RISCARIO INSIDER: buyer beware

Showing posts with label buyer beware. Show all posts

December 21, 2014

GET/GIVE TONY ROBBINS NEW BOOK “MONEY: MASTER THE GAME”

There are lots of reasons to read a book about money and there are lots of books about money. Tony Robbins has a new one, Money: Master The Game.

Unfortunately, not many people read books. Even fewer read nonfiction. Only a small sliver read books about money. Be an exception and join them.

Not Perfect

There are various criticisms of the book, such as

an outsider: but being outside the traditional financial community gives Tony a different perspective
contradicting advice: but that’s common in life. He interviews 50 money experts with varying views.
over-simplified: but isn’t that better than over-complicating and confusing? Complexity can be added once the A-B-Cs (or 1-2-3s) are known.
conflicts of interest: Tony recommends companies in which he might have financial interests (see dealing with biased financial advice). That doesn’t mean the choices are bad but they but warrant more investigation.
too long: yes … I got the audiobook which runs over 21 hours and sped up the playback by 30%
US-centric: yes but the general ideas apply everywhere

Tony responded to some criticism in this interview for The Wall Street Journal.

At the other extreme, you’ll find gushing praise.

Tony’s Advantage

Do celebrities give better financial advice? Maybe not but Tony reaches the unreachable — people who get missed by conventional financial education. Even when Tony says things you’ve heard before, you might be more likely to believe them now. For instance, I’ve covered things like

$1,000,000 after taxes on investment growth (2007)
Your life expectancy exceeds 1 billion seconds (2009)
Why is financial planning ignored? (2009)
The Globe and Mail on Canada’s insurance loophole (2011)
How to protect your money from Goliath (2013)

We often know the keys about money (e.g., spend less than you earn, disaster-proof your life, save for the future). That doesn’t mean we do. Tony helps people change. He might get you to change too. He has a knack for making financial education engaging. He explains his terms and uses many examples.

Differently

Instead of writing a book, Tony could have created videos and an app. That’s what I thought before getting the book. I don’t see videos, but he has a free app (if you’re willing to give your contact information).

Instead of using a conventional publisher, Tony could have self-published. He could have made the book cheaper. He could have narrated the full audiobook, rather than portions.

Overall, what he did is fine.

Free Meals

Tony is paying for 50 million free meals. Besides donating all his book royalties, he’s made an additional personal financial contribution. That’s rare. Chances are good that you’ll end up on his mailing list, though. That gives him the opportunity to sell you his other stuff with the money you’re saving.

Caution

Tony tackles tough topics such as the conflicts of interest rampant in the financial sector. He gives solutions too. Think before you leap.

The stories from successes like Richard Branson are interesting but may not provide much practical guidance (e.g., how Honest Ed turned $212 into $100 million). Look for patterns rather than a guaranteed formula to financial independence.

I wasn’t expecting much from Tony’s book but because he’s popular, I knew that I had an obligation to read it. Overall, I’m impressed and highly recommend Money: Master The Game. There’s lots of practical advice.

Money books get stale. Tony’s book is new, which means now is the best time to read it.

Links

PS Another must-read (or re-read) is Warren Buffett’s biography, The Snowball

December 14, 2014

UNDERSTANDING THE INGREDIENTS OF LIFE INSURANCE (TERM AND PERM)

Michael James wrote a thoughtful post comparing temporary (term) life insurance and permanent life insurance. Like our canine friends above, both are similar, yet different. The best choice depends on different factors. A winner on one scale loses on another. As Michael’s analysis shows, comparisons can be misleading or omit important elements (like inflation).

Typical Plans

A temporary plan like Term 10 is often

renewable to extend coverage for another 10 years for a higher-but-guaranteed premium
convertible to permanent insurance without underwriting up to a maximum age

Since a permanent plan lasts for life, there’s no need for renewal or conversion options. Here are typical plans.

Temporary Life Plan	Permanent Life Plans
Term 10 (renewable, convertible)	Term 100
Term 20 (renewable, convertible)	Whole Life
Level term to age 65	Universal Life

We won’t be looking at which form of insurance is better. We’ll be looking at how they’re different.

First Principles

Mortality rates underlie all life insurance. The mortality rate is based on the true probability of someone like you (same gender, age, smoking status and health) dying during the year. Your mortality rate increases annually because you’ll die eventually (based on current medical science and how we define life).

Your retail premium rate is based on your wholesale mortality rate with margins added for expenses and profits. Your premium is the premium rate multiplied by how much insurance you’re buying. There may be additional loads for premium tax and Investment Income Tax (IIT).

One Year At A Time

When you buy insurance, you are getting one year of protection at a time.

Comparing With Property Insurance

With your car and home insurance, the insurer will usually offer you coverage for another year under similar conditions. Your new premium depends on factors such as their claims (actual vs. projected), expenses (actual vs. projected), investment earnings (actual vs. projected), capital requirements and profit targets.

The insurer could refuse to insure you next year or change the contract provisions (e.g., weaken protection for water damage). You could decide to switch companies.

The Additional Guarantees With Life Insurance

Life insurance also protects you a year at a time but usually

you have the right to renew your coverage until a maximum age (even if the insurer stops new sales)
your premium rate scale is fully guaranteed (e.g., you keep your nonsmoker rates if you start smoking or stop exercising in the future)
your insurer can’t modify the contract unless the change is an improvement

You get this extra protection because you may not be able to switch insurers if your health has deteriorated. You might even become uninsurable.

Yearly Renewable Term

The building block of all life insurance is Yearly Renewable Term (YRT), which is sometimes called Annually Renewable Term (ART).

Do you see the problem?

Your probability of dying during the year increases from 0.01% to 1% to 10% to 80% to 100%. This means your YRT rates will increase every year and become increasingly unaffordable as claims becomes more likely. That’s not good for you or your beneficiaries.

