RISCARIO INSIDER

January 29, 2011

NOXIOUS CHINESE DRYWALL AND BEYOND

"… toxic Chinese drywall may well become the biggest environmental crisis to hit North American homeowners and builders in decades." — Toronto Star

You may not know much about drywall (I don't) and buy on price. Or maybe your handyman or contractor does that for you. There might be consequences. If you're buying to resell after a renovation, you may not care. After all, if the products are being sold legally, they probably meet mandated standards.

Welcome to Chinese drywall.

Thanks to the US building boom, Chinese drywall started entering the country in 2001. Hurricanes in 2004-2005 contributed to drywall shortages and imports grew. Between 2006 and 2008 alone, enough drywall was imported to build 60,000 houses in 39 states (over 550,000,000 pounds). Hurricanes didn't hit Canada but the bad drywall is here too.

Consequences

The bad drywall emits smelly, noxious gases. The health issues include "fatigue, difficulty breathing, asthma attacks, sore throats, sinus problems, nosebleeds, runny noses, irritated and itchy eyes and skin, persistent cough, insomnia, loss of appetite, and headaches" (Contingencies magazine). Quite a list.

Non-health issues include copper turning black and powdery. That affects piping, wiring, air conditioners, TVs, video game consoles, fridges and dishwashers. There are other problems too, but you get the idea.

Once the drywall is in place, how can you tell if you got the bad stuff?

Cost Cutting

Companies boost profits by switching to cheaper ingredients and processes. High fructose corn syrup instead of sugar. Veneer instead of hardwood. Plating instead of solid metal. Processed cheese instead of real cheese.
That's okay if you know what you're getting. What if you're not sure or don't understand the long term implications of your decision? Consequences like obesity take years to materialize. We tend to fear the wrong risks (Harvard Business Review).

Closer To Home

Drywall isn't the only way to suffer from shortcuts or lax quality control. We've heard about lead paint in toys (New York Times), melamine in pet food (USA Today) and salmonella in spinach (CBC). I was disturbed by shortcuts at Johnson & Johnson, which used to be reference for putting customers first (Fortune). They recalled 300 million packages in 2010 and another 50 million this month (Reuters).

At least there were big public uproars and quick action. That support is less likely when you're buying intangibles like financial services. Even if you buy a financial product, it's been tailored for you. You probably signed agreements that say you understand what you bought.

If something goes wrong, getting redress takes time and money. Even today, the Chinese drywall makers are still refusing to pay compensation --- and that's when governments are involved.

Podcast Episode 102 (4:11)

direct download | Internet Archive page

PS Remember asbestos?

January 23, 2011

THE GLOBE & MAIL ON CANADA'S INSURANCE LOOPHOLE: WHAT ELSE IS WRONG?

"Once licensed, a life agent is not subject to any mandatory industry oversight, which differs significantly from all other sectors of the financial services sector [such as] property and casualty insurance, securities, mutual funds and real estate."
— Gerald Matier, executive director of the Insurance Council of British Columbia

That quote comes from a detailed investigation into the mysterious world of life insurance by the Globe & Mail. Do read through Canada's insurance loophole for yourself.

Silence Condones

Those in the insurance world rarely take a public stance before an issue arises or even afterwards. Silence is a lousy option. I've asked for help for years. Here are two examples.

2007: Refuting myths about universal life insurance
2009: Squawking about life insurance

I no longer bother asking but do what I can. Here are my thoughts on matters that aren't widely discussed.

No Education Required

When we bought a Toyota 11 years ago, the manager said that new salespeople must have university degrees. Why? Because consumers were more educated and demanding.

Even today, there are no educational requirements to get a license to sell life insurance. You don't need to graduate from university, college or even high school. Your language and math skills aren't directly tested. In Ontario, you write a multiple choice exam with 140 questions. Get 55 wrong and you still pass.

I've written lots of exams but the Life Licence Qualification Program (LLQP) is the most bizarre and degrading. You're forced to take a course and pass a trial exam before you're allowed to write the provincial exam. I went through this process last year. At the trial exam, one candidate said he'd already failed six times. At the real exam, there were candidates who'd already failed more than once.

Candidate Conduct

Here's the degrading part. There are rules for candidate conduct. Here's an excerpt from the FAQ.

The following will not be tolerated either during the exam sessions or while communicating with any of the administration staff: swearing, raised voices, threats of violence, physical confrontation.

Candidates are expected to arrive at the exam session dressed "business casual" and cleaned as if they were attending a client's home.

During the exam, candidates are expected to restrain from making distracting noises and actions that may be considered in poor taste by the general public.

Aren't those rules common sense? Yet there must have been enough issues to warrant writing them. There are even explanations for the rules. For instance, the dress code is in place to "afford a level of professionalism … and to show respect for the other candidates". Guilty until proven innocent.

No Training Provided

Entering a field without experience is fine but there's little training for rookies. Where help is available, the trainer wants to be paid. Whatever happened to mentoring?

The rookie's initial prospects are friends and family. In a sense, the trainer is paying the rookie for access to them during joint sales calls.

Heaped Compensation

Rewards affect behaviour. Insurance advisors receive most of their compensation at the time of sale. This puts the emphasis on selling you new insurance and replacing old coverage instead of servicing what you already have. How is that in your long term interest? Client satisfaction surveys routinely show that you aren't getting the level of post-sales service you expect.

Complicated Products

Insurance combines the worlds of risk, accounting, investing and law. That's very sophisticated and requires a team approach (see The Financial TRAIL). Using a team creates two problems for you

cost: advisors are reluctant to pay, which restricts the quality of expertise you get
bias: if your advisor gets free help from a specific insurer, there's an obligation to sell that company's products

Poor Explanations By Insurers

Insurance companies are out to make money for their shareholders. Do you think they spend their marketing dollars on low revenue products? Do you think they disclose all the drawbacks? Do you think all the advisors selling the products have a sound understanding?

This week, I saw an odd presentation on how to use a retirement income calculator to sell investments. A case study was used. The assumptions weren't clearly stated and seemed biased. As you might expect, the high compensation solution "won".

The presenter had no handouts and even refused to email attendees a copy of the presentation for review. No reason was given. Instead, you could get training on how to use the tool. That nicely deflects the responsibility for usage and results to the advisor.

No Public Hangings

The investment world actively polices, penalizes and publicizes. Here are several examples from this week.

$1,000,000 fine for poorly documented third-party arrangement (Jan 20, 2011)
$400,000 fine for firm and two reps (Jan 21, 2011)
$75,000 fine for mutual fund salesman (Jan 21, 2011)
$50,000 fine and permanent ban in misappropriation case (Jan 17, 2011)

You need to see the tricks advisors use and boundaries to product conduct. The life insurance world combines low barriers to entry, heaped commissions and complicated products. There's bound to be trouble. Where are the public hangings?

My Mission

I've tried to act as your advocate by giving you insider insights. Here are some posts over the years.

I'll continue in 2011. It would be so helpful if others would participate in this process of educating.

Podcast Episode 101 (8:19)

direct download | Internet Archive page

PS The next post will be shorter!