Tag Archives: organizational effectiveness

Boost your retirement savings

“Success is the ability to go from one failure to another with no loss of enthusiasm.”—Winston Churchill

Retirement tips – Save, save, save and watch the fees:
A hidden shame of the disproportionate recovery explained here. Not only have many, many not enjoyed the rising stock market, but largely they say it is because they do not have the money to invest. Over half of Americans pass on the stock market
On a similar, and related, note, many, many Americans do not have employer based retirement plans. So, they are on their own, know it, or not, and likely to be expecting Social Security to carry the day. US Retirement Preparedness Seems Wobbly
Here’s a fascinating overview of the phantom recovery notion and some sage advice on downside protection for your retirement savings. Paper Wealth In Your Accounts Is Great, But Only If You Know How To Protect It
To the extent you do participate in the markets, don’t forget the fees! This week consider the 12b-1 fee – honest, look for this one. The Single Most Obnoxious Retirement Fee: How to Dump It

Leadership tips – get some tips from the Pope, and stay accessible:
Pope Francis has been a refreshing change for the Roman Catholic Church. Perhaps it is time to take a few pointers from his leadership playbook. Pope Francis and the Discipline to Win the Long Game
While I often harp on it, communication is key to successful leadership. Here learn more, and highlight the notion of meaningful work for your team. How and Why to Help Employees Find Meaning in Their Work

Travel tips – while you save for retirement, save on your travel, too:
This guy spends all his time finding deals, now you can benefit from his labors. The ‘Man Who Flies for Free’ says these are the 3 best websites for airline deals
When you are on the road – hopefully decompressing – use these apps to make it a better experience. 30 Must-Have iPhone Apps for Frequent Flyers

This week, something to ponder:
This crosses over between distraction and travel, really interesting, though. Seven Unknown Architectural Wonders
I’m going to bet you missed this one. Amid a glut of shipwreck finds, this stands apart for its antiquity. The Antikythera Shipwreck – The Titanic of the Ancient World and its Sunken Historic Treasure

A better life in time for Passover and Easter

“Attach yourself to those who advise you rather than praise you.”— Nicolas Boileau-Despreaux, poet and literary critic

Retirement tips – diligence on our savings is the best advice:
This is a fascinating read on where we stand today and why you may need to change some attitudes … and allocations. This is Why You Are Diversifying Wrong
Have I mentioned fees lately? I should, and this article points out the most insidious ones hidden in your 401(k). Warning: You May be Handing Over $155,000 in 401(k) Fees
Since you are already now kicking around in your 401(k), take the time to ask these questions, too. Having been there for the birth of Ameriprise, it’s near and dear to me. Four Ways to De-Bug Your 401(k)

Leadership tips – behavioral changes that will make you a real leader:
I beat this drum as often as possible, open communication, accessibility, and an understandable strategy are keys winning long term. Employee Engagement and the Communicator’s Role
I loved the heart of this article, simple, to the point, worthwhile. The 5 Best Pieces of Advice Any New Leader Will Ever Get
Travel tips – a few minutes now can save you a lot of hassle on the road:
Thanks to modern security protocols, sometimes you make the gate well before your flight … try to catch that earlier flight. How to get on earlier flight without paying fee
If that fails, then you might be interested in this app. LoungeBuddy Airline Lounge Locator App

This week, something to ponder:
With the Iran nuclear framework announced, plenty will be written on both sides of this story. I happened across this one earlier today. Have you formed an opinion yet? Obama’s nuclear deal with Iran puts the world’s safety at risk
Just for a little added context, there are crazy guys like this running around. A Russian ‘Doctor of Military Sciences’ says Moscow should just nuke Yellowstone if tensions boil over

Inspiring Leadership

Management is doing things right; leadership is doing the right things.”
— Peter Drucker, Austrian-American writer and management consultant

Here is a great argument for staying visible, accessible and open. Gossip in the Workplace Could Signal Larger Problems
In some respects, this is a primer on transitioning from managing to leading. 4 things managers need to stop and start doing
A great way to get yourself thinking today, and often. 35 Inspiring Leadership Quotes