There is a solution: prefunding. Suppose you need insurance for 22 years. You could average the premiums and put that amount into a savings account every year and make withdrawals to pay the YRT premiums.

You could have the insurer invest for you instead. With Term 10 life insurance, you pay a level premium for 10 years at a time. The insurer does the averaging and bears the investment risk. At the extreme, Term 100 life insurance has a level premium for life (and is really permanent insurance and often continues beyond age 100 without further premiums).

Whole life insurance uses YRT rates (which might not be guaranteed). Universal life usually offers two guaranteed scales: YRT and LCOI (Level Cost of Insurance).

Start With The Need

Is your need for insurance temporary or permanent? If you’re addressing the risk of dying while you have financial obligations (e.g., children, a mortgage, a spouse or ex-spouse, other family members), life insurance is the ideal way to create or enhance your estate — if you’re insurable. How else can you get a specified tax-free lump sum at death?

For a temporary need, term life insurance is ideal. You get the most protection for the lowest price.

What If You’re Wrong?

A need which initially looks temporary may last longer than you expect. For instance, a child may have a lifelong disability due to an accident. If you guess wrong, term life insurance gets expensive. You can often renew coverage up to a maximum age without underwriting but the premiums shoot up each time.

Compared with renewing, you may be able to save money by buying a new term plan with new underwriting.

Conversion

Term life insurance often allows you to convert to permanent protection without underwriting up to a maximum age (e.g., 65). You pay the premiums for your age at the time of conversion (your “attained age”).

Example: Suppose you buy Term 10 at age 32. If you convert eight years later, you pay the permanent premium for a 40 year old. This will be more than the permanent insurance premium at 32 and may be more than what a newly underwritten 40 year old would pay for permanent insurance.

Why Permanent Insurance?

You might want permanent life insurance for estate planning. You may not see the need now because you’re not thinking of your legacy. Maybe you will in your 50s or 60s.

The tax-free insurance proceeds can be an inexpensive way to pay taxes at death, leave money for heirs or help a charity. Coverage is available in a cheaper form called Joint Last To Die (JLTD), which insures you and your spouse. The money gets paid when the longest living spouse dies. That’s when the bulk of taxes are due.

Some younger people buy a small amount of permanent insurance for their legacy and a large amount of term insurance for their temporary needs.

An Appreciating Asset

Why does permanent life insurance have a savings component? Further, why do the savings grow on a tax deferred basis? The government doesn’t give valuable advantages without reasons. There are ways you can benefit with planning.

Permanent life insurance grows in value every year because the payout becomes more likely — especially if your health has deteriorated. Your insurance contract could easily have a market value which is much higher than the cash surrender value. An investor may want to buy your contract, pay the future premiums and get the death benefit. That’s called a life settlement. They are legal in the US and several Canadian provinces (but not Ontario).

Permanent life insurance gives you the opportunity for tax-deferred savings. Universal life provides the most guarantees, flexibility and transparency. You could

invest more (limited by the Maximum Tax Actuarial Reserve (MTAR))
select the investments
stop paying premiums (e.g., in 20 years or at age 65), though not always guaranteed

Having more options helps with tax planning, especially for incorporated businesses.

Affordability

You can offset the cost of your insurance by reducing your coverage as

your financial responsibilities drop (e.g., children older, mortgage smaller, spouse’s income)
your assets grow (e.g., savings, pension)

Before you do, consider inflation which decreases the value of money. Also, your financial obligations could grow (e.g., new children, divorce, health issues).

Conclusion

Temporary life insurance gets compared with permanent life insurance but both cover different needs and timeframes. Since advisors get paid much more for selling permanent insurance, they may have biases they don’t even realize. Explore different scenarios before deciding and re-evaluate your needs over time.

For general questions, ask below. I'll answer what I can here or on Question an Actuary (QanA). For personalized answers, reserve time to Learn About Life.

December 7, 2014

HOW CAR BRANDS CAN IMPROVE THE SHOPPING PROCESS

We’re looking for a new vehicle. There are lots of options. Prices usually start under $25,000 and easily reach $40,000 with the features we want (AWD, heated rear seats, navigation, keyless ignition), taxes and other charges.

Each manufacturer makes compromises. You might get better materials but less features. Or many features but a disappointing engine. You’ll find lots of useful information online, including many YouTube videos. There’s less about improving the process for customers.

The buying process still involves visiting dealerships for test drives and talking to the salespeople. Manufacturers can raise the standards. Let’s look at our actual experiences with various brands in Toronto area. The dealerships aren’t identified and your experience would likely vary.

Acura

Tell salespeople to leave their videogame consoles at homes, not in their offices. Tell them to phone customers back when promised, not three days later. Remind them that a test drive with a nearly empty gas tank doesn’t inspire confidence.

BMW

Tell dealerships to make sure the vehicles run. An engine that shuts down during a test drive does not encourage a return visit. Walking back to a dealership was good for cardio, though.

Chevrolet

Make sure the salespeople have a passion for their product and know basics about the marketplace (e.g., the CX5 is not a Honda). Tell them to only give brochures on products which interest the customer. If customers dislike ample use of cheap hard plastic, a glossy brochure won’t change their minds.

Jeep

Tell salespeople to refrain from asking customers where they were born and the colour of vehicle they want to test drive. Don’t put customers in a vehicle with a manual transmission without asking since they probably want automatic. Let them go on the highway if they want. Tell salespeople that being new to the dealership doesn’t excuse ignorance about what they’re selling.

KIA

Tell salespeople to provide printed quotes upon request, rather than telling customers to write information down on the back of a business card. Have brochures that explain the optional 10 year / 200,000 km extended warranty. Ditto for the non-KIA protection plan for undercoating, tires and rims. Putting the prices online would save time and reduce the feeling that the finance manager makes up the numbers.

