moneyFYI
Financial Freedom Is Merely Organized Common Sense
Template To Avoid Professional Liability Problems
Notice To ________________________________________ Adviser
From: ________________________________________ Person
________________________________________ Corporation
Further to your advice of _______________________________________
Regarding ___________________________________________________
I advise you that: (initial each)
- ____ I have listened / read and understood the matters you have communicated to me/us
- ____ I understand that I am acting opposed to your instruction and advice
- ____ I take full responsibility for any (all) adverse outcomes
- ____ I acknowledge that what I propose to do is stupid
Dated at ________________________ on ____ of ____________, 201__
Print Name Print Witness Name
__________________________ _________________________
__________________________ _________________________
Your Signature Signature of Witness
Indicate position in the corporation
if applicable ___________________
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Go Ahead, Ask
When someone behaves irrationally, there is usually something that person knows that you do not and that information explains the apparent insanity. Smart people ask.
A black hat gunslinger appears in an old west salon and proceeds to down several bourbons. Being a black hat gunslinger he does not become a happy drunk.
There is a piano player, off in the corner, peacefully enjoying himself. The gunslinger decides that he wants quiet, draws his six-shooter and shoots off the cufflink on the pianist’s right cuff. Nothing. Playing continues. So the gunslinger shoots of the left cufflink. Still no effect. Using the last four bullets he cuts the piano player’s hat in half. Still nothing.
About this time the bartender appears.
“Fine shootin’ mister. Haven’t seen shootin’ like that in here for a couple of months.”
“Let me see your gun.”
With the gun in hand,
“Wow, nice gun. Great balance, good feel. Shoots straight too, we saw that.”
“But, you know, if it were my gun, I would modify it some. I would file that big sight off the barrel. Right down smooth. Then I would take the hammer out of the other end of barrel. Make it smooth too. And after that I would cover the whole thing with bear grease.”
The gunslinger grabs the gun back, and says, “You’re crazy”
But he’s a smart gunslinger. (The dumb ones don’t last long.) So he asks for more information.
“Why would you do that?”
The bartender replies, “Well, the way I got it figured, when Wyatt Earp over there finishes playing the piano, he’s gonna shove that gun up your ____.”
One little bit of information explains the apparent insanity.
Better to ask when you don’t know.
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What Is The Best Question?
I understand that this can lead to paradoxical answers. Setting that aside, I think that one of the best questions is, “What Happens Then?”
The point to “What Happens Then?” is to make people notice that decisions and their results are not fully self-contained. They are part of a chain.
The first decision is “Do this. Get that.” Cause and effect. The thing to notice is that effect in step 1 is the cause in some effect 2 and the effect in step 2 is the cause in step 3 and so on.
“What Happens Then?” is the beginning of the defense to unintended consequences.
Many, probably all, decisions have unintended consequences. Some are visible before making the first decision, others not.
Here is an easy one.
Suppose a government raises the tax rate on interest income to 100%. If they get $200 million with a 20% rate, how much would they get with a 100% rate?
Answer – No More. Probably no revenue at all. The reason here is that tax revenue depends on two variables. 1) the rate and 2) the base to which it applies. Rates and revenue are not proportional unless you can hold the base still.
In the real world, if the rate is too high the base will go away. Thus no revenue at all. That is the first “What Happens Then?”
Because there is no revenue at level 1, there are some effects at level two. They derive from how the revenue went to zero.
1) What was previously invested in interest producing assets, will move to some other form of asset with a better tax rate.
2) The income will go underground.
3) The taxpayer will move to a new tax jurisdiction.
Each of the new effects will become causes. You can work out the effects for each, but let’s look at 3) – Taxpayer moves away.
The jurisdiction the taxpayer leaves will be poorer. Not only did the jurisdiction fail to get extra revenue from interest income for this taxpayer, they lost the tax revenue from all sources. (Salary, business, interest, dividends, capital gains, municipal tax, sales tax) With one taxpayer gone, those remaining must divide the total undiminished costs remaining. Each will pay a little more. There is at least one of those who had been close to deciding to move, who can then justify the aggravation. As that one moves it, makes it more likely that another will move. In the end, every person who pays taxes will move away.
