Q&A: Maximize Your Legacy for Your Grandchildren

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You’re a financially successful grandparent who wants to leave a big legacy for your grandchildren. You would like to maximize the legacy you leave them while minimizing taxes. Here are some questions you’ll need to consider:

Q. Will the Generation Skipping Transfