Growth Blog from Rich and Co.

Decision making among groups can be significantly better than that of individuals.

When the researchers made random groups out of the 2,000 plus guessers, they found that the average guess of groups with more than 40 members was better than the best quarter of individual guesses.

This, they argue, implies that large groups of average intelligence can be smarter than individual brainiacs.

Groups of varying people may out-perform high-ability individuals, hinting at a selection pressure for diverse populations.  Results include:

individual performance and collective performance can be uncorrelated and that a group of individually high performers can be outcompeted by a same-size group of individually low performers

adding diversity to a group can be more beneficial than adding expertise

results question the emphasis that societies and organizations can put on individual performance to the detriment of diversity as far as teams are concerned.

Most startups fail because they waste too much time and money building the wrong product  Key concepts include: 

Rather than spending months in stealth mode, a lean startup launches as quickly as possible with a "minimum viable product" (MVP), a bare-bones product that includes just enough features to allow useful feedback from early adopters. The company then continues hypothesis testing with a succession of incrementally refined product versions.

Lean startup executives do not invest in scaling the company until they have achieved product market fit (PMF); that is, the knowledge that they have developed a solution that matches the problem.

In lean startup lingo, "pivoting" refers to a major change in a company's direction based on user feedback. 

Adhering to a lean startup strategy is especially challenging for companies that require a great deal of time to launch a workable product

the lean startup launches as quickly as possible with what Ries calls a "minimum viable product" (MVP), a product that includes just enough features to allow useful feedback from early adopters. This makes it easier for the company to speed to market with subsequent customer-driven versions of the product. And it mitigates the likelihood of a company wasting time on features that nobody wants.

"Pivoting simply means making a major change of some sort

"In lean startup logic, it's something you do, ideally, after you've run some decisive test to disprove a hypothesis

It can be changing the target customer segments by narrowing or broadening them. It can be changing the product itself, either by adding features or by taking features away. It can be a dramatic change: 'We were going business-to-consumer, but we should be going business-to-business.' Or it can be a change in business model: 'We were doing transaction-based pricing, but we've realized we should be doing subscription-based pricing.'

The notion of a pivot is to make a change, and ideally, after you pivot, you have a new set of assumptions and hypotheses that you're going to test. And what we're learning in the course is that pivoting is really hard."

Executive Summary:

Managers who inundate their teams with the same messages, over and over, via multiple media, need not feel bad about their persistence. In fact, this redundant communication works to get projects completed quickly, according to new research by Harvard Business School professor Tsedal B. Neeleyand Northwestern University's Paul M. Leonardi andElizabeth M. Gerber. Key concepts include:

Managers who are deliberately redundant as communicators move their projects forward more quickly and smoothly than those who are not.

Project managers lacking direct authority will work harder at communication, trying to enlist support from team members. They time first and second messages close together, typically starting with a phone call or face-to-face meeting followed up by an e-mail.

Project managers with power delay communication, typically sending an e-mail, assuming that is enough to pressure employees to do the job—only to find themselves later scrambling to do damage control.

Clarity in messaging matters less than redundancy. It's not the message; it's the frequency of the message that counts in getting the job done.

We don't feel this growing problem is getting enough attention so we are coming out and calling it a "crisis."  It is.  There is much at stake.

The details may differ but the impact of the baby-boomers shows up everywhere; their pensions will be a huge burden on coming generations.

The Economist is to be complimented for facing this matter head-on.  We have posted earlier on some of their articles.  Here are excerpts from another.  Well done.  

from The Economist: A special report on pensions: Falling Short

by APR 7TH 2011 | FROM THE PRINT EDITION, FROM THE PRINT EDITION | SPECIAL REPORTS  •  APRIL 7, 2011

A pension promise can be easy to make but expensive to keep. The employers who promised higher pensions in the past knew they would not be in their posts when the bill became due. That made it tempting for them to offer higher pensions rather than better pay. Over the past 15 years the economics of the deal have become clear, initially in the private sector, where pensions (and health-care costs after retirement) were central to the bankruptcy of General Motors and many other firms.

There are big national differences, but in most developed countries:

the bulk of retirement income (around 60%, according to the OECD) comes from the state

Most countries offer some kind of basic safety net for those who have no other income. 

In addition to this, they may have a social-insurance scheme to which workers and employers contribute. Despite the insurance label, these are essentially pay-as-you-go (PAYG) systems in which benefits are paid out of current taxes.

In some countries workers also have pension rights that are linked to their employment, whether it is in the public or the private sector. Such schemes can be funded (as in America, Britain and the Netherlands) or unfunded (as in much of Europe). In some cases the state has required such schemes to cover all employees. Australia, for instance, has turned itself into the world’s fourth-largest market for fund management by setting up a compulsory national pension scheme for its 22m people. On top of that, people accumulate savings (sometimes called pensions and sometimes not) that they expect to draw on during their declining years.