For test drives, put the customer in a higher trim level if the dealership doesn’t have the right one. This might even be a way to upsell. How is a customer judge a touch screen navigation or sound system from an explanation? Make sure the website works:

Lexus

Tell the dealership to make customers feel welcome. The place looked dead an hour before closing. No one was at the reception desk. The three salespeople alone in their offices saw us but didn’t offer any help. Maybe the boss was away (unless one of them was the boss).

Mercedes-Benz

Tell smaller dealerships to put desirable vehicles in the showroom. Who aspires to a

B250 ($43K) with no power seats
GLA250 ($47K) with no sunroof

Make sure the test drive vehicles work. The backup camera in our GLK250 showed a blank screen, though the vehicle had been driven 493 km and had been backed into its parking spot.

Subaru

Tell salespeople to stop whining about how few Foresters and Outbacks they have. Supply chain problems don’t concern customers. The allocation between dealerships isn’t our concern either. Have dealers put accurate inventory information online, rather than this:

Toyota

When a customer shows up for a scheduled test drive, don’t tell them another salesperson went home with the demonstrator. Wouldn’t a successful dealership have another vehicle to test drive? Sorry won’t do. Neither will saying that some customers buy without a test drive because we don’t.
Don’t tell customers who want to test drive on the highway to go another Toyota dealership but return to buy. (Yes this really happened).

Volkswagen

Make sure the salespeople know how blind spot detection works even if your vehicles lack this safety feature. Asking the customer is unusual. The best answer to why doesn’t the Tiguan offer a diesel engine isn’t to blame government regulations. When the competition offers a power trunk closing, adding that feature to your top trim makes more sense than having salespeople quip there’s less to break with a manual system.

If you’re promoting a $4,000 cash discount off the negotiated price of the outgoing model, discontinue the promotion if there are no vehicles left. We were told the dealership ran out months ago. Better still, have a substitute offer. Otherwise customers may feel they were tricked.

Lessons

The car shopping process remains poor. Buyers have more information than ever but the dealership experience remains disappointing. The manufacturers could help by mystery shopping and enforcing higher standards.

Links

PS We visited the dealerships and quiet times and only waited a few minutes for a salesperson.

November 30, 2014

KEEPING PROMISES: CORPORATE GOVERNANCE 2014 IN CANADA

We can’t predict the future but can take steps to put the odds on our side.

Corporate governance is a measure of companies keeping promises. Since life and health insurance is a long term promise that may last decades, isn’t that important?

Unlike car/home insurance, well-designed protection for mortality, morbidity and disability tends to have premiums guaranteed for life. That provides peace of mind since you can’t easily switch insurers: you’re older and your health may have deteriorated. In addition, newer products may fewer options and weaker guarantees. If the government changes the rules governing insurance, old policies may be “grandfathered” (exempt from the changes).

Similarly, financial advice can have lasting implications even when of high quality.

Lucky 13

The Globe and Mail has compared corporate governance for 13 consecutive years. Board Games 2014 includes 247 major companies in a searchable table. Data was prepared by the Clarkson Centre for Business Ethics and Board Effectiveness at the University of Toronto.

Not much changes, as you’ll see by looking at results for 2011 and 2007.

Selected Rankings

Let’s look at the financial sector, which historically ranks low in trust in comparisons like the annual Edelman Trust Barometer. Here are the banks, insurers, mutual fund manufacturers and advice givers. You’ll likely recognize the names.

Rank	Company	Score
1	Bank of Montreal (includes BMO Insurance)	98%
2	Sun Life Financial	97%
3 tie	Bank of Nova Scotia	96%
3 tie	Royal Bank of Canada (includes RBC Insurance)	96%
6	Manulife Financial	95%
8	Intact Financial Corp (belairdirect, Grey Power, Jevco)	94%
13 tie	CIBC / National Bank / TD Bank	93%
30	Industrial Alliance Insurance and Financial Services	89%
62	Western Canadian Bank	81%
69	Laurentian Bank	79%
81	CI Financial Group (CI Investments, Assante Wealth Management, Stonegate Private Counsel)	76%
185	Power Financial Corp (Great-West Lifeco, IGM Financial)	58%
197 tie	Canaccord Genuity Group / Fairfax Holdings Inc	55%
197 tie	IGM Financial Inc (Investors Group, Investment Planning Counsel, Mackenzie Investments)
205	AGF Management	54%
221	Great-West Lifeco (Canada Life, Great-West Life, London Life)	48%
231	Dundee Corp	46%
237	Power Corp of Canada	44%

Look at the range. Some companies are at the very top with near-perfect scores. Others are closer to #247 (Fortuna Silver Mines, scoring 35%).

Missing Companies

You may be dealing with companies which aren’t rated. That doesn’t mean they’re “bad”. How would they score f they were included? That’s very tough to say. You can’t really tell. You can ask them if they are ranked by credible independent parties in a transparent way. You may get measures of financial strength. Maybe that shows they’re great at making money but doesn’t mean they’re great at keeping promises.

As usual, buyer beware!

November 16, 2014

DEALING WITH BIASED FINANCIAL ADVICE

You won’t find the type of warnings on alcohol or tobacco applied to

sugary drinks: cause of about 180,000 deaths a year globally
credit cards: 30% of customers don’t payoff their entire balance each month and 93% of the credit cards in Canada (257 of 275) charge 11.25% to 30% interest according to a handy government comparison tool.

The onus is on us to learn, evaluate and decide. Attempts at consumer protection (e.g., banning sugary drinks in school vending machines or capping credit card interest rates at prime+5%) get challenged. How dare we lose our freedom to harm ourselves!

Which Side?