Similarly, the jurisdiction who received the taxpayer will become wealthier at no cost. More income tax, more sales tax and so on. They can afford new services or lower tax rates. Either will attract people from other places.
Raising rates clearly has some unintended consequences. They are clear and the list above is incomplete. This is an example of imposing a tactic (how you get what you want) that conflicts with a strategy (What are you trying to do?). That never works well.
Case 3 is a little like football. When you lose momentum, it is hard to get it back.
How would jurisdiction 1 reverse the unintended consequence once it starts?
If there were an answer to that, and there might not be one, would it not make more sense do take that step before raising rates?
But, there is the ideological problem of appearing to be fair. More unintended consequences still.
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Some Important Laws
Life is easier if we understand the limits and operating requirements
The Law of Conservation of Problem
Financial problems are neither created nor destroyed. They merely change their form.
You cannot receive a large amount of money and remove your financial problems. The problems of having too little money would be replaced with things like, finding an investment adviser with integrity and skill, finding a good tax practitioner, personal security for yourself and your children, change in relationships with friends and family and discovery of many new “friends.”
The Law of Experience and Risk Tolerance
Experience + Risk Tolerance = A Constant
When you are young, you are bulletproof. Risk tolerance declines as experience increases and teaches you that bad things can happen.
The Law of Universal Costs
There is a cost to do something and there is a cost to do nothing. It is a mistake to assume that doing nothing costs nothing.
The End of Life Baggage Limit
Despite what American Express says, their traveler’s cheques are not good everywhere. You cannot take your wealth with you.
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Try It. You’ll Like It.
I have been watching the American election process with some interest. If a Martian appears, I think he will wonder what it is all about. Since he knows everything about democracies and elections, he would be incredulous.
From his viewing point, elections are to create a group of people who receive the task of governing. He would see little of that just now in the United States. Presently the group of people tasked with governing has made politics the game and governance the cover.
To choose how to vote, a Martian ignores the personalities and the methods that got the Americans to where they are. Martians are absolute objective realists. Ours would start with where things are as way to help him decide. He would not care how they got that way. His instinct would be to find the problems and opportunities and decide who among the candidates would achieve the most.
- He would see a colossal debt that is manageable at today’s interest rates but not at higher rates. Like 7% or more. He would see little from the candidates, in the way of a clear approach to resolving that problem. No help with the decision here.
- He would see that the debt is growing and difficult to reverse. Not a lot to choose.
- He would see an inflation overhang from a huge spurt in money supply. Hard to fix for anyone. Maybe Romney would try.
- The rhetoric surrounding taxes is blinding and disingenuous from both sides. The tax rate makes no difference, except figuratively. The rate could be 100% or 1,000% and it would raise exactly the same amount of revenue. None, in either case. The base that it applies to makes the difference. 20% of a large base raises more money than 80% of a small base. Rich people can afford the ways that make the tax dollars due go away and the poor people have nothing to pay with in any case. No help.
- He would see a vast army of regulators imposing their will on every business with the costs passed to the consumer. Very little here, that clearly distinguishes the candidates. He might prefer Romney because Obama has demonstrated the willingness to regulate while Romney may instinctively not want as much.
- A mostly uninformed voter population. Many people (over 20%) have no clear idea where government money comes from. Many believe the rich are taking advantage of them. Many believe in entitlements as rights but rely on others to give them their entitlements. As Walter Williams has said, “To what share of my income are you entitled, and why?” This is not changing regardless of the president until people understand that if they can get something for nothing, someone else must necessarily get nothing for something.
- Ideology prevails over reason. Neither candidate has an edge here
- Many voters downplay the worth of skill, self-denial, risk-taking and effort. Neither candidate is pointing to a different way.
- The Martian would see people using safety nets as hammocks. Neither candidate seems very concerned
- He would see social inequality. He might see that as imposed, but he might also see it as the inability of some to apply simple rules for success to their own lives.
- He would see the lack of government effort to enforce existing laws while politicizing the resulting situation.
- He would see courts using ideological models for their decisions.
- Probably dozens more.
Being eminently practical our Martian friend would accept these as a given, useless to his purpose, and would approach the choice of candidates in a different way
First, he would examine character. The reason is that you cannot know how a person without integrity will behave. People of character are predictable. Similarly, people of character tell you the truth even when it is unpleasant for them to do so. You get pretty much what you expect from people of character. Not certain, but on the evidence, advantage Romney
Second, he would examine competence as an executive. The president is “The Chief Executive.” Competence would be nice. Many people think executive competence is common. They also think anyone who can barbeque a hamburger or cook spaghetti can operate a restaurant. People learn executive skill. It is not given. Clear advantage Romney
Charisma is third. Charisma is important in getting other people to follow you and accept your ideas. If character is not present at the same time, then it is a serious flaw. If Obama’s character is not questioned, clear advantage Obama.
Fourth, he would look at the ability to create consensus. If you govern from power, you do not care about consensus. If you govern to get the most for the people, you need everyone to be involved and involved with the best ideas. If you saw the third debate, you noticed that Romney agreed with a number of Obama positions and actions. That was weakness according to the pundits. From the Martian’s viewpoint, that shows the ability to use the best ideas, not just your own ideas. Advantage Romney.
Fifth – Creed. A candidate with an unshakeable creed is a menace. A politician serves all the people, not just those with whom he or she shares values. Tossup. Both have a clear bias to a certain kind of society.
Lastly, Counselors. The Obama administration has the impairment that few of his advisers have business experience. That could be the problem with the economy. Jan L.A. van de Snepscheut has said, “In theory, there is no difference between theory and practice. But, in practice, there is.” On the other hand, it is unclear how Romney will relate to social matters. Could he appoint some who disagree with his basic ideas? Toss up.
The future needs a leader who can supply a good answer to the six C’s. Character, competence, charisma, consensus, creed and counselors. It is time for politics to take second place behind good governance. Good politicians are the ones who do what works even when it is not in their own best interest.
The Martian would vote for Romney on the basis that he, predictably, would bring more of the important characteristics of good leaders to the job. Being a non-resident alien, he will not vote. Even with photo ID, it would be a particularly dull polling person who failed to notice that he was not from around here.
Other voters can make good use of his analysis.
Try it. You’ll like it.
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The Swiss Army Knife
In 1891, Carl Elsener, a master cutler in the Swiss village of Ibach, invented a most innovative object – The “SWISS ARMY KNIFE”.
You would be hard pressed to find someone who does not know about these. The New York Museum of Modern Art and the State Museum for Applied Art in Munich have both selected it for their collection of design excellence.
Despite its excellence, the SWISS ARMY KNIFE has an obvious flaw.
It is good at doing 33 things but it is not the best at doing any one of them.
A Swiss Army Knife is most valuable when you do not know exactly what problem you will face.
In cases where you do know what problem to solve, single purpose tools will always solve the problem better. A green Robertson screwdriver is an extremely poor pair of scissors but it is peerless at driving #6 Robertson screws.
People need to address this specialized versus multipurpose decision when looking at achieving financial goals.
You know some problems in advance. The clear ones include the need for income in the event of illness or injury, the need for liquidity, the need to resolve debt or tax obligations on death.
You should use special purpose tools to resolve these. If you need income, buy an income tool. If you need capital, buy a capital tool. You will always get better value.
If you know the problem, then “Swiss-Army-Knife-Like” financial tools provide weaker answers. No mutual fund can guarantee retirement income as well as an annuity. Similarly, no annuity can provide accessible capital at some future undetermined time as well as a mutual fund.
Nothing is cheaper than using life insurance to pay the inevitable estate costs and income taxes.
Special purpose tools solve specific problems most efficiently. When the problem or opportunity has not yet become clear or may change in the future, a multipurpose tool will be advantageous. However, watch for changes that will render it less efficient.
If you can clearly define the problem or opportunity, you should find a specific financial tool to resolve it.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com
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Quit
In 1803, the British created a civil service position. It involved a man with a spyglass standing on the cliffs of Dover watching for Napoleon to come across the channel. If he saw the French coming, he was to ring a bell and alert the militia.
They abolished the position in 1945, (some reports say 1951).
In the past, I have talked about the idea “Quit Quick.” It is a way to keep decisions and investments that do not work from continuing and eating up time and money resources. These have some metric and a review process you can use to decide.
Like the civil servant at Dover, there is a class of things that should stop. The ones that made sense once but whose time has passed. They are no longer in the evaluation cycle so they just tick along, consuming resources in the background. They are the things that are no longer worth their cost but no one has assessed the cost/benefit in a long time.
In my case, they include things like cable channels no one watches, a bank account that I no longer use, pet insurance that has increased in price 50%, a number of subscriptions to internet services, and newspaper I don’t read. There are more but I won’t bore you.
These are all convenient to keep. The money for them just disappears. I do not need to make a conscious effort to pay for them. If I did, they would not exist. I had to go looking.
The point is we all have unexamined overhead. Periodically review your expenses.
35 years ago there was a control process called Zero-Based Budgeting.
The idea was that every year you had to consciously allocate money to every item in a budget. The story to the department heads was this. “Your base budget is zero for next year. Rationalize any increase from that.”
Some people still use a modified form but it is uncommon. Certainly so in the civil service.
For people, it works and it is not hard to do.
Go through the credit card and automatic bank charges and ask yourself the question, “For this price, if I was not already getting this service, would I immediately rush out and buy it.
You might be surprised how many times NO! appears.
Now you can Quit Quick.
Now go check how you spend your time. Same rules. Would I start if I wasn’t already doing it.
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Cheap Is Too Expensive
People believe that cost and price mean the same thing. Very wrong. An error that can easily lead to catastrophic mistakes.
When you acquire a product or service, you are trying to get value equal to or more than what you must give up to get it. The give up is cost. Money is one part of cost, but often not the most important.
You need to know all the parts you are trading for the hoped for value.
For example. Suppose you are flying across the prairies and the captain comes on the intercom and declares that the plane is going to crash. However, the airline has made provision for this. (You might wonder why you chose this airline.) The flight attendants are in the aisles renting parachutes.
The attendant comes to you and says, “We have two kinds of parachutes. One is $50, the other $100. Which do you want?”
If you know that price is not a good way to judge value, you will ask, “What’s the difference?”
“The $50 ones are factory seconds and about half of them work. The $100 ones work all the time.”
Clearly, you cannot adequately achieve the value required, (certain continued life) with the $50 parachute. The total cost to you is $50 plus a 50% probability of death versus $100 and no uncertainty.
Many financial products are like that too. Like life insurance.
From the insurer’s perspective, all life insurance “costs” the same. People die at the same rate regardless of who insures them, the costs to do business are about the same for all carriers and the investment returns they receive are much the same too. If someone is offering a lower price, it is because they took something out that you might want, or put something in that you do not want.
For example. An insurer can offer you a very attractive price if you agree to take a medical every year and if your health has declined, the insurer cancels the policy. How much is the access to future coverage worth to you? The higher premium that guarantees availability might be better.
Similarly, an insurer could sell for about half price if the contract included a clause that says, “If there is a claim, the insurer will toss a coin and if it comes up heads they will pay the claim; otherwise not.” Some policies almost have this clause. It is the preexisting condition clause. You cannot be certain you have coverage or that you have answered all the questions properly.
If there is a question that looks like, “In the past 10 years have you had any medical tests performed?” Many healthy people answer no, but that is almost always wrong. Blood tests or blood pressure taken that were normal are easy to forget about if you are healthy. normal. If you had a normal blood pressure test 10 years ago, failed to disclose it and died from a heart attack, you might not get paid. Better to deal with an insurer that does their underwriting before they issue than one that does their underwriting when faced with a claim.
If you do not know how the price difference arises, you can be in trouble. Bear in mind that the insurer knows more about insurance and probabilities than you do. Probably vastly more.
You cannot afford cheap. Would you buy cancer drugs from a person in an alley? How about cheap brakes or low-priced laser eye surgery? No?
Bargains are okay but only if you know why they are bargains.
Consider this idea attributed to the English philosopher, John Ruskin.
“There is hardly anything that some man cannot make a little worse and sell a little cheaper, and people who consider price alone are this man’s lawful prey.”
Or this one from Seymour Jaron,
“The bitterness of poor quality remains long after the sweetness of a low price is forgotten.”
Easier to remember – CHEAP IS TOO EXPENSIVE!
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com
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Employee Review
Not many people like employee evaluation/performance review. If you know what the person is supposed to be doing, then you can evaluate against the task requirements. Objectivity is always a plus.
You might find the following helpful for the review of each element in a a particular job.
TASK |
|
||||
Does
|
Skill/Knowledge Required |
||||
In Depth |
Aware |
Oblivious |
|||
| Always |
1 |
2 |
3 |
||
| Sometimes |
4 |
5 |
6 |
||
| Never |
7 |
8 |
9 |
||
To Do Or Notice
- Nothing. Meets standard. Comment
- Improve knowledge. Training and support. QC
- Find what they are doing. It could be transferable. Oblivious and always right is interesting.
- Demand accountability and performance. Find reason for sometimes
- Fill out knowledge. Identify areas where performance is not good enough. QC need
- QC and training.
- Demand performance and accountability. QC and supervision
- Fill out knowledge. Demand performance and accountability. Supervision. Supervision, training, QC
- Training. Permission to experiment with supervision and QC
Principal Points
- Notice and comment on 1
- Be excited about 3. Could be an opportunity for everyone.
- You cannot criticize the doing of wrong unless you are sure the person knows how to do it right and you can explain the difference between expected performance and actual performance and you can provide a method or technique to correct the error.
- Oblivious is overcome by training
- Never is overcome by supervision, QC and accountability
- 2,3, 5 & 6 are part of normal progression to mastery. Require supervision, training, QC and feedback
- 2, 3 & 6 indicate an opportunity for you to improve the standard, or find better ways to implement it.
- 9 is likely a new hire and you will have ways to get them started
- 4, 7 & 8 are seriously deficient. Supervision, communication and documentation of performance are necessary
Be sure to ask employees for insight and evaluation of their task list. Sometimes there are conflicting expectations and improvements. They know more about the task than you do because they do it the current environment. Your experience may have become obsolete.
Remain objective. This is about outcomes not people.
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Addition by Subtraction
Back in the 90’s, there was a story, possibly apocryphal, about the the Philadelphia Phillies and their skilled but difficult outfielder, Lenny Dykstra.
On coming to the clubhouse one day, another player tells solid-citizen catcher Darren Dalton, “They traded Dykstra.”
His reply. “Good trade, who did we get?”
Obviously addition by subtraction can work. Make the whole better by eliminating some of the parts.
For most people life goals are pretty simple.
- Establish a lifestyle and the means to maintain it.
- Have predictability, certainty if you can get it.
- Have a margin for error. (security)
- Help others, especially family
They don’t always get those. They get off track and do things and commit to things that delay or hurt achievement, or avoid things that would let it happen. Misplaced resources. Too many distractions. No priorities.
Fix it by reducing the load. If you hate your line of credit more than you love your condo in ski country, sell the condo and reduce the line of credit.
Not everything that hurts you is a big thing. If you attach yourself to forty 5-pound anchors, you will drown at the same rate as if you attach yourself to one 200-pound anchor.
All planning is about allocating scarce resources. Time and money usually. Assess how you spend time and money. Find all the 5-pound anchors and eliminate them.
You can make your life better by adding things you want to it or by subtracting things from it that you do not need.
But you must decide. Failure to quit something is a decision to do nothing and it is just as much a decision as the decision to do something. You should choose the one with the better cost / benefit ratio.
Addition by subtraction will solve more life plans easier and quicker than addition by addition.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com
Follow on Twitter @DonShaughnessy
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