The Four Challenges Pension provision is higgledy-piggledy and often complex, but most rich countries are having to deal with four main underlying problems.

The first is that people are living longer, but they are retiring earlier than they were 40 years ago. A higher proportion of their lives is thus spent in retirement. 

Second, the large generation of baby-boomers (in America, those born between 1946 and 1964) is now retiring. But the following generations are smaller, leaving the children of the boomers with a huge cost burden.

Third, some employees have been promised pensions linked to their salaries, known as defined-benefit (DB) schemes. In the 1980s and 1990s the true cost of these promises was hidden by a long bull market in equities. But the past dismal decade for stockmarkets depleted those funds and left employers on the hook for the shortfall. Private-sector employers have largely stopped making such promises to new employees; the public sector is beginning to face the same issues, particularly in Britain and America.

Fourth, private-sector employers are now providing pensions in which the payouts are linked to the investment performance of the funds concerned. These defined-contribution (DC) schemes transfer nearly all the risk to the employees. In theory, they can provide an adequate retirement income as long as enough money is paid in, but employees and employers are contributing too little. 

Both sorts of funded schemes, DB and DC, essentially face the same problem. “The aggregate amount of pension savings is inadequate,” says Roger Urwin of Towers Watson, a consultancy.

Estimating the cost of pension provision has proved enormously difficult. People have consistently lived longer than the actuaries have expected. In 1956 a 60-year-old woman retiring from a job in Britain’s National Health Service had a life expectancy of just under 20 years; by 2010 she could expect to live for another 32 years.

Paying a pension for longer is much more expensive, particularly if the payout is linked to inflation. 

The Economist asked MetLife, an insurance company, to calculate what a couple in America would have to spend on an annuity paying out the maximum level of Social Security benefit (the state pension) at age 66: $4,692 a month now and rising in line with inflation. The answer is almost $1.2m.

Politicians tend to underestimate the cost of financing PAYG systems. It is tempting to look simply at the ratio of cash benefits to contributions, rather than allowing for the value of the promises being made to future pensioners. But even on a cash basis, pension finances are deteriorating.

In 2010 America’s Social Security system ran a cash deficit for the first time since 1983 as more money was paid out in benefits than was collected in contributions. This happened about six years earlier than expected, thanks to unusually high unemployment.

The immediate cash cost is only part of the problem; the longer-term calculation also involves the value of future pension promises. In bearing that burden, the key figure is the ratio of workers to pensioners, known as the support (or dependency) ratio. This is deteriorating steadily in all rich countries (see chart). As a result, the tax burden is set to rise, at a time when many countries are still struggling to cope with the fiscal deficits left over from the financial crisis.

Pensions paid through a funded scheme do not necessarily work better. Many American states and cities have been underfunding the pension schemes for their employees for years, gambling on the stockmarkets to bail them out. That gamble has failed, and now taxpayers are expected to come to the rescue. Either taxes must rise or benefits must be cut.

A Cut by Another Name The most obvious “cut” is for people to work longer so that pensions are paid over a smaller proportion of their lifetime.

In many countries reform attempts have accordingly concentrated on raising the minimum retirement age or increasing the number of years for which an employee has to contribute before qualifying for full benefits.

In France a move to raise the minimum retirement age to 62 was accompanied by a phased increase in the minimum level of contributions from 40.5 to 41.5 years, a change that was duly attacked by left-wing commentators as being unfair to unemployed workers, part-timers and students entering the job market late. Italy has gone one stage further: from 2015 on, future changes in the retirement age will be indexed to the rise in life expectancy.

Sweden, Germany and Japan already have an automatic balancing system to deal with deteriorating pension finances, largely by making the inflation-linking of benefits less generous. 

The Netherlands, which has the best-funded (and widely admired) DB pension system in the world, also limits inflation-linking, but delivers pensions that are very close to average earnings. Research by Towers Watson shows that it has a higher ratio of pension assets to GDP than any other country—and it benefits from economies of scale, with pension provision dominated by the giant ABP and PGGM funds. However, contributions are high and the rules on solvency are extremely strict, requiring liabilities to be more than 100% funded.

Pension promises involve a transfer from one generation to another, even when one of those generations is too young to vote. That is true even when schemes are funded, and the money invested in equities and bonds; future workers will have to generate the income needed to pay the dividends on those shares and the interest on that debt.

That is turning pensions into a battleground, pitting young against old and taxpayers against pensioners. The fiscal crisis has exacerbated the fight.

