CASE STUDY: THE DOCTOR THE INSURANCE ADVISOR MISTREATED

A customer is the most important visitor on our premises, he is not dependent on us. We are dependent on him. He is not an interruption in our work. He is the purpose of it. He is not an outsider in our business. He is part of it. We are not doing him a favour by serving him. He is doing us a favour by giving us an opportunity to do so. 
— Mahatma Gandhi

Is this the era of bad service? A week without phone service. A summer of medical mistreatment in 2008. There's poor after-sales service with life insurance,

Doctors are among the most coveted clients. Even they get mistreated.

Doctor Says

Here's an email from a doctor

Hi Promod,

I'm a physician living and working in Toronto.

I recently met with my insurance adviser to transfer life insurance policies to my professional corporation (PC). He asked me to meet with an actuary to determine a fair market value in order to allow for their sale to the PC. I found your website through the Canadian Institute of Actuaries website.

Would you be able to assist with this assessment and what cost would be involved for your time and opinion?

Regards,

Response

Here is a simple but powerful rule: always give people more than what they expect to get. — Nelson Boswell

I've never, never, never heard of a single time where a client was told to arrange an actuarial valuation of their insurance on their own. I even asked around.

Experienced insurance advisors already know valuation actuaries. Novices can easily find you a pre-screened one with a quick email or phone call to the intermediary through which they sell insurance (called a Managing General Agent (MGA)). This is step 2 in the graphic from the Globe and Mail (click to read).

If your doctor prescribed an MRI, you'd expect them to arrange the details, guide you through the process and follow-up.

Advisors don't need much training to sell insurance. That's why solid support is readily available to them.

Prescription

How you do anything is how you do everything. Your “character” or “nature” just refers to how you handle all the day-to-day things in life, no matter how small. — Derek Sivers: Character predicts your future

How can you trust an advisor who takes a clear shortcut? There may be weaknesses with the insurance currently in place and the proposal to change ownership.

Before going further, this doctor would do well to get his insurance needs evaluated by an advisor he trusts. The Process System is a simple way. There are other models that achieve similar results with more steps.

What's Wrong?

There are no traffic jams along the extra mile. 
— Roger Staubach

Insurers pay salespeople the bulk of their compensation the moment you buy. You've prepaid for after-sales service and are entitled to receive it. The advisor could have helped the doctor in mere minutes.  How long does it take to make a phone call or send an email? Better still, the advisor could have taken care of the details to save the doctor's time.

Why would an advisor provide such lousy service? No immediate compensation. How sad.

Links

• Where are the customer service ratings for advisors?
• Why after-sales service stinks for life insurance
• The Globe and Mail on Canada's insurance loophole: what else is wrong?
• Does your insurance company win when you cancel your coverage?
• Do financial doctors make as many mistakes as medical doctors?
• Christmas in the emergency ward
• Surviving a week without phone service
• When doctors disagree: toe to toe
• Three keys to getting your claim paid
• The Process System for planning simply
• The foolproof measure of trust
• image courtesy of Steve Ford Elliott (Ireland)

Podcast 126 (4:41)

direct download | Internet Archive page | iTunes

PS In a future post, we'll look at the kind of post-sales service you deserve.

MEET INDISPENSABLE COMRADES ON LINCHPIN DAY

Are you indispensable?

That's tough to answer unless you think the world orbits around you. Maybe you've taken steps to become a bottleneck. Do things go wrong when you're on vacation? If so, you're more disposable than you think (unless you're unionized).

Suppose you died. Finding a replacement may take time but your company won't shut down (unless you're a freelancer).

The truth is that life goes on. We often matter most to our families. They'll survive too. How well varies …

Make A Difference

The truth is that we make a difference in the lives around us.

You may want to make a bigger impact. Taking a path you rarely travel helps. So do comrades. There's vicarious joy in seeing them make the world better too.

How To Identify The Indispensable

If you're not sure if you're indispensable or on the path there, this video from Jacqueline Novogratz helps you decide. She the founder and CEO of Acumen Fund.

Jacqueline Novogratz on how to recognize a linchpin from Seth Godin on Vimeo.

Where To Find Like Minds

How do you find people who share your view of the world? That's easy online but less than satisfying. Meeting in person --- at least occasionally --- builds bonds. If you've already connected online, you're not meeting strangers.