Sellers claim to be on our side, but are they really? We’re encouraged to

drink responsibly (but still drink)
follow the rules of the road (but buy vehicles which break them in commercials)
eat a healthy breakfast (but include Nutella)

Since shareholders have different interests than buyers — and rightly so — don’t count on voluntary transitions to better guarantees, more transparency and lower prices. Look at MasterCard/Visa credit card transaction fees in Canada, which are among the world’s highest. They’ve increased 25% in the last two years. Now MasterCard/Visa will make voluntary reductions of about 10%, leading to a typical charge of 1.5%. This is considered a victory, but for whom?

Money Madness

The financial sector promotes financial literacy … but profits from our ignorance, inertia and limited choices. That’s not as effective as improving the products. We could be prevented from paying heavily on unpaid credit card balances if interest rates were lower. We could avoid the pitfalls of mortgage life insurance if poor products were not sold.

Until we live in perfect world, beware.

An Example

We were looking for a video tripod strong enough to support a camera, 15mm rod system, teleprompter and an iPad. The advisor at a well-known specialty store recommended tripods costing $750 or more! When I asked for a cheaper option. I was shown a $350 tripod with weak legs and a poor head. Then another $750 tripod.

Because I did my research, I knew that getting photography legs and a video head separately would be better and cheaper. The advisor — an expert — could have suggested this but maybe she got sales commissions or thought conventionally.

A Strategy

Protect yourself with education. You can often learn the basics online from objective sources. That helps you ask the right questions and spot the wrong answers. You might find better solutions than those presented to you.

September 21, 2014

DEALING WITH AN INEVITABLE COMPUTER BREAKDOWN

No matter which computer you buy, or how carefully you take care of it, you can’t prevent technical problems. Over the years, I've had machines from ALR, Compaq, Dell, IBM, Lenovo, NEC, Toshiba. In addition, I've had high performance computers custom-made and even assembled two mini-towers.

In recent years, I switched to notebooks because they’re portable, quiet and sufficiently powerful.

The most problematic was a pricey customized Lenovo workstation notebook optimized for video editing. During the latest repairs, the technician said malfunctions are most likely with CTO. That means something like Customized To Order. When you get a computer specially made, there's less quality control and delivery takes longer.

Lesson learned: buy computers "off the shelf" with no customization.

Software

In addition, problems arise when updating operating systems. I no longer bother, preferring to using the computer with whatever was pre-installed. Replacing the whole machine is faster and less aggravating.

Saving Money

Price doesn’t ensure reliability and the technology keeps improving, That’s why I've started buying less expensive computers --- closer to $1,000 than $2,000. They last about two years before getting cascaded to secondary uses.

The Biggest Woes

The biggest problems occur with

enhanced graphics cards: the standard video card in a notebook computer is weak for video editing (and gaming). I usually opt for an second more powerful graphics card. The computer switches between the two as required.

A better and cheaper solution is to get a powerful desktop computer for video editing. You can then upgrade components and worry less about overheating. Either way, the big problem is with video drivers (software which communicates with the hardware). Count on more trouble if you're upgrading your operating system, since the new drivers may have bugs.
hard drives: you need backups of your data. I use an external hard drive and online backup, both via CrashPlan. For additional safety, I put key files in the cloud with Dropbox, Google Drive or OneDrive. You may think SSD hard drives are better because they have no moving parts and cost much more. I've had two fail …

Extended warranties

I'm not a fan of extended warranties but with computers (especially laptops), they can be useful. Even then, repairs take time and you're stuck while waiting. That's why keeping an older computer as a backup is wise. For instance, I have three year next business day service but on Friday, that means Monday. You might have to spend hours on the phone with the help desk first.

Currently, my Dell isn't working. Windows 8 isn't starting. There are no hardware errors. The problem seems to be with the enhanced video card drivers. The recovery options in Windows 8 didn't work. I was sent DVDs to reinstall Windows but drivers for the hard drive couldn’t be found. I was then sent a USB key with Windows 8 and the drivers. The hard drive isn't being detected. Dell is sending a new hard drive which they want me to install under their guidance. Since it's currently the weekend, the shipment won't take place until Monday, which means delivery won’t be until Tuesday or Wednesday. That's nearly a week without a working computer.

While inconvenient, I've continued working with a two generation old Lenovo Windows tablet.
As with risks based on your health (disability, morbidity, mortality, longevity), you can't tell when problems will arise. You can take steps to reduce the financial harm.

Links

PS You can use other devices like tablets and smartphones while awaiting repairs.

August 25, 2014

TIPS ON BUYING CAR AND HOME INSURANCE

was the dog the driver? pickup truck + ditch + winter = accident

When you’re looking for insurance on your home or vehicle, you may be tempted to pick the lowest price or buy from a convenient place. More important is whether your claim will be paid.

When disaster strikes, you find out how good your car or home insurance really is. Many customers were shocked after Hurricane Sandy and the Western Canada floods. They found they didn't have the protection they expected. Some insurers stepped up to make exceptions. That's the type of insurer you want if you ever have a claim.

How Premiums Get Set

Actuaries make guesses ("projections") of future claims based on past data and future trends. If actual claims are higher, profits are lower. That leads to pressure to restore profits. (Factors like expenses and investment returns also affect profits).

Raising rates isn’t easy unless competitors do too. Another solution is to quietly cheapen the ingredients.

Example: Since strawberries are expensive, Starbucks coloured their Strawberry Frappuccinos with natural red dye from cochineal beetles. Consumers found out and weren’t pleased. Starbucks wasn’t prepared to use real strawberries but compromised by switching to dye from tomato extract.

Cutting Back

Insurance gets cheapened by cutting back on the protection --- transferring more risk to you. Coverage which was solid last year might deteriorate this year. For car and home insurance, the terms can often change each year when you renew your protection. You might face

more exclusions
bigger deductibles
smaller benefit limits

The Alberta floods showed that premiums may have been similar but some insurers were denying claims their competitors covered despite similar contract wording. Now insurance policies changing after the $1.7B in flood payouts --- even for customers who weren't affected.

Note: Life insurance, disability insurance, critical illness insurance and long-term care insurance are different. Rates are often guaranteed for life and contract wording can’t be changed.

After Hurricane Sandy, about 23% of claims led to no payment. The two main reasons: exclusions and high deductibles. Did these buyers know they weren’t covered? Who advised them?

Since insurers decide which claims to approve and how much to pay out, they can improve their profits by denying claims and/or reducing payouts. Since each claim is assessed separately, trends are difficult to spot. You may recall Hurricane Sandy victims getting short-changed on their flood insurance benefits by the claims adjusters who the insurers trained and employed.

Taking Precautions

There are three keys to getting claims paid for any type of insurance: select an independent advisor who works through an independent distributor and offers products from insurers which keep promises.

If you buy directly from the insurance company, who’s on your side during a dispute? You might get stuck dealing with a by-the-script call centre representative located far away.

If you buy through an association (or group), don’t count on lower prices, stronger guarantees or more lenient claims adjudication. The association likely receives big financial incentives since insurers compete to get access to the members. As the association becomes dependent on the revenue where are their loyalties?

Bank of America had buying power with QBE Insurance but inflated the cost of insurance they forced homeowners to buy. The result is a $228 million settlement. Other banks had similar schemes and also got caught.

Apples or Avocados?

Unless you're very patient (or a lawyer), you may have difficulty comparing one insurance contract with another. How do you know what's left out or what's weak? An independent advisor can help. You can contact more than one.

Generally speaking, prices are similar among companies when you're making a fair comparison. Be wary if you find big price differences. What are you giving up for the apparent savings?

Money Saving Tips

With property insurance, there is a component to protect you from liability claims. If you have both home and car coverage, you're getting liability coverage in both places. You may save money by getting both plans from the same insurer, reducing the liability coverage and buying an umbrella policy for the liability.

Look At Corporate Governance

When disputes occur, you benefit from having an insurer that ranks high in corporate governance (a measure of keeping promises). They’re more likely to treat you well and make exceptions. For example, TD was reversing decisions on Alberta flood claims and lost $170 million. That's better for customers than shareholders.

Links

PS As the summer driving season ends and schools re-open, please pay attention to the most dangerous part of driving.

August 17, 2014

CHECK YOUR INSURANCE STATEMENTS FOR MISTAKES

My client’s annual statement for universal life insurance showed a tax-free death benefit of the face amount ($2,000,000) plus the investment returns ($317,079). Do the math and what’s the total? I get $2,317,079. The insurer showed $3,317,079 — an extra million dollars. I contacted them and got a quick response. They’re issuing a letter of apology and a corrected statement.

Luckily, my client didn’t have whole life insurance where the lack of transparency makes mistakes almost impossible to spot.

Big insurers have big resources but even leaders in corporate governance make mistakes. That’s because computers are programmed and the limited testing is generally done internally. The systems are expected to be 100% functional when launched. In contrast, Gmail was in beta for from April 2004 to July 2009.

Time bombs

When I developed products, we focused on launching new offerings. We maximized our resources by delaying work which could be completed later. For launch, we needed

marketing tools: an announcement, PowerPoint presentations for the marketing directors to use with advisors, computer-based tools for advisors to prepare proposals for their clients
administration support: printing the policy contract (basics like accepting premiums, paying compensation etc were already part of the administration systems and rarely required major modifications)

To speed up times, we minimized printed materials like marketing guides. They looked nice but added costs and created delays. We then had leeway to make “last-minute” changes.

Month-to-month, universal life insurance policies operate much like bank accounts with deposits (premiums, investment returns) and withdrawals (mortality charges, administration charges). The major calculations took place on policy anniversaries. That meant we had almost a year to get ready.

Other capabilities like inforce illustrations (projecting performance after purchase) could be delayed for years. Manual calculations could be done in the interim, if necessary. I once got approval to add two unbudgeted head count. During a hiring freeze. That’s because we could no longer defer some work.

The Human Element

Staff leave. Staff forget. Staff are under pressure to meet deadlines. Miscommunication occurs. Documentation may not be comprehensive enough or clear enough.

Administration systems change. Older products might be on legacy systems. Migrating them to the latest system is much more difficult than upgrading from a version of Windows (see challenges in trying to upgrade to Windows 8 or from 8 to 8.1).

Be Vigilant

Mistakes occur. You might not be sympathetic but you can be vigilant. You don’t need a PhD in mathematics or to be an actuary (though both help). Instead, be a detective. Question what looks odd or what you don’t understand. You’re entitled to ask.

Links

PS Your advisor should be looking for mistakes on your behalf.

August 10, 2014

PRICE MATCHING BY BUYERS AND PRICE MISMATCHING BY SELLERS

The price match should have reduced the price by a dollar from $7 to $6. Instead, the cashier reduced the price to a dollar --- a reduction of $6. The customer noticed but didn’t say anything. This wasn’t for her personal benefit but to protect the cashier from getting in trouble for the mistake.

That’s noble, but would the customer in this real-life example have been concerned about the cashier if the price were higher than expected?

Justification

We’re great at justifying to get advantages. Have you heard or used arguments like these

stores overprice
you didn’t make a mistake
you had to do extra work to get the price match
the store doesn’t lose money overall because unaware customers are paying their higher price (the store didn’t lower their price even when you showed them they were charging more)
the store should train their staff properly
if the store had the lowest price, there would have been no need for a price match

What’s The Real Price?

You can only compare prices when different retailers sell the same product and publish their prices. They’ll often match prices when you provide proof. Sometimes they’ll reduce their prices temporarily to match a competitor (e.g., when we ended 10 years without a TV).

Mismatching: When You Can’t Compare

When you’re buying financial products, what’s the lowest price? The options might be tailored to you, which makes comparisons difficult. There’s rarely an easy way to check online. Prices might not be negotiable, even if you have proof. While you may not be able to much about the price, you can get better value by selecting a better advisor.

When you can’t compare make good comparisons, you risk getting poor options. For instance, Freakonomics found that real estate agents encouraged clients to buy/sell quickly, rather than wait for a better price … but left their own properties on the market for longer and sold for higher prices (see the video in tips for first-time homebuyers).

Sellers have ways of justifying their actions

the higher margin choice isn’t necessarily “bad”
selling takes work and maybe you took extra time
showing more options might confuse you and stop you from buying (see the jam experiment)
you’re better off buying what they have in stock
you’re not forced to buy

Both buyers and sellers have ways to justify their actions. Buyer beware. Seller beware too.

July 7, 2014

WHY DO YOU CARE WHAT YOUR INSURANCE ADVISOR GETS PAID?

Life insurance offers solid protection and powerful tax advantages when properly implemented. If buying puts you in a better position, why does the amount of money your advisor gets matter? Logically it shouldn’t. Emotionally, it does.

We Balk At The Unfair

We have an innate sense of fairness from birth. Give a child a cookie and they’re happy … until they see another kid got two.

Let’s say a stranger and you can share $10. The stranger decides on the split. If you’re not satisfied, both get nothing. If you were offered $1, you’re still ahead but would you let the stranger keep $9 (a 10/90 split)? Maybe you think a 50/50 split is fair but would accept 30/70. If you don’t get enough, maybe you’d cancel the arrangement leaving each with nothing. That’s what happens in the Ultimatum Game.

The Insurance Dilemma

Now suppose you don’t know how much money is available. You might might reject $7 if you think the stranger has more than $10 to share. Perhaps the stranger has $20 or even $100 to split.

With insurance, the products have margins built in. Advisors and buyers don’t know how much. Insurers decide on the split in value between the advisor and you. As the advisor gets more, you get less. Insurers who sell through independent advisors must pay compensation similar to their competitors. Otherwise, advisors are tempted to sell products from other companies (even if inferior).

You can’t tell if you’re getting an optimal deal since you don’t know what’s possible. There are different types of products (e.g., term, whole life or universal life), different companies varying in corporate governance and different ways to structure strategies. You only know what the advisor chooses to show you. You don’t know what factors influenced the selection.

Secrecy

If you paid your insurance advisor directly, you could compare what you’re spending with the value you’re getting. The industry fears you wouldn’t pay as much as advisors want. Their solution is to hide the compensation inside the products.

The lack of transparency has a side effect. You may think your advisor gets paid too much.

You probably don’t know what your peers earn and advisors don’t know what other advisors get paid. Compensation can vary by distribution channel (captive agents vs independent advisors vs national chains). While commissions are standardized within a channel, insurers pay varying bonuses (called “overrides”) to intermediaries called Managing General Agents (MGAs). In turn, these MGAs keep a small portion and pay the rest to the advisors contracted through them. Since top MGAs and top advisors get more, the rest get less. That seems fair — pay for performance.

Perceived Value

Becoming an insurance advisor requires little more than passing a multiple-choice exam. People who invested heavily in their careers — say by going to university, getting a professional designation or achieving financial success — may resent advisors making lots on a sale.

Sales success comes more from prospecting than technical skills.

Advisors who’ve been in business for 10+ years know how to sell. They look and act trustworthy. Appearances aren’t evidence of product knowledge or signs that you’ll get ongoing service. Advisors might keep selling what they’re used to selling rather than mastering better options.

When you have doubts about value and fairness, maybe you need more information?

Links

PS When you fill out an insurance application, your advisor finds out what you're paid and what you're worth.

June 28, 2014

MAKE SURE YOUR INTERNET SERVICE IS RUNNING AT THE PROMISED SPEEDS

Internet service isn’t cheap. How do you know if you’re getting the speeds you’re promised (and paying for)? You can’t tell unless you monitor regularly. You then have a baseline for comparison.

Your Own Tests

You can run your own tests with Ookla SpeedTest from your browser or as an app on your mobile device. For better results

measure via a wired Internet connection (Plan B: use a wireless device close to your WiFi source)
disconnect all other devices accessing the Internet (Plan B: accept lower results)

Note: The speed over WiFi is lower, fluctuates and varies by room. One reason to get a faster plan is to accommodate these drops. (Related: How to get your wireless Internet working)

If the results are far from what you expect, call your provider to find out what’s wrong.

Detailed Monitoring

Rogers is the only Internet provider in Canada with certified speeds. We’re part of the independent monitoring via SamKnows. Our service is monitored 24/7 and we can see the detailed reports ourselves. That’s how we find out and verify problems.

Speed Today

Our Rogers Ultimate unlimited plan promises 150 Mbps downloads and 10 Mbps uploads. We routinely get faster downloads (about 190 Mbps) and slightly faster uploads (about 11 Mbps). Since our service is reliable and stable, we don’t routinely check the performance.

Our speed today is much lower than usual — about 100 Mbps (blue line in graph below) instead of 150 (the red line). That’s too big difference to ignore.

Speed This Month

This month, our service started deteriorating on the 10th. That’s when the blue line dropped below the red line below. We noticed but didn’t notice because our service was still fast. That’s another reason to get a faster plan.

Anomalies happen and are usually fixed quickly. I called Rogers. They said our Internet signal strength has dropped to marginal levels. They’re sending a technician tomorrow.

Speed This Year

Overall, Rogers is excellent at delivering consistent fast speeds. This graph of speed year-to-date shows this. The last slowdown was minor, months ago and quickly fixed. At that time, there was apparently a problem affecting the neighborhood, perhaps caused by the polar vortex.

Lessons

Just because speeds are independently certified doesn’t mean you’re getting them or will keep getting them.

Without monitoring, we might not have called Rogers. It’s easy to think that slowdowns are caused by other users, including family members. If we checked the monitoring more regularly, we would have had a fix earlier.

Links

PS We upgraded our unlimited plan from 150/10 plan to 250/20. Is Hybrid Fibre better? I’ll share details once our service is fully functional.

June 22, 2014

SIX QUESTIONS TO ASK BEFORE SELECTING AN INSURANCE ADVISOR

If you're looking for an insurance advisor, you’ve got lots of choices. Before picking one, interview several and ask questions, including these six.

1. How Did You Get Into The Insurance Business?

This is an indirect way of asking why they decided to sell insurance. Who grows up aspiring to get into commissioned sales? Are they part of a family business? Couldn’t they find another job?

One advisor may look much like another. When you start with why (see Simon Sinek’s TED Talk), you often find big differences.

2. What Products Are You Licensed To Sell?

Many advisors are reluctant to "leave money on the table". They may sell a range of products like life insurance, health insurance, employee benefits, mutual funds, segregated funds, annuities and mortgages. You'll often see what they provide on their business cards and websites.

Did you buy your last TV at a department store?

One-stop shopping may look appealing but can an advisor really master everything? You could hire specialists instead. A plumber, electrician and painter each have much more practical experience than a handyman.

3. Which Companies Do You Have Contracts With?

A captive advisor is like a commissioned employee and only allowed to sell what that company permits — which may be less competitive and less flexible. The advisor’s business card often has the name of the company, rather than their own brand.

An independent advisor can have a contract with most insurance companies. To get business, the insurers must be competitive. Since products and procedures differ, an advisor cannot realistically know them all well. Advisors often do most of their business with several insurers.

Variants: which companies’ products do you not sell? Why?

4. What Designations Do You Have (And What Do They Mean)?

The world of life insurance is especially complicated because you're dealing with risk, accounting, investing and law. Assessing your needs and developing optimal solutions takes skill. Yet selling insurance requires little more than passing a multiple choice exam.

The better advisors take the time to earn designations that require some effort. Look for a CFP (Certified Financial Planner), or — better still --- a CLU (Chartered Life Underwriter). These designations impose additional standards of conduct on their members. For instance, there are requirements for continuing education.

Ask advisors what their designations mean, how much continuing education is required and why they matter.

5. What Associations Do You Belong To?

There's no self-regulating association to which insurance advisors must belong. There are for accountants, actuaries, doctors, engineers and lawyers. The associations can investigate and discipline members for misconduct. The processes may not be perfect, but they're well intentioned.

Insurance advisors aren't required to belong to any association. In Canada, the main association for advisors is called Advocis. It’s reasonable to expect advisors to belong, though some prefer the Independent Financial Brokers (IFB). Advocis has an sister organization for top advisors called Conference for Advanced Life Underwriting (CALU). There’s also the Million Dollar Roundtable (MDRT).

Associations promote the interests of their members. Yet some advisors won't join. They get the benefits from the lobbying the associations do without spending a penny. What moochers! If they'll take shortcuts like this, be wary.

6. Where Is Your Blog?

Advisors often acknowledge they should have a blog but they don’t have time, they don’t know how, they aren’t convinced of the ROI, …

Advisors can create and publish their original content through a blog (or podcast or video). LinkedIn is an excellent, easy-to-use platform. How often do they publish? How much do they publish? When did they last publish?

There are many advisors but only one you. Why not take the time to find the right advisor for you?

Links

PS For fun, ask “are you a fiduciary with a legal obligation to put my best interests first”?

June 15, 2014

READ THIS BEFORE GIVING REFERRALS TO AN INSURANCE ADVISOR

Insurance advisors love referrals but why would you bother giving them? They sell the same products from the same insurance companies at the same prices. What really sets an advisor apart?

The potential advisor must show they are significantly better or different to overcome the client's inertia. As with other consumer goods, packaging helps.

A common approach among insurance advisors is claiming to offer “exclusive” financial strategies. There’s a risk with financial innovation but there’s an allure too. The advisor might sell something different, but at least they got to meet the prospect. The “10-8” insured leveraging strategies were often used as door-openers, though the 2013 federal budget reduced their appeal.

Before giving a referral, consider these questions.

Do you understand the strategy?

If you can't explain it simply, you don't understand it well enough.
— Albert Einstein

Just because you don’t understand a magic trick like levitation doesn’t mean you can believe your eyes. Insurance strategies are designed to look appealing and plausible. Advisors are trained to look knowledgeable and sincere.

Results which look too-good-to-be-true, might be. Assumptions and interpretations affect the results in ways that may not be obvious.

What if the advisor is wrong?

You likely aren't an expert in what the advisor is selling. You might not be especially interested in the details. If the advisor is wrong, what's the worst that could happen?

You're a steward with an obligation to protect your connections. What happens to your relationships and credibility if you make a bad referral because you didn’t do enough checking?

What makes the new advisor a better choice?

Unless the new advisor seems better, why go through the hassle of switching? The new advisor might appear more innovative, more knowledgeable and better at providing ongoing service. That doesn't mean you get what you see. Advisors are trained at prospecting. The successful ones get very good at building rapport and getting business.

What makes the advisor a true expert?

The only source of knowledge is experience.
— Albert Einstein

Advisors get rewarded for selling. Success requires being good at that. Once they've found a prospect, they can bring in other people to help them. I was a resource for them when I worked for insurance companies.

It's unrealistic to expect an advisor to be an expert in the technical details, the substance. They are rewarded for creating the sizzle that marks the start of the sales process and the closing at the end. They get help in the middle.

Think of buying a car. You start with the salesperson, talk to a service advisor for maintenance, have the work done by a technician and pay the service reception desk. This division of roles is more efficient and provides you with better service.

To get more than sizzle. Who taught the advisor? Who supports the advisor?

Does the advisor claim to have unique strategies?

The secret to creativity is knowing how to hide your sources.
— Albert Einstein

If an advisor claims to have have something unique, you may not be getting the whole story. The only difference may be in the packaging. Ultimately, you get the same product from the same insurance company at their normal price.