Pension promises made by the government (either to all citizens or to public-sector workers) do not show up in the debt-to-GDP ratios that are used to analyse state finances. Adding them in makes the position look even more alarming. On conservative accounting assumptions, the combined pension deficits of the American states are equal to a quarter of the gross federal debt.

The problem is particularly acute at the level of America’s states because so many of them have balanced-budget amendments.

When pension shortfalls require higher contributions, the money must be found from somewhere: higher taxes, less spending on other services or higher contributions from workers (amounting to a pay cut). 

A further difficulty is that pension rights have been deemed to be legally (and in some cases constitutionally) protected—though some Republican governors have tried to cut unions’ bargaining rights.

The key figure is the ratio of workers to pensioners, known as the support ratio. This is deteriorating steadily in all rich countries

Private-sector workers may be aggrieved at having to fund the generous pensions of their public-sector counterparts through their taxes. But unions are strongest in the public sector and will fight hard. Nobody seriously disputes that employees should keep the pension rights they have accrued so far, although they may receive the benefits later; the battle is over whether employees should be allowed to keep accruing the same perks in the future.

Since pensions are a form of deferred pay, workers view such reforms as a pay cut, albeit to pension rights they have not yet accrued. There is room for debate about whether such cuts are fair. But in some countries the raid on pensioners’ assets has been rather more brazen. 

If all the burden is not to fall on the state, workers need to save more during their lifetimes. That may require a change in attitude.

The old system was distinctly paternalist:

either the employer or the government would provide. In America and Britain the switch from DB to DC schemes in the private sector has left the responsibility with the individual worker, but employees have yet to rise to the challenge. 

They are not putting enough money in, and inevitably will not get enough out. British pensioners with DC plans have accumulated an average pension pot of only £27,000, 

Whether or not people can expect a comfortable retirement depends on the replacement ratio—the proportion of their lifetime average earnings that their pension will pay out.

This does not have to be close to 100% because generally pensioners need less to live on than full-time workers. They avoid the expenses associated with work and dependent children, have mostly paid off the mortgage on their house and no longer need to save for their retirement.

But the ratio often falls short of expectations.

The OECD reckons that the average worker in its member countries currently gets a state pension of around 42% of his average earnings. 

If state benefits are cut, more of the burden will fall on private provision. 

A recent survey by Aviva suggested that European workers are hoping for a replacement ratio in the region of 70% but are likely to get only 35-55%, depending on the country.

The replacement ratio needs to be higher than average for the least well paid, who spend proportionately more on essentials such as food, fuel and shelter. The OECD reckons that the net replacement ratio (allowing for the effect of taxes) for the poorest workers, on half mean earnings, averages just under 83%, but there are big national differences;.

So despite the need for cutting costs, governments need to ensure that their elderly citizens have enough money to maintain a decent standard of living. In the majority of countries poverty rates among the elderly are higher than those in the general population. Women are in a worse position than men: they live longer, typically earn less and spend a shorter time in the workforce. If they are married, their pension entitlements often depend on their husbands’ earnings.

Japan, which started greying earlier than other developed economies, can be viewed as an ominous precedent. Its only advantage in the pensions battle has been that its workers tend to retire later than those in other countries—around a decade after those in France.

Nevertheless, the ageing of its population over the past 20 years has been accompanied by deflationary pressures, sluggish economic growth and moribund asset markets.

Public spending on pensions has risen by more than 80%. In the corporate sector lax accounting standards disguised the true cost of providing pensions. When the standards were changed, the true horror was revealed: in 2003 the average plan was just 42% funded, so the government had to take over the liabilities of many companies.

Even after this rescue, Japan Airlines had to slash pensions by 30% as part of a restructuring plan—a huge blow to pensioners’ standard of living.

Emerging Retirement Experts -- FutureBenefits of America Offers Open-Architecture Multiple-Employer Plans (MEPs)  (Contact information below)

(When we hear good news stories in the retirement market we like to share them.  Here is one.) 

“This should really be an easy sale for an advisor if you have an established plan created.  Getting small employers to adopt a plan where they can alleviate fiduciary liability and limits the cost to them, should be very inviting to a potential small business.” Tony Michael, President, FutureBenefits of America

We are always interested in new ways to support and offer opportunities for advisors that want to work with retirement plans. 

The retirement plan business is a hyper-competitive business that also demands some real expertise, above and beyond what most advisors have.  In addition, few broker dealers supply adequate retirement plan prospecting services or support.  Most B/Ds have actually cut back on staff and support for retirement plans.  

Your TPA – Retirement Advisors’ Strong Partner At the same time, third-party administration firms (TPAs) are eager to work with, educate and support advisors in building their retirement plan, and rollover, businesses.   

TPAs have real advantages to share with advisors:

TPAs work in your local market

They already have in-place successful systems, tools and business development support

 A good TPA partner will walk an advisor thru every step of educating them, providing support pre- and post- sale and is always available for prospect and client meetings.  Free of charge!

