techniques to get thousands of followers on Twitter. They seem to involve you following thousands of people and them reciprocating. You can get quantity quickly, but quality takes time. The growth of @riscario is organic, and slow. That's fine.
The Real Rank
The correct rank for @riscario is #160,191 based on 290 followers. That may underwhelm you, but there are over 100 million Twitter users. That impressive total is misleading because many accounts are dormant.
If you define a true Twitter user as
10+ followers, and
10+ friends, and
10+ tweets
then only 29% qualify. That's still 2.9 million users and up from 21% in January 2010.
This three-month graph shows the statistics returning to normal.
Notice how the trend looks consistent and predictive … until the drop two days ago.
@what
The Twitter channel @riscario (twitter.com/riscario) supplements this blog and the podcast. You'll find an update on most days. If you're more interested in marketing, there's @mActuary (twitter.com/mActuary), which supplements my Marketing Actuary blog for entrepreneurs. Again, the goal is one meaningful tweet per day.
Some Twitter users have thousands and thousands of tweets, adding many daily. Ranking high on that list would scare me. Time is too precious to fritter.
We're not talking about a butterfly across the ocean causing a storm just after you wash you car. The causality is hard to show and the effects are minor. Instead, think of beavers. They use renewable resources to build nice homes with swimming pools. They're happy but they flood land above their dams and send less water downstream.
Golf
The RBC Canadian Open is making golf fans happy and stimulating the Toronto economy. What's the effect on the residential neighbourhood surrounding St. George's Golf and Country Club?
We live inside the No Parking blue zone but not in the smaller Local Traffic Only zone. A portion of Islington Avenue, a major road, is closed from July 12-30. The detours are putting more traffic on other streets like The Kingsway, Kipling and Eglington.
We're still getting city services like garbage collection. Traffic isn't bad enough to require the police to direct it. Drivers aren't honking their horns in frustration. Life is fairly normal.
Here are three externalities
cars park just outside the No Parking zone
the MetLife blimp in the skies is more intrusive than the satellite view in Google Maps but they're probably not recording activities in our yard (aside: my first fulltime job was with MetLife)
some neighbours are renting parking on their driveways and lawns for $20 to (gulp) $50, depending on the day and location. The official parking is at the distant Woodbine Racetrack with yellow school buses as shuttles. No air conditioning.
Overall, the event looks well-organized. Planning started three years ago. The disruptions are limited because of school holidays and summer vacations. Other neighbours may feel differently depending on where they live. Some businesses may have extra customers.
Win/Lose
Other activities may have greater externalities. Let's look at some.
Down the street, a neighbour feeds racoons. This makes her happy but they damage and defecate on nearby lawns. Logic doesn't work well with animal lovers who ignore these consequences
Our Costco started selling gasoline last month: premium fuel is about the price that other gas stations charge for regular. The regular gas stations are probably losing business.
Drivers with radar detectors zip faster with impunity. This encourages other drivers to speed too … but they're more likely to get caught.
Some people engage in dangerous sports and endanger the lives of the rescue crews.
Addictions like drinking, smoking and gambling may give participants satisfaction (at least in the beginning) but there are huge consequences for families and society overall. Car accidents. Second-hand smoke. Bankruptcy and crime.
The tax-free underground economy helps participants but honest taxpayers make up the lost revenue. We benefit when tax auditors catch the culprits but about 50% the audits found no unreported income.
There's also the Planet of the Apes series. Depending on movie, apes are slaves to humans or vice versa. That's win/lose too.
Inducements
Businesses take steps to induce behaviour. McDonalds is selling any size of soft drink for $1. That's cheaper than water. However, those buying the largest sizes and conditioning their bodies to consume them are inflicting harm on themselves.
Governments take steps to induce taxpayers to act in ways that benefit society. Some incentives create tax savings for a few, which shifts the tax burden to the masses. To limit these side effect, governments take steps to limit the size of the benefits. That helps maintain tax revenue. Here are common tax saving tools.
investment loans: limits on interest deductibility based on the investments made
Unblocking The Restrictions
Hybrid technology improves fuel economy, but can boost performance instead. It's unlikely that Porsche and BMW are striving to beat the fuel efficiency of the Prius.
On the financial side, the wealthy say they most want tax advice and income tax strategy (67%). They expect frequent, proactive advice and aggressive recommendations. The right advisor can propose creative strategies and --- more important --- implement them effectively.
For instance, life insurance has unique tax advantages. Deposits are capped by the Maximum Tax Actuarial Reserve (MTAR) but you can deposit more by simply buying more insurance. Withdrawals are taxable but the savings can be accessed via tax-free loans. Tax deductions arise when the loan proceeds are invested. In some cases, a portion of the premium can be made tax deductible too.