That's why I'm more interested in attending the local TEDxTO than an official TED conference thousands of miles/kilometres away.

Linchpins Are Everywhere

Attend a free volunteer-run event on Linchpin Day, June 14, 2010. Currently 5,680 people from 90 countries have registered for 791 events across the planet. Most gatherings have less than 30 registrants. That's a recipe for intimate and interactive discussions.

You're bound to meet people making a difference in the world. If this appeals to you, why not participate?

Links

• Linchpin Day directory (Meetup.com)
• Linchpins are everywhere (raise the flag) (Seth Godin)
• Linchpin video summary (Steve Cunningham)
• You (yes you) are a genius [The Linchpin Session]
• Three lessons from Seth Godin live at The Linchpin Session
• Take a path you don't regularly travel

Podcast 70 (2:49)

direct download | Internet Archive page
PS I'll be at two gatherings: general at 10 AM (organized by Phil Johnson) and philanthropic at 5PM (organized by Paul Nazareth). If you're there too, let's chat.

HOW EFFECTIVE ARE TAX AUDITORS?

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.

Cheaters

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.

Links

• Auditing Small and Medium Enterprises by Canada Revenue Agency (Auditor General, March 2009 | 40 page PDF)
• 2009 Auditor General's Reports Released (KPMG)
• Biography of Auditor General Sheila Fraser (about.com)
• Mope, Gloat or Move: How tax compares by province
• Surviving an audit: two lies and three tips
• photo courtesy of Adam Ciesielski (Capetown, South Africa)

Podcast Episode 37 (5:45)

direct download | Internet Archive page

Mope, Gloat or Move: How Tax Compares by Province (Personal and Corporate)

I got something now to think about.

I'll work all day but not to pay it out.

--- Pete Townshend, Keep on Working

Tax. Tax. Tax. Like the weather, something we talk about but can't do much about. 

How do taxes compare from one province to another? We can find out from timely new report entitled In Search of Tax Excellence: Where Provinces Rank in Creating a Tax Climate for Small- and Medium-Business Success.   This research comes from the Canadian Federation of Independent Business (CFIB).

Smaller businesses use about half the country's workforce to produce about half the GDP. They face specific tax worries, worth understanding.

The full report runs 51 pages packs in many details and contains many references for further reading. The analysis considers 65 indicators encompassing the five key areas of tax

1. premiums and payroll tax
   
2. corporate income tax
   
3. property and capital tax
   
4. personal income tax
   
5. sales and excise tax
   

We'll look at high level results for businesses and individuals. 

Gloat: The Best Province

I'd rather be here than any other place.

--- Pete Townshend, Keep on Working

The best province for smaller businesses is Alberta. That's probably no surprise. You can enlarge the chart below by clicking on it. 

Mope: the worst provinces, Ontario and Quebec, came as a surprise.

"It is alarming that the two biggest provinces, which make up 60 per cent of the total economy, are the weakest links in the provincial tax chain."
--- Catherine Swift, CFIB President

Move: I'm not ready to return to Alberta where I lived from ages two to five. Or to New Brunswick or Saskatchewan. But I'm disappointed as an Ontario resident.

Personal Income Tax

Let's look at how much income tax we pay, provincial and federal combined. In the heat map, green means the lowest tax. British Columbia and Alberta have the lowest taxes, depending on the income. Quebec is at the other extreme. 

Corporate Income Tax
Alberta and Manitoba have the lowest corporate tax, depending on the level of income. The worst provinces are Ontario and Quebec. 

We can't do much about tax levels but our governments can. In tax worries for smaller businesses, you'll see they have been adding jobs --- unlike larger companies. Where would tax savings go? Smaller businesses say they would invest in new equipment, pay down debt, increase employee wages, hire more employees and train employees better. Wouldn't that help the economy?

Links

• In Search of Tax Excellence (CFIB, April 2009)
• Tax Worries for Small Business Owners in Canada
• The Problem of "Trapped" Retained Earnings
• Secret 7: The Best Tax Sheltering in Canada
• The Four Steps in Wealth Management

Podcast

direct download | Internet Archive page

RICHARD BRANSON: WHEN YOUR SERVANT IS YOUR MASTER

Everyone needs something to aim for. You can call it a challenge, or you can call it a goal. It is what makes us human. It was challenges that took us from being cavemen to reaching for the stars. --- Richard Branson

Richard Branson has intrigued me for years. Not for his knack for getting publicity but because he makes the world better. He cares. He enters established markets (e.g., music, airlines, mobile phones) and makes them more competitive. And more fun.

We look for opportunities where we can offer something better, fresher, and more valuable, and we seize them. We often move into areas where the customer has traditionally received a poor deal, and where the competition is complacent. --- Richard Branson

No Show
I expected to see Branson live at the 2007 Real Estate and Wealth Expo (see lessons learned), alongside Tony Robbins and Donald Trump. We were duped (probably by the organizers). Branson appeared on screen from his island home in a presentation that looked prerecorded. Even so, he commanded our attention.

When Old Is New

If I have not read a book before, it is, for all intents and purposes, new to me whether it was printed yesterday or three hundred years ago. --- William Hazlitt

Autobiographies let us learn from people we'll (likely) never meet. Losing My Virginity is hardly new. It was published in 1999 and runs chronologically. I listened to the audiobook, which Branson narrates. You can get a newer print edition if you prefer reading.

Misconceptions
Frankly, I didn't know much about Branson since I live a low noise life. I assumed he went smoothly from success to success, starting with Virgin Music. Hardly. He faced many obstacles and could have easily lost his businesses many times since the 1960s. When facing a hurdle, he usually made risky moves and won.

I was especially surprised to learn

• the role of the unknown Mike Oldfield
• private businesses have outside masters too
  

Mike Oldfield
The success of Mike Oldfield's debut Tubular Bells --- the first record released by Virgin --- kept the company going for years. Oldfield recorded at The Manor when the studio was not rented out to other musicians. Virgin rented most of the 20+ instruments used. Branson writes:

I set about finding all these instruments: the acoustic guitar cost £35, the Spanish guitar £25, the Fender amplifier was £45, the mandolin £15, and the triangle was a bargain at £1. The tubular bells cost £20. £20 for tubular bells??

I said, "They'd better be worth it."

They were. The record set records. The profits were reinvested, primarily in finding and supporting new recording artists.

Outside Masters

Fortunately we're not a public company - we're a private group of companies, and I can do what I want. --- Richard Branson

Public companies tend to focus on short term goals, which can hurt the long term prospects. Virgin went from private to public to raise capital. Then from public to private to act fast (no need for board approval) and experiment more (e.g., starting the Virgin Atlantic airline).

Becoming private again still meant scrutiny. This time from banks. To grow, Virgin invested heavily and used borrowed money. This gave the banks influence over what Virgin could do and how long they could continue. Cash flow becomes very, very, very important.

There are numerous examples of challenges with the banks. Virgin was not well understood by lenders or stock markets.

Confucius on Wisdom

By three methods we may learn wisdom: First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest. --- Confucius

While others may imitate, Richard Branson learned by experience and reflection. In his autobiography, he candidly shares what he went through. This leaves us richer --- though not quite billionaires.

Links

• Richard Branson Quotations (Spark Insight)
• Customer Reviews (Amazon.com)
  
• Book Review (Ok Dork)
• Book Review (Citywire)
• £20 for tubular bells? (Richard Branson)
• Mike Oldfield: Tubular Bells (Dutch Progressive Rock Page)
• How to think like billionaire Richard Branson (Wily Walnut)
  

Live - The Prime Minister and Others

Spotting politicians in Ottawa is like spotting elk in Elk Island National Park. They're there but they're not in plain view. I lived walking distance from Parliament Hill from 1984-1989 but I only saw the Prime Minister on public events like Canada Day.

As a member of the Conference for Advanced Life Underwriting (CALU), I see politicians and senior government officials regularly now. Our annual conference took place in Ottawa this week (the reason I stayed in a suite for the handicapped). We were addressed (in order) by

• Deputy Opposition Leader Michael Ignatieff
• Governor of the Bank of Canada Mark Carney
• Prime Minister Stephen Harper
• Finance Minister Jim Flaherty
  

Here are some of their thoughts.

Michael Ignatieff
On Monday morning, Ignatieff spoke without prepared notes and answered questions. He talked about the role of the federal government. By reducing taxes, the Conservatives were making the federal government weaker, which makes the provinces stronger. Cutting GST by 2% reduces tax revenue by $65 billion over 5 years, which means less money for infrastructure and other projects.

The Liberals feel that Canada can't survive without a strong federal government. Inertia makes north/south relations with the Americans easy. West/East connections among the provinces take effort. He called Canada an act of imagination. It's easier for Atlantic provinces to send electricity to the US than west to Ontario. Since children are our future, they want more money spent on childcare and teaching young children.

Ignatieff wants the same level of healthcare regardless of province or urban density (city vs rural). Since healthcare costs spiral (consuming 51% of Ontario's budget already), he wants to focus on prevention. This means better food (e.g., better labeling) and more exercise. He was open to partnerships with the private sector.

Mark Carney
The Governor of the Bank of Canada spoke over lunch from prepared notes and then took questions. He flew in from a morning meeting with bankers in Toronto.

Canada's growth rate of 3.25% for 15 years is the best in the G7. Commodities have helped. Our jobless rate is the lowest in 33 years. In Alberta, 10% of current residents lived in another province five years ago.

Not all is rosy. Our aging population is growing at the second fastest rate in the G7. Our productivity is too low: 1% less than the US for the last 10 years. Globalization will determine our future.

The Bank of Canada focuses on maintaining a low, stable, predictable rate of inflation. This lowers the cost of capital. The target is 2%. We don't always gauge inflation well. Did you know that food prices dropped 10% last year? We can thank our strong dollar and new "big box" stores.

Two Pieces of Advice
Carney received two pieces of advice 20 years ago

1. In banking, it's never too soon to panic.
2. If it doesn't make sense, it doesn't make sense. [e.g., stay away if disclosure is poor as it was for Asset-Based Commercial Paper]

When asked about the rising prices for white rice ($230 to $1,000 to ??? per ton), Carney identified three factors

• speculation
• low supplies
• increasing demands, as people in poorer countries start eating more
  

Stephen Harper
The Prime Minister spoke in the afternoon from notes and did not take questions. He knew what Ignatieff said and joked that those who felt GST was a "good tax" could continue paying a higher rate. His focus is lower tax, controlled spending and debt reduction ($37 billion paid off during his term). He would rather strengthen individuals through tax relief than strengthen the federal government.

Canada is in the best position in the G7 but we are not an island protected against the US subprime problems. Canada is on track to have the lowest corporate income tax rates in the G7 by 2012 (but Ontario has not been supportive). Money is being spent on infrastructure and education.

Tax-Free Savings Account
Harper called the Tax-Free Savings Account the centerpoint of the 2008 budget, the single most important new savings vehicle since the introduction of RRSPs 50 years ago (see The Original and Overlooked Tax-Free Savings Account). Savings are exempt from taxation forever without penalty. The tax savings give a powerful incentive to create a national pool of investment capital. In contrast, the US has been encouraging debt. Here we are aiming far, aiming high.

Jim Flaherty
On Tuesday morning, Jim Flaherty spoke. His three budgets have all passed. A minority government hasn't had this success since the 1960s. When he first addressed the conference in 2006, he spoke of optimism. In 2008, we're being affected by world events and the US slowdown. We are not an island. Here is our situation:

• strong Canadian dollar
• high energy prices
• aging population
• shortage of skilled workers, especially in Western Canada

Even so, we continue to have the greatest fiscal strength in the G7. The value of our timber reserves has doubled in a decade to $1 trillion.

Even Flaherty's children ask why reducing public debt matters. His reply? Lower pubic debt reduces interest rates, helps us weather economic slowdowns and reduces intergenerational inequity. Our debt has been reduced by $1,570 per Canadian, which means savings in interest payments of $2 billion in 2009-2010.

Charitable giving has increased since the elimination of capital gains tax on donations of shares. Flaherty felt that Canadians should decide for themselves which charities they want to support.

In Canada, the subprime mortgages are less than 3% of the mortgage market. However, Flaherty felt we need one common securities regulator. We have 13 for a population of 33 million.