 The TPA is experienced with all the packaged advisor-friendly 401(k) products and packages.  Sometimes they have their own recordkeeping systems that the advisor can “co-brand.”   

The Advisor-Friendly and Multiple-Employer Plan (MEP) Specialist -- FutureBenefits of America One of the best and most advisor-friendly TPAs we have met is our new client  -- FutureBenefits of America (FBA) (www.fb401k.com).  What has impressed us about their practice includes: 

Dedication to helping advisors build their 401k business

Top-level expertise and resources so an advisor can walk into a competition and have solutions that will differentiate them

 Thought- and process-leadership

 Special skills and opportunities in Multiple-Employer Plans (MEP)

Offers a, somewhat unique, open-architecture MEP program as opposed to standard group annuity products. 

This last point may offer hungry advisors a real opportunity for new plan and asset gathering.  So let’s look at this more closely. 

Open-Architecture Multiple-Employer Plans (MEP) -- A New Opportunity for Advisors Tony Michael is the owner of FutureBenefits of America and a very experienced and solid professional.  We see real opportunity in the MEP program he has created and worked with successfully for over ten years. 

What makes MEP’s new is the demand for low cost 401(k) plans and risk- and purchasing-sharing among employers, especially small employers. 

We asked Tony to tell us about the basis of these kinds of plans and the opportunities for advisors. 

Q.  Tony, tell me what is a MEP and how do they work?   

A.   Most plans are considered single employer plans.  An MEP is a Multiple Employer Plan which means there is one Plan Sponsor responsible for the plan but has many adopting employers of the plan.  A document is created to set up a template 401k plan.  Separate companies agree to and adopt the contents and policies of that document in order to be part of it.  

There are usually a few separate options listed on the adoption agreement that lets each employer have different choices within the plan and let each customize the plan practices and features to their specific needs, i.e., eligibility, loans, hardships, etc..  

Q.  What’s the history?  How did you get into the business?  What are your offerings?    

A.  MEP's have been around for a very long time.  Actually Andrew Carnegie started an endowment trust of $10 million in 1905 that later became TIAA-CREF.  It was built for teachers to contribute to a plan.  You could say that it was the beginning of the MEP.  

I began working with MEP's around the year 2000.  We provided daily recordkeeping and administration for an investment group.  At one time there were close to 100 separate MEP's on our system.  Many of the offerings today involve group annuity platforms.  We are one of the few that offer an open architecture platform.  Mutual funds, ETFs, Collective Trust and Money Managers are all part of the offerings available on the FB401k.com platform.

Q.  What does a solution look like? 

A.   There are many solutions, but let’s just choose one to look at.  Associations are a good place to look.  Associations usually involve many different companies that have a connection to this one entity.  It can be quite costly for each one of those employers to start their own plan.  

By having the Association sponsor the plan and allow all the groups that are part of the association join as an adopting employer, the cost of setup, base fees, audit and other cost are saved by each individual adopter.  Independent contractors can also be part of that opportunity.  It does not have to be a group associated with each other for an open-architecture multiple-employer plan to work; it seems the cohesiveness of this setup is best.  

Q.  Why should people look into a MEP?  What are benefits for the advisor, for plan sponsor?    

A.  It is estimated that 46 percent of small firms are not covered by a retirement plan.  According to the Department of Labor (DOL), small businesses account for 99.7% of the total number of firms.  That would mean that 50% of employees are not part of a plan.  Most of them do not start a plan for their employees because of cost and liability.  

A MEP can help in both of those areas.  The employer can transfer a large part of their fiduciary liability by adopting an MEP.  As we talked about above, the costs are considerably lower due to the economies of scale of many adopting employers added together.  

Q.  Tony, get into the mechanics of how they work and what mistakes to look for. 

A.  MEP's have a few wrinkles that most plans don't deal with.  This is why there are only a few TPA's who want to administer them.  Multiple payrolls being processed can cause many TPA's to avoid these types of plans.  It is hard to keep cost down from the processing cost.  

There are many rules that are not common to traditional plans especially when it comes to distributions that can cause trouble down the road for a TPA.  It is imperative that you find someone with experience working with MEP's to avoid any pitfalls in the administration. 

Q.  What should an advisor look out for with MEP’s? 

A.  The advisor really doesn't have a lot of problems with the MEP that they should be overly concerned with.  Maybe the biggest issue would be communication with so many different locations.  Since they are not dealing with the compliance issues themselves, they can rest a little easier having a competent TPA handle that aspect.  As stated before, just make sure you are working with a TPA that understands the MEP and compliance issues involved with them.  

Q.   What is the opportunity for advisors – right now?  

A,  This should really be an easy sale for an advisor if you have an established plan created.  Getting small employers to adopt a plan that can alleviate fiduciary liability and limits the cost to them, should be very inviting to a potential small business. 

A sober overview from experience and research around the world.  Our response and comment posted to the article site is at the end.

Highlights:

American married couple both retire at age 65, there is a 50% chance that one of them will live to 90. But pensioners tend to underestimate how long they will live.

A further complication is that people’s spending profile after retirement tends to be U-shaped.

Employees in America do not like annuities. “People hate losing control of their money,” 

But South Africa also offers access to pension savings, and research that 70% of members were taking their benefits in cash before retirement.

Many people use the money to pay off their debts; some go on a spending spree. So they may eat up their savings and have to fall back on the state’s means-tested benefit at 65.

the Brookings Institution found that about half the assets in the Australian scheme were held in self-managed or retail funds, which pushed up charges to an average of around 1.25% of assets

…more time is needed to demonstrate that auto-enrolment actually works

Saving for a pension may not be the best use of an employee’s income

Another problem is that the amount of money going into NEST (UK DC pension scheme) may not be enough to generate a decent pension.

The Economist -- A Special Report On Pensions

A Nudge And A Wink -- How To Persuade Employees To Provide For Their Old Age -- Apr 7th 2011

ALBERT EINSTEIN IS said to have described compound interest as the eighth wonder of the world. It should also be a boon for workers planning their retirement. Start saving early enough and a pension becomes much more affordable.

Unfortunately young people are often unable or unwilling to take advantage of this miracle.

Their wages are low

Their main priority may be to pay off their student debts or to save for a deposit on a house

They may find it difficult to defer gratification or, as economists like to put it, they use hyperbolic discounting

Most of them would much rather have money in their hands today than put it aside for a retirement which they can barely imagine. “People worry about sacrificing their liquidity by putting money in a pension.  They may have money to save now but think they might need it next year.”

But people MAY change their behaviour if the problem is explained to them in the right way.  In one academic study college-age students who were shown digitised pictures of themselves as they might look in old age allocated more than twice as much of their income to retirement savings as students who were shown contemporary photos.

Most countries use some form of tax incentive to encourage saving for pensions, usually by making contributions tax-deductible and allowing pension pots to accumulate tax-free. In a survey by the Investment Company Institute,

more than 80% of pension-plan members said that the tax break acted as an incentive

40% said that without the 401(k) concessions they would not be saving at all.

But tax incentives are likely to be of most benefit to the rich, who have more money to save; and those on lower earnings may find the tax rules too complicated.

A survey of British savers by Aegon, an insurance company, found that few understood the concept of tax relief.   It concluded that participation in pension plans would increase if the government were described as “matching” the amount of money put aside by workers.

The Easy Option These days the pensions industry is calling on the wiles of the behavioural school of economics.  Governments are trying to “nudge” people into doing what is good for them, as described in the eponymous book by two economists, Richard Thaler and Cass Sunstein.

The most popular nudge to do with pensions is auto-enrolment, which takes advantage of people’s inertia. … 

Under the nudge principle, workers are automatically enrolled in the scheme and actively have to opt out if they do not want to join. This has duly boosted participation.

In America auto-enrolment was approved in the Pension Protection Act of 2006 and was used by 57% of private-sector companies in 2010, with a further 15% planning to introduce it this year, according to a survey by Aon Hewitt, a consultancy

David John of the Brookings Institution suggests that the concept could be extended to small employers via an auto-IRA (individual retirement account), allowing businesses to offer employees a pension scheme at low cost

In Britain auto-enrolment is at the heart of a new national pension scheme, the National Employment Savings Trust (NEST). Due to start in 2012, it is designed to deal with the 45% of workers without a private pension plan. In future all employers will have to offer one, and NEST offers them a low-cost option if they do not want to set up their own scheme.

Economies of scale and limited investment choice will keep down charges.

However, Auto-Enrolment Raises Questions.

Saving for a pension may not always be the best use of an employee’s income. People with credit-card debts who are paying interest of 15-20% would be better off reducing their balances

In some countries (including Britain) means-tested benefits for low earners may be reduced in retirement if a pension is being paid.

Another problem is that the amount of money going into NEST may not be enough to generate a decent pension.

Total contributions will be 8%

of which 3% will come from the employer

4% from the employeeand 

1% from the government, in the form of tax relief.

But that is less than the average contribution rate of private-sector DC schemes. The danger is that employers will be tempted to “trade down” to the new levels.

Saving for a pension may not be the best use of an employee’s income -- people with credit-card debts would be better off reducing their balances

“It has been relatively rare for companies not to slash their contributions when they move from DB to DC.  There is a danger that auto-enrolment may exacerbate the trend as companies realise they have to make contributions for more people.”

…more time is needed to demonstrate that auto-enrolment actually works; 

the initial studies were based on just a small number of American companies

The success of New Zealand’s KiwiSaver programme, which used auto-enrolment to boost participation, may have been due to the generous tax incentives being offered

In particular, what will happen when workers discover they can get a short-term pay rise by opting out of the system.

In America’s corporate sector auto-enrolment is sometimes accompanied by auto-escalation. As workers earn more, their pension contribution goes up steadily. The hope is that they will barely notice the difference in take-home pay but that a higher contribution rate (perhaps 10-15% in total) will in due course allow them to earn a decent pension.

Make Them Pay The alternative to auto-enrolment is compulsion, as practised in Australia since 1992.

Employers there are required to contribute 9% (set to rise to 12% in 2019) of an employee’s salary to a superannuation account

The system applies to all Australian workers except the very lowest-paidA report by the Brookings Institution found that about half the assets in the Australian scheme were held in self-managed or retail funds, which pushed up charges to an average of around 1.25% of assets

Members of the scheme are able to take all their benefits as a lump sum at age 55

There is no requirement to buy an annuity. Many people use the money to pay off their debts; some go on a spending spree. So they may eat up their savings and have to fall back on the state’s means-tested benefit at 65.

In theory, being able to withdraw money from a pension scheme may persuade employees to contribute to it in the first place.

But South Africa also offers access to pension savings, and research that 70% of members were taking their benefits in cash before retirement.

Problems with Annuities Ideally savers will not take advantage of that option. One answer would be compulsory annuitisation, which is what Britain imposed for many years. Pensions are subsidised through the tax system to generate a lump sum that can be used to buy a retirement income to prevent the elderly from becoming a burden on taxpayers.

If workers in DC schemes fail to buy an annuity, they face the risk that they may outlive their savings.  Even those British workers who do buy an annuity tend to go for a flat-rate version, running the risk that inflation will erode their purchasing power.

The legal requirement to buy an annuity has been weakened in recent years. And British enthusiasm for annuities will have been dampened further by a European Court of Justice decision last month that stopped insurance companies from discriminating on the ground of gender.

Traditionally, men have received higher annuity payouts because their life expectancy is shorterIn future, annuity rates for men—the main buyers of the product—will have to be cut, perhaps by 5%, to bring them in line with rates for women. In effect, men will be underpaid.

Employees in America do not like annuities. “People hate losing control of their money,”  

If their capital is tied up, pensioners may not be able to meet sudden health-care billsthey will be exposed to the credit risk of the insurer, which the collapse of AIG in 2008 showed to be a real dangerand in some cases their heirs may get nothing.

The American insurance industry has tried to get around this problem by offering variable annuities, which they like to call a “living benefit”.  But this market still attracts only a small fraction of DC assets.

That may be because investors suffer from a condition called “money illusion”. They prefer having a lump sum to an inflation-linked income…a pension pot of $1m will buy an inflation-linked annuity of just $45,000 a year. “Retirees would go from being a millionaire to barely being in the middle class,”

This apparently low annuity rate reflects increasing life expectancy. If an American married couple both retire at age 65, there is a 50% chance that one of them will live to 90. But pensioners tend to underestimate how long they will live.

A further complication is that people’s spending profile after retirement tends to be U-shaped.

When they first leave work, they are still active and keen to travel and spend moneyAs they reach their mid-70s they stay at home more and spend lessIn their 80s their costs may rise again because of higher health-care bills or because they have moved to a nursing home.

If workers are not required to use all of their pension pot to buy an annuity, it seems sensible to ensure they make provision for their basic needs. In a report on retirement design, Mercer suggests dividing the pension pot into three:

one from which to draw income for the first 15 years after retirement, aiming at a 50% replacement ratioa second to be set aside to meet the higher costs of advanced ageand the rest for discretionary spending.

But this will be possible only if workers learn to regard their DC plans as the basis for an income stream. According to Geoff Manville, head of government relations at Mercer, the Obama administration is looking into a policy change that would require DC sponsors to give members a rough idea of the level of annuity they might expect. That could be another nudge in the right direction.

(This is our comment posted to the original article site.) It is well to take any and all of the behavioral ideas and theories with great critical thinking and skeptcism.   It’s appropriate to ask hard basic questions.  “Where is the evidence?” is one.

Behavioral theories and ideas are largely a pop media phenomena.  There is very little (if any) hard, peer-reviewed, double-blind study evidence for even the preliminary theories let alone practical applications.  BTW, there was no “Nobel” prize for these ideas --- there is, in fact, no Noble Prize for economics. A bank in Sweden gives out a prize in economics which they “spin” and is mislabed as a “Noble Prize” in economics.

The idea that some of the most pervasive, self-harming and intractable problems of human behavior and policy can be solved by simple “nudges” is sadly silly and simple.  But silly and simple ideas are always hugely popular.

In fact, the British government has made a serious investment in these ideas and found them a dead end.  British ministers, it turns out, are sensible and properly skeptical of fashionable ideas of the moment.

Here is some evidence contra BE – 

“Real Science? > Skepticism Over Behavioral Econ + “Nudge” Theories”

“Behavioral Economics Overreach” 

“Demographic Time Bomb” This is a massive and increasingly complex and accelerating global problem – how to fund extended lifespans with increasing health care costs, for hundreds of millions of adults – living for extended decades after their work lives?  Yikes!!

There seem to be a few determining factors in this “wicked problem:”

Historically unprecedented lifespans – longer for women.

No historical precedents or models for coping – in any domains.  We effectively have to get out and repaird the “airplane” “in-flight.”

Increasing realization of the serious limits in the human brain’s, and therefore policy, groups and institutions, to cope with problems that are inevitable but in the future.  

  We have been studying and posting on this primacy of hyperbolic discounting or soel focus on the “moods of the moment” in driving behaviors.  There are additional age and life –stage complexities,  For example, younger people are more impulsive and focused on “dating and mating” priorities; older adults suffer from brain capacity declines – especially men.

“Selling Employees Life-Long Austerity to Increase Retirement Savings” 

“Hyperbolic Discounting, Hyper Current Consumption and Disinvesting in the Future = Danger”

Finally, there simply is no money to pay for even basic living and health expenses for the vast numbers of people entering retirement.  The retirees don’t have the money, employers and companies don’t, governments don’t.  Add in health care which is inflating at 5% a year….it’s serious.

There are historical precedents for periods when population growth has exceeded the current “carrying capacity” of the “local ecologies” (economies).  These are often accompanied by the serious challenges to the social fabric and warfare.  It is said Hitler was helped to power by the German government’s inability to pay WWI vets pension guarantees -- leading to hyper-inflation.

Our hope would be that any solutions be expert-advised, evidence-based and experimented with before being enacted.  Realistically, there will need to be much trial and error – with the majority of the ideas failing.

We work in this space and have a Family Office group on Linked In and you error on the hype side -- quite a bit.

In fact, wealthy individuals and families value their privacy quite a bit so social media is a real problem, especially if it is bought and paid for by people selling something to rich people.  

These sites are then following a magazine model and are not really social media.

What is true is that you can always find sellers of products and services willing to spend for a "hot" new idea to find prospects.  Of course, the more sellers you have selling on a site the more it drives away potential prospects.

A real catch-22 for social media and HNW folks.

The service is free to all wealthy individual members, but the 40 or so corporate members pay £10,000 a year and extra for premium services. They appear willing to pay for access to new clients.

(Ah, the true “mission” of the site!)

April 5, 2011

Wealthy Turn to Social Media for Investment Help

By MATTHEW SALTMARSH

PARIS — Will the ultrawealthy find their place in the social media explosion? A handful of entrepreneurs think so and are building businesses around it.

One such entrepreneur is Caroline Garnham. She started a Web site, Family Bhive, in London three years ago as a “Facebook for the fortunate,” where those with serious cash could interact discreetly with the similarly well-heeled.

The site has since become a magnet for asset management firms, charities and lawyers, who use its restricted online platform to fish for well-heeled clients — members’ assets have to be professionally verified — and arrange social events or link potential investors to new projects.

Individuals use the service to catch up on chatter, arrange social calendars and exchange investment ideas.

“It’s a way for naturally inquisitive and like-minded people to meet away from the glare,” said Ms. Garnham, also an expert on succession and tax planning at the London law firm Lawrence Graham.

A raft of operators are coming up with their own twist in the sector. A few have moved into a niche between the high-net-worth set and the wealth management industry. The Bernard Madoff scandal shook up many wealthy investors, pushing them toward different forms of financial advice and the safety of being next to investors who are part of their community, in this case online.

“Social media is here to stay and it’s only going to get bigger for the wealthy,” said Stacey Haefele, chief executive of HNW, a marketing firm based in New York that advises wealth management firms and luxury industries.

In addition, Ms. Haefele said, the rich are typically early adopters of new technology, so a new breed of young, social-media-savvy millionaires will emerge from the coming initial public offerings expected from companies like Groupon, Etsy and LinkedIn, as well as from other investments in social media. The less fortunate could lose their shirts.

But not everyone is convinced that social media will play a transformative role. Joachim H. Strähle, chief executive of Bank Sarasin, the Swiss private bank and asset manager, said he had not witnessed any demand from his clients for social media tools.

“Wealthy clients generally look for privacy and don’t want to share data publicly, even if their anonymity is preserved,” he said. “Most of them just want to live their lives, work, enjoy themselves and have a safety net — in private.”

Family Bhive is but one firm that has used variations on the same model to allow the wealthy to offer each other advice and tips and sometimes enter projects together.

In Britain, Peers and Pi Capital have focused on bringing together wealthy individuals to share ideas and projects. Another firm, Ecademy, acts as more of a business-to-business information network.

Pi has become something of an alternative investment club and a power network for entrepreneurs and business chiefs. The group, based in London’s swanky Mayfair district, was founded in 2002 by a Florida native, David Giampaolo.

It offers its 300 members — who pay £1,000 to join and £4,000 a year in fees — access to an exclusive network, forming a kind of private equity syndicate that invests on average £15 million, or $24.4 million, to £20 million a year.

“The idea is: together, we’re smarter,” Mr. Giampaolo, 51, said.

The group, which is regulated by Britain’s Financial Services Authority, “shares contacts, deal flow, intelligence and the transfer of intellectual capital,” he said.

Members have invested together in a number of deals, taking stakes in private companies in, for example, the health and fitness sector, biotechnology, gambling and transport. In so doing, they have been able to avoid the chunky fees charged by brokers or advisers on more traditional deals and they “share the pain” if deals turn sour.

The group also organizes gatherings that combine the social with the financial. Recent events include meetings with Pervez Musharraf, the former Pakistani president; the musician and activist Bob Geldof; Willie Walsh, chief executive of British Airways; senior journalists from The Financial Times and The Economist; and Danny G. Alexander, the chief secretary to the British Treasury.

Mr. Giampaolo said most members must have their assets verified and that the site was profitable.

A similar group is Peers, started in London in 2008 by a Dutchman, Francis Claessens. He now has a chapter in Lausanne, Switzerland. It has over 50 members with several billion pounds in combined investable assets. Its stated aim is to “provide a source of expertise, generate profitable ideas and facilitate good company.” It is a not-for-profit and has no joining or membership fees.

In the United States, the Institute of Private Investors, or I.P.I., and Affluence.org have become established networking platforms. I.P.I., which was recently bought for an undisclosed sum by the London-based business publisher Campden Media, has more than 1,100 private investors and 140 professional firms as members. It promotes education and networking events.

If it is to expand, the sector will also have to navigate a regulatory environment that is evolving.

Ms. Haefele of HNW said that guidance remained formative. In the United States, FINRA, an independent regulator for securities firms, is taking a closer interest in the way potentially sensitive financial information is disseminated on the sites. Many U.S. companies are still wary of social media and restrict what is posted on blogs and Twitter for investor issues, for fear of violating the Securities and Exchange Commission’s rules on disclosure.

Last year, FINRA issued guidelines for blogs and social networking sites, advising, among other things, that operators should consider prohibiting interactive e-communications that recommend specific investment products unless a registered principal has approved the content. New, probably tighter, rules are expected.

In Europe, regulators appear to have focused more on privacy issues and protecting minors than on the dissemination of financial data, which appears to have been left to national regulators. A spokeswoman for the European Commission said that depending on the advice offered, social media platforms may be covered by Europewide rules for investment services and distance selling.

As it has pushed into the business world, Family Bhive has become a platform through which wealth management firms including Merrill Lynch, Vestra Wealth, the Fine Art Fund and Investec showcase their expertise and search out clients.

The individual members include celebrities, politicians, entrepreneurs and those with family wealth. Most want to remain anonymous. The British businessman and former lawmaker Howard E. Flight and the food entrepreneur Frank Brake are members.

The members intersect through messages exchanged on the site and social, charitable and business events organized through the site. It also offers editorial products tailored to clients from specialist providers like Luxury Briefing, Spears and Private Banker.

Steven Jerath, a partner and adviser at St. James’s Place Wealth Management, which is based in London, has been a member of Bhive since January. While it is too early to see an immediate effect, he said that he was “positive on the Web site” and the model.

Mr. Jerath uses the site to post bulletins on investment advice, tax matters and market intelligence, which draw comments from potential clients. “And relations build from there,” he said, adding the wealth advisory sector was a “long game,” in which relationships took time to cement.

The 700 individual members are ranked by their net worth: “Jet” for those worth over £100 million, about 4 percent of members; “Jade” for the £20 million to £100 million club, or 13 percent of members; and “Amber” for those with £5 million to £20 million, representing over 80 percent.

The company employs seven or eight people and expects to turn a “healthy profit” this year based on its fee-driven model, Ms. Garnham said. In the future, it might expand other revenue-driving channels like premium services and advertising; Ms. Garnham plans to take the concept to Zurich, Dubai, Singapore, China and the United States.