When I was the product actuary at National Life, we created white label products like MD Life Plan (sold to doctors) and TD Universal Life (sold to bank clients). These products performed better than our normal products because the compensation was lower. Other advisors who sold our products were not pleased that we were helping their competition. Sales suffered. Lesson learned. Future white label products had our normal street pricing and differed only in packaging (e.g., exclusive investment choices in UL).

What are the potential side effects?

A fiduciary like a doctor, lawyer or accountant has a legal responsibility to tell you about side effects from a recommendation. Salespeople need not unless you ask.

For instance, when I got my first SUV, I wasn't told the tires only lasted 40,000 km and that replacements cost $500-$700 each! I wasn’t told how pricey the scheduled maintenance was either. Caveat emptor in action.

Who is the supporting the advisor working?

Advisors need help with complex strategies. Asking for help creates obligations to

sell higher compensation options to "feed" the extra mouths
sell products from a specific insurer if getting help from them
close sales to get the revenue

If an advisor claims to be working alone, be wary. That’s unlikely. Life insurance combines the specialized worlds of risk, accounting, investment and law. How well could one person know all of them?

How forthright is the advisor?

"It's the words that we don't say that scare me so."
— Elvis Costello, Accidents Will Happen

A forthright advisor tells you what you ought to know before you ask.

Have you been given adequate information about the advisor's hidden incentives (e.g., commissions, bonuses, conventions), the downsides, the reasonability of the assumptions used or the alternatives? You may have difficulty figuring out what's left out, which makes it tougher to ask the right questions and gauge the responses.

What does Google say?

Experts publish and get interviewed. Is the advisor an expert?

Do a web search for the advisor’s original content. In particular, look at their LinkedIn profiles. What have they published there? How recently? How many readers do they have?

Nothing stops advisors from creating and publishing quality content continually — except themselves. Their digital tapestry shows the past and may predict future performance.

Why does the advisor need your help?

If you bought what the advisor wants to sell to your connections, you have a reason to tell the ones who might benefit.

If you didn't buy, you don't have direct experience with the advisor’s full process. That’s a reason to be more cautious. The post-sale service might not meet your pre-sale expectations.

Who backs the promises?

Things can go wrong. What then? What is the advisor guaranteeing? The fineprint often tells you to get independent advice, which is a way to transfer responsibility from your advisor.

If you're using standard strategies backed by mega-insurance companies with solid corporate governance, they have incentives to fight on your behalf. For 10-8 insured leveraging, insurers fought all the way to the Supreme Court. If you're buying an “exclusive” for-your-eyes-only strategy, who can you count on?

What’s your reward?

Advisors might pay you a referral fee if a sale occurs. This is illegal in Ontario but still happens. If you're getting rewarded for giving referrals, your objectivity may suffer --- even if you think you're unbiased. It's tempting to believe what makes us money. It's not as if people are forced to work for tobacco companies or today's equivalents like processed foods.

Would you make a referral for free? If not, should you for money?

Links

PS Buyer beware. Referrer beware too.

June 8, 2014

FIVE MONEY LESSONS FROM JACK BAUER AND 24

We can learn valuable lessons about money from Jack Bauer (Kiefer Sutherland) and others in the Counter Terrorism Unit (CTU) . Here are five.

1. Communicate Clearly

When time is tight, every word and second matters. In 24, you know what’s said and what’s meant. Simple questions get asked if there’s a need for clarification or confirmation.

Does your advisor have a clear understanding of what you want? Your goals and priorities may have changed since your last meeting. Advisors are not mind readers and may not be proactive. Tell them.

Conversely, your advisor also has an obligation to communicate clearly with you. If you don’t understand, ask. Since you’re paying, you’re in charge. Get your money’s worth.

2. Trust With Caution

The world of 24 is filled with mistrust. You can't tell who’s telling the truth or how long the honest will stay truthful. The stakes are very high and human motivation is complicated. There are conflicting interests. The losers don't accept defeat willingly.

Defiance harms trust. When people think they're doing right, they may bend rules, violate direct orders and tell blatant lies. The bad people have an advantage because they aren't constrained by rules of law.

Building relationships is a key strategy for advisors. Relationships help retain you as a client and make you more receptive to advice. As the years pass, you can become more vulnerable. For instance, Tom Hanks got cheated by his insurance advisor but the process took years. In 24, the process is much faster.

3. Each Moment Is Unpredictable

The world of 24 is filled with twists and shocks. We don't know what’ll happen in the next moment or next hour. That’s true in real life too.

On 24, we know Jack will overcome setbacks and achieve the key goal. Our lives have drama but don't come with the same assurances. Unpredictable events like injury, sickness or death are rare in our working lives (low probability) but can cause serious financial hardship (high severity). Insurance is a cost-effective way to transfer the risks.

4. We All Need Help

Jack is the main character but he relies on help from many others. Sometimes he asks the wrong person but things eventually work out. Diligence is important. Keep inspecting what you're expecting.

Since each organization has different strengths and limitations, Jack gets help from different places (CTU, FBI, the NSA, the President). If you rely on advisors from the same firm, you get convenience but risk unknown compromises. You get more options with independent outside advisors.

Sometimes Jack can’t get the help he needs because the providers havce conflicting interests. The good of the many can take precedence over one life. That makes sense unless you’re the one. That’s when you need to look out for yourself.

5. Be Flexible

Events don’t happen as expected. When a plan fails in 24, Jack and team make instant changes with minimal discussions based on the little information they have.

Our own lives often lack the excitement a viewing audience demands. That's good. Precautions like insurance reduce the drama further.

After all, Jack Bauer and CTU are forms of insurance — well worth the premiums.

Links

PS We never watch 24 before. Thanks to Netflix, we’re well into the third season.