Tax-Free Savings Account
Like Harper, Flaherty talked about the significance of the TFSA, which is similar to programs in the UK and US. He reminded us that there are no restrictions on the reasons for savings, no federal clawbacks. Young people benefit the most. Over time, 90% of Canadians will pay no tax on their savings. Already, 20,000 Canadians have used an online calculator to see their tax savings.

In wrapping up, Flaherty said, "I have gone on almost as long as it seems".

Summary
Each speaker spoke well and radiated confidence. Last year, Stéphane Dion --- in his only appearance --- did not. I'm looking forward to next year.

Links

• The Original and Overlooked Tax-Free Savings Account
• CALU public website (www.calu.ca)
  

The Problem of "Trapped" Retained Earnings

The government encourages small business (technically Canadian-Controlled Private Corporations or CCPCs) through favourable taxation. Let's see the effects in Alberta, the province with the lowest combined federal and provincial tax rates. Active business income up to the Small Business Limit (generally $400,000) is taxed at 14% and the balance at 29.5%. These rates are attractive compared to the 39% marginal tax rate on personal income.

All isn't rosy. Governments discourage small business from generating passive investment income with a hefty tax rate of 44.7%. And that's in low-taxed Alberta.

What Do Business Owners Do?
Typically, small business owners and incorporated professionals like doctors pay tax on income up to the Small Business Limit and retain these after-tax earnings in the corporation (e.g., $400,000 less 14% leaves $344,000 retained). Prior to eligible dividends, income above the Small Business Limit was generally paid out as a bonus (tax deductible to the business and taxable to the recipient). Now accountants often recommend that tax be paid and the after-tax earnings be retained unless the owner wants to spend the money.

A successful small business can easily have hundreds of thousands of dollars in retained earnings "trapped" inside the corporation to avoid additional taxation. This is not what the owners want.

Uses of Retained Earnings
Retained earnings can be used in three ways

1. reinvested to grow the business (which results in more taxable income)
2. spent (goes to owner via dividends from after-tax income, effectively taxed at the top marginal tax rate)
3. saved in the corporation (and investment income taxed at rates higher than the top personal marginal tax rate)

Saved Retained Earnings
What tax-effective strategies deal with saved retained earnings? They can be invested in dividend paying shares of some Canadian companies since the dividends are received tax-free (and can be used to buy more of the same). This builds more retained earnings in the corporation, though.

Another solution is to transfer the retained earnings into universal life insurance for

• tax-free growth until death, and
  
• tax-free payout through the corporation's Capital Dividend Account.

Tax-Free Access
If the owner wants income in the future, the corporation can use the cash value as collateral for tax-free bank loans and distribute the proceeds to the owner as shareholder dividends. Since the collateral is so secure (an insurance contract backed by a multi-billion dollar insurance company), there are generally no requirements to pay the loan interest on an ongoing basis. Instead, the loan and the accumulated interest can be paid with the tax-free death benefit.

Links

• Corporate Income Tax Rates (KPMG or Ernst & Young [PDF])
  
• Capital Dividend Account (riscario.com companion wiki)
  

The Financial TRAIL To Taming Your Financial Risks

Alone we can do so little; together we can do so much. --- Helen Keller

Accountants are the most trusted financial advisors. Unfortunately, they are rarely experts in how the tax advantages of life insurance can help their clients. That's fine because they were at least asking. That got me thinking, about the roles of different advisors in today's specialized world.

As time passes we all get better at blazing a trail through the thicket of advice. ---
Margot Bennett

Why The Weird Capitalization?
Your Financial TRAIL starts with Trust and relies on specialists in four areas:

1. Risk: measures and reduces financial risks (e.g., insurance advisor)
   
2. Accounting: tax planning, tax filing (e.g., accountant)
   
3. Investments: selects and manages investments (e.g., stock broker, mutual fund advisor)
   
4. Law: prepares and reviews documents (e.g., lawyer)
   
   
   

The Trusted Financial Advisor
One of these four --- typically your accountant --- is the trusted financial advisor, the one you consult before making an important decision. This happens most often in small businesses.

Many sports are based on teams. However, your specialists probably work separately, depriving you of the advantages of a true team.

The way a team plays as a whole determines its success. You may have the greatest bunch of individual stars in the world, but if they don't play together, the club won't be worth a dime. --- Babe Ruth