You realize how set I am on reducing fees and their impact on your retirement. Still, this feels too much like it is asking for increased regulation, somehow skirting the rules. U.S. mutual funds cut expenses by shifting billions to trusts
Forbes has a CFP give you some tips on retirement withdrawal rates. How Much Investment Money Can You Take Out in Retirement
Here is a decent, albeit brief, look at spend rates in retirement. It loops in the rule of thumb 4% guideline. How Much of Their Nest Egg Should Retirees Spend a Year?
This is an interesting article because I’m amazed that Money magazine would publish it without reference to longevity annuities, especially qualified ones. The New Rules for Making Your Money Last in Retirement

Funny and insightful, this post helps you while away the hours you spend in airports between flights. The Definitive Guide to Drinking in Airports
Leverage technology to save yourself some money on your next vacation. 6 Google Flights Tricks That Are Better Than Any Travel Agent
Mind you, this is a bit backwards as it is the UK perspective, still, I think there are some worthwhile points in here. Booking a flight? This table shows how timing affects ticket pricing.
Fascinating Aside:
File this in the unintended consequences category. Can a solar eclipse shut down Europe?

New Years Retirement Tips

Plus, some great leadership ideas, retirement planning tips, fun for the holiday break
Start the New Year right by leveraging these retirement ideas:
If there is any recurring theme in my retirement posts, it’s this one, lower fees matter. How to Quadruple Your Mutual Fund Returns with One Decision
This one’s crazy, a Nationwide Financial survey finds Boomers “terrified” of health care costs in retirement … so be sure you consider that, and probably get some help. Advisors Should Include Insurance in Retirement Planning
My youngest friends, relatives and readers should pay particular attention to this one. How Compound Interest Affects Retirement Savings
I wasn’t sure where to put this, but settled on retirement. No time like the present to blow some smoke. 14 Meaningless Phrases That Will Make You Sound Like a Stock-Market Wizard
Consistent themes in my leadership reading for you:
Many of you have heard me tout these very same ideas. Presumably I was listening in those 16 years at GE with Jack Welch as CEO. 10 Leadership Lessons You Don’t Want to Learn the Hard Way
I couldn’t agree more with this, and feel it is a great differentiator for me. How senior leaders can connect with front-line workers
Yet another set of tips I couldn’t agree more with: 7 Daily Habits of Exceptionally Productive Leaders
Can’t resist this one, Steve Jobs led a very unique life. There’s some great insight here. A Dozen Things I’ve Learned from Steve Jobs about Business
Some great ways to take your mind off things:
This one is a word to the wise, don’t believe everything you read. Perhaps you heard about the great, 5% growth in GDP in the Third Quarter … not so fast. Exposing the Deception: How the US Economy “Grew” by $140 Billion as Americans Became Poorer
Imagine treating cancer without dramatically tough side-effects. Looks like it’s closer than you may think. Can DNA Nanobots Successfully Treat Cancer Patients? First Human Trial Soon
Bill Gates deserves a lot of credit for putting his money to good use. Here he’s really showing commitment to his causes. Watch Bill Gates Test a New Machine That Turns Poop Into Clean Water
I love this new site, the guys who predicted the last election bring statistics to the masses. This time, pick your own favorite: Our 33 Weirdest Charts from 2014

Questioning Shareholder Value

James Montier delivers a lengthy takedown of shareholder value in his piece. It is interesting because it gets into so many other areas like income inequality, CEO pay, business investment rates, and more. So many companies place credence in shareholder value that it is worth understanding the implications. I focus your attention on this one piece because I wonder what your reaction will be to this. So, please take a minute to share your thoughts.

The World’s Dumbest Idea

The Fallacy of Cost of Capital continued

Friday I teed up the frequent breakdown in implementation of cost of capital constructs. Today I will give an example illustrating the downstream cost of this oversight. While this is, by no means, limited to the life & annuity space – the lessons are broadly applicable; I will continue the life & annuity company example, assuming a few things:

  • Indexed annuity product with a target/expected 12% ROE
  • $3 billion of annual production
  • 10% total compensation paid at issuance
  • Nominal cost of capital of 8%
  • 10 year amortization schedule (straight line for simplicity sake)

Today, with generally flush capital structures, there is little concern about layering in new business in this product. The horns of the dilemma are that in leaner times, say 2009, it would be difficult to authorize more volume despite returns beating corporate targets. A fully executed cost of capital construct would ‘charge’ the business 8% for invested capital, incentivizing the business to find a more efficient capital structure, releasing capital for redeployment (business development, shareholder returns, capital investment, etc.) and easing capital strain.

Here is a comparison of acquisition costs with and without the cost of capital (CoC) charge:

with CoC without CoC Variance V%
Required Capital/Cash (Issue Year) $300.0 $300.0 $0.0 0.0%
Est. GAAP Expense (Issue Year) 43.0 30.0 (13.0) (43.3%)
Total Capital Cost (Over 10 Years) 410.2 300.0 (110.2) (36.7%)

Not applying an explicit cost of capital charge obscures the true cost of running this business, by understating issue year GAAP expense by 43% and total cost by 37%. This is true for any business, not just life & annuity, for any capital cost.

Since alternative solutions do have a cost, not explicitly applying the cost of capital stymies business unit motivation to be more capital efficient. Since we embed our program costs, there is little difference, with or without the cost of capital charge:

with CoC without CoC Variance V%
Required Capital and Cash (Issue Year) $26.4 $26.4 $0.0 0.0%
Est. GAAP Expense (Issue Year) 27.5 26.4 (1.1) (4.2%)
Total Capital Cost 397.2 390.1 (7.1) (1.8%)

Viewed together, you see the economic value of an explicit cost of capital charge:

with CoC without CoC
with Program without Program Variance V% with Program without Program Variance V%
Required Capital and Cash (Issue Year) $26.4 $300.0 ($273.6) (91.2%) $26.4 $300.0 ($273.6) (91.2%)
Est. GAAP Expense (Issue Year) 27.5 43.0 ($15.5) (36.0%) 26.4 20.0 $6.4 32.0%
Total Capital Cost 397.2 410.2 ($13.0) (3.2%) 390.1 300.0 $90.1 30.0%

Only inception costs remain constant, as others, which play out over time, rise. Failing to account for carrying cost masks parent level benefits obtained by seeking alternative capital structures. Here you see that the parent gets the most efficient use of capital by reflecting the cost of capital in business unit financials and incentivizing innovation. The business unit sees lower cash and capital demand in the issue year, lower GAAP expense in the issue year and lower total GAAP expense over the amortization period, all likely forgone without that explicit recognition of the cost of capital.

Call or email me to discuss this interesting insight, learn how it may inadvertently hamstring your growth and to talk about our innovative solutions.

Improve your retirement and leadership

Improve your retirement and leadership
Then, learn some cool stuff, too

Some overdue looks at great reads on leadership:
It’s easy to forget, but you never should: successful strategy is all about execution. Strategy Execution: A Short Checklist That Helps
You never can be a good enough negotiator. Here are some more tips from Wharton:
13 negotiating techniques taught at the Wharton School of Business
Speed up your decision-making process, and improve it. Too much to expect, well, at least read the ideas, they may ring true. 5 ways to make better, faster leadership decisions

A weekly dose of retirement guidance:
A noted economics professor and prize winning author on why people don’t buy more annuities … even though they should Jeff Brown: Retirement Researcher, Model & Mentor
A really interesting article on how to market time, without the risk of market timing. It’s worth the free sign-up to a great site. Simple and Effective Market Timing with Tactical Asset Allocation
Another reason to sign up for Seeking Alpha, a great tool for picking ETFs. Plus, they’ve got a great iPad app, too! ETF Hub
An interesting review of actual 401(k) balances vs. theoretical ones Why aren’t 401(k) and IRA balances bigger?

Better than average weekly diversions:
Despite having read the book Krakatoa, and visited Indonesia on several occasions, this slipped from my radar. It’s astonishing. The Sound So Loud That It Circled the Earth Four Times
This was not the first, and won’t be the last, article I have read about how the developing world holds the key to arresting climate change – in fact dig around on The Week site, they have a couple more. Why India is the key to the world’s climate future
You won’ learn anything from this, but you’ll be amazed. Photo of Earth from the Curiosity Rover on Mars