There are probably other tools with effective tax strategies too.
When there are side effects, why not join the winners? You can. Even if you live near a golf course.
A friend asked me to review an insurance proposal from his advisor. This is tough to do when your own standards are exacting but I complied. This walkthrough shows you the process and helps you identify signs of a fair deal.
The Situation
The case is simple. The client has a young family and wants to protect them in case of his untimely death. He owns a business but has no life insurance from his company. So he has $2 million of Term 10 in the form of two policies from two advisors ($1.1 million and $0.9 million). The policies are nearly 10 years old. An advisor provided three different proposals.
What should he do?
The Dilemma
Term 10 is excellent for short term needs. You get the most coverage for the fewest dollars. The problem is that rates shoot up every 10 years. That's partially because you're older and more likely to die. The bigger reason is product design. Initial rates are almost loss leaders due to competition. The insurance companies make their money if you convert your coverage to permanent insurance or if you renew after the 10 years at the much higher rates.
If you still need term insurance at renewal, you face a dilemma. If you renew you pay much more than if you bought a brand new policy. If you apply for new coverage, you undergo new underwriting that usually involves answering many personal questions, giving blood and perhaps additional tests. Not very appealing. Also, you're subject to extra scrutiny if you die within the next two years (contestability period and suicide exclusion clause).
Here are the common practices:
convert to permanent insurance: this contractual right lets you skip underwriting too
if you're healthy: apply for new Term 10 with full underwriting
if you're unhealthy: continue your current coverage at the new higher rates (a contractual right)
The Need
The process system quickly showed that the client wanted to continue his insurance. Changes such as a larger mortgage make $2.5 million a more suitable death benefit. He likes the tax advantages of permanent insurance but is currently investing as much as possible in his business.
The "obvious" solution is new Term 10 insurance with conversion to permanent coverage in 2-3 years when the current investments boost business revenue.
The Proposals
The advisor proposed $1.1 million of
Term 20
Universal Life
Whole Life
What's missing? Term 10 and a market comparison. All products were from one company (and in a folder from that company). The insurer ranks low in corporate governance, a measure of keeping promises. You'd think that would matter more than ever, given the turmoil in financial markets.
These proposals were prepared without consulting the client. That's efficient for the advisor but ignores the client's current situation. Coverage needs to be increased to $2.5 million. There were no plans to consolidate both present policies a new policy. The advisor didn't realize there is other coverage --- and didn't ask.
I did a market comparison and found that two insurers with excellent corporate governance offered better overall rates and better options for conversion to permanent insurance.
Why One Company?
If an advisor only proposes one company, are you getting the best options? Here are possible motivations
no choice: the advisor may be tied to a company and only be permitted to sell products they select
hidden incentives: the advisor may receive cash or non-cash rewards
personal biases: the advisor may simply like a particular company
By coincidence, one company may have the best products for your situation. Your advisor should be able to show comparisons that lead to the recommendations.
The Costly Mistake
The current insurance is owned personally. That's generally a costly mistake. You pay insurance premiums with after-tax dollars in exchange for a tax-free death benefit. Would you rather pay with a dollar that's worth
54 cents? (after personal tax at Ontario's top personal marginal tax rate of 46%)
84 cents? (after corporate tax of 16%)
The difference is huge. Business owners generally own insurance corporately, which also reduces the problem of "trapped" retained earnings. The option for corporate ownership was not discussed before.
When the original policies were purchased, the option for corporate ownership was not even discussed. That cost the client thousands of extra dollars over the last 10 years.
Warning Signs
If your advisor shows you insurance proposals, look for these warning signs of shortcuts
one company only: no company is ideal in every situation
folders from an insurer: perhaps the advisor is tied to that company (not independent) or pinching pennies
black & white printing: content is designed in colour these days
cheap paper: paper's cheap but maybe the advisor's even cheaper?
no narrative: just an assortment of pages. The kit was not organized in any meaningful way. It was just an assortment of illustrations
It's great to maximize benefits while minimizing costs, unless the rewards go to the advisor.
It's summer driving season, a great time to think about safety. We don't want to become human crash test dummies.
What were drivers doing when fatal car crashes occurred? Making turns? Driving fast?
Cause And Effect
Here are findings using US data from the National Highway Traffic Safety Administration (NHSTA) in the current issue of Wired.
You've heard of the 80/20 rule. Here, the two riskiest activities --- going straight and negotiating a curve --- account for 83.7% of the fatal car crashes. Add turning left and the total reaches 89.8%. Even if you guessed at the risks correctly, did you expect such skewed results?