The Fallacy of Cost of Capital

The Fallacy of Cost of Capital in the Life & Annuity Industry


As a longtime business leader with GE, American Express and Ameriprise Financial, I came to expect the inevitability of cost of capital in annual planning and product development conversations. While the number generally had little discernible relationship with the true borrowing cost for the corporate parent, the construct made perfect sense: each P&L bears a reasonable cost for the invested capital carried on its balance sheet. As an independent advisor, I have come to realize that often times this cost is more implicit than explicit. Cost of capital appears most often in the guise of a hurdle rate. Whether considering new product design or a major technology investment, running a spreadsheet against the hurdle rate is a prerequisite. Once implemented, though, how does the cost of capital manifest itself in business unit financials? In an annuity or life business level P&L, for example, where significant issuance costs are capitalized and amortized; is the business charged a carrying cost at the cost of capital? Is there a journal entry from the parent, ultimately eliminated, mind you, reflecting the opportunity cost of this investment? Often not, which stifles creativity and confounds analysis of alternative capital structures. The parent is happy with a nominal 10% or 12% or 15% return. Have they accounted for the true cost? As businesses firm up the 2015 planning cycle, perhaps it is time to reflect on the efficacy of cost of capital execution and the downside risk of not fully accounting for the true cost of investment in business units. This recalibration may yield better corporate results by incentivizing scrutiny of invested capital, freeing up capital for long deferred investment projects. Call or email me to discuss this interesting insight and learn how it may inadvertently hamstring your growth.

Improve your leadership skills

Improve your leadership skills to deliver superior results
Plus: some weekly guidance on your retirement planning

Leadership tips and insights along with an interesting, emerging trend:
Talk about hot topics, so much written recently about purpose driven organizations, this one puts it into an interesting context, worth a fast read as I have always said feeling good about what you do helps you to do it better Your Company’s Purpose is not it’s Vision, Mission or Values
This is a fun, while still insightful, piece about the big influence the little things can have 10 Ways to Say the Right Thing Every Time
Yes, there has been a lot written about this, too, servant leadership, but here again, there’s a gem in this one about showing gratitude, it is hard to remember, but do it The One Attribute All ‘Servant Leaders’ Have in Common
This is a great article if you seem to be stumped for growth Eight Ways to Rethink Your Business Model
This is a really interesting, emerging trend, may work in your favor, if you are flexible Surge pricing is the next wave of digital ordering

Live a better retirement by planning now:
Of course an actuary created a tool to figure your retirement income needs, good thing is he’s shared it A simple tool for figuring retirement income
No rocket science here, but always good to be reminded, especially after this sustained bull run 2 Things You Have to do with Your Retirement Investments

Living in the time of the sound bite

Living in the time of the sound bite

It always amazes me how our politicians, in particular, seek refuge in the sound bite. With the magnitude of issues and depth of discord in Washington, the citizenry should hope for meaningful dialogue. Yet all we see is the perpetual distillation of issues into easily digestible, meaningless prattle. The examples are seemingly limitless, but the latest one to irk me is “economic patriotism” and its cohort “tax inversion.” The problem, of course, is the intersection of an endlessly complex corporate tax code and the wholly appropriate incentive systems designed by public and private corporate boards. Yes, corporate boards will incentivize their leadership to optimize shareholder returns, and yes, corporate leaders will find and leverage tax provisions as one of the ways to deliver those optimized shareholder returns. That is our basic economic construct. Doing so generates shareholder wealth, and, presumably, conflicts with no laws.

It all gets back to the notion of treating the symptom or the cause. While most accept that the nominal US corporate tax is among the highest in the world, critics are quick to point out that the real corporate tax is far more in line. Both statements are true, but how Congress has chosen to bridge the two, with a series of incentives, artificially manipulates corporate behavior and, in turn, markets. Whether it is energy or farming or any other incentive, Congress pushes (helps, if you will) corporations in a certain direction, introducing bias into the system. One can dispute whether this system, arguably far too manipulated by so-called special interests, is good or bad, but one cannot deny that it is what it is. Consequently, corporations, especially those not benefiting from the incentives and ‘in line’ real tax rates, find it beneficial to redomicile outside the US – tax inversion. Sure, at a sound bite level that seems economically unpatriotic, but then we ask shareholders to forgo higher returns for this notion of “economic patriotism.” Surely, some would willingly pay that price; others would not, presumably shifting their investments accordingly. This movement from a company’s stock is a steep price for corporate leaders and boards to pay because Congress and the White House are unwilling to address the underlying issue, an overly complex, burdensome and biased corporate tax code.

Some Commentary on Tax Inversions:
Interesting British perspective, you may notice that Boots, beneath the Walgreens angle on this topic, already abandoned Britain for Switzerland … something the Brit’s don’t seem to have liked, either Obama doubles down on threat to act against ‘tax inversions’ by US firms
Superseding the US-Africa Leaders Summit to identify the villains behind tax inversions: accountants Obama Joins Blame Game as Companies Flee US for Lower Tax Rates