Why?
Statistics tell us what happened but not why. Maybe most accidents occur when we're going straight because that's what we do most of the time. Some long stretches of highway are straight to the point of boredom. So designers add curves, which has other consequences.
You've probably heard that most accidents occur near home. Maybe that's because that's where we start or end our trips. Maybe we're less attentive in familiar surroundings?
By Extension
Going straight to our destination without any obstacles can be dangerous. It's difficult to know what to do. Turning right is safe (relatively speaking) but keep doing that and you won't get far.
What about the financial world? We don't have paved roads with large signs to our destination. Instead, we take a Financial TRAIL and face many obstacles
external: such as economic downturns, investment returns, inflation
internal: such as self-control, health, ambition
Our destination changes. Living longer takes more money as do unexpected medical expenses. Either can easily deplete our savings and stop us short of our goals. We like navigation systems in our cars yet we ignore financial planning. We often prefer to follow our noses and hope things turn out well. Could that be a recipe to crash?
Links
Dashboard: Crash by the numbers (Wired, p68, issue 18.07, Jul 2010) [no web link]
When it comes to giving, you've got many ways. Some involve tax receipts and others are pure gifts. Last time, we looked at donation guidelines for billionaires from Warren Buffett, Bill Gates and Melinda Gates.
We don't have quite as much money to give, which makes the use of effective strategies more important.
There will be certain people who have been successful and if you can show them how their money might be leveraged, that really appeals to them. The leverage aspect is important. --- Warren Buffett
Leveraging lets you do more with less.
Conventional Ways To Give
The approaches here are simplified and focus on money. They are meant for people with a giving heart who are willing to bear some cost. Otherwise the donation is not a genuine gift. If you're looking solely for tax advantages, you may not be satisfied. Though, when it comes to giving, do the reasons matter?
In Canada (and probably other countries), your dollar goes farther when you
give to registered charities, which usually gives tax credits or tax deductions
give money to poorer countries
use matching gifts: your employer or some other donor may match your gifts
gift public shares: you don't pay tax on the capital gains
An Overlooked Way
Life insurance provides an exceptional form of leverage: a small premium provides a large death benefit. Did you think of insurance in those terms before?
Suppose you want to donate $100,000 to a charity. Giving cash or equivalents may not be possible. An alternative is to buy a $100,000 life insurance policy on yourself and donate the death benefit to the charity. Your small premiums are usually tax deductible but you forfeit the big tax savings from the death benefit.
There are three drawbacks for the charity:
your gift doesn't help with current needs
if you stop paying the premiums, you create a dilemma: does the charity throw the insurance away or pay premiums with funds earmarked for pressing uses like repairing the roof?
the charity doesn't know when they'll receive the lump sum
In some ways, you're worth more to the charity dead than alive. The sooner you die, the more they benefit. How perverse.
Enhancements
There's another way if you have cash or the equivalent: donate the $100,000 now. The charity rejoices because you've eliminated all surprises and and let them work on current projects. You're happy because you're helping now, getting recognition now and getting tax savings now. You may even spur other donors to follow your lead. You no longer need to worry about investing the $100,000 or paying tax on the investment returns --- a nice bonus.
But you no longer have the $100,000.
Here's a way to get that back. Why not use the tax savings to offset the value of your gift with life insurance? The death benefit could be $100,000 or a larger amount if you want to replace the growth you could have earned if you donated at death. The tax savings may not be enough to pay the entire premium, but certainly offset the cost.
Here you control who receives the death benefit. Right now, you may want the proceeds to go to your family. When you're retired and they are settled, you may might want to donate the death benefit to a charity. That creates more tax savings, which leaves more of your estate intact.
Here Tomorrow?
Governments want our money too. If they're not satisfied with what they're collecting, they're bound to find ways to grab more from us. In their parlance, we're "taxpayers". The tax incentives that encourage charitable donations could easily be reduced or eliminated.
By donating now, you lock in today's tax advantages. The incentives could be enhanced, but how likely do you think that is --- especially if billionaires deplete tax coffers with hefty donations.
How horrible to plan and find the vagaries of the tax system work against you. Giving now eliminates those risks.
Other Ways
"… the giver must make a sacrifice, create an uneven exchange, … and do it all with the right spirit. To do anything less … doesn't rise to the magical level of the gift." --- Seth Godin, Gifts, misunderstood
Leverage reduces your sacrifice, which boosts the value of your gift. With conventional financial leveraging, you create tax deductions by borrowing to invest. That magnifies gains … and losses. Leveraging for charitable giving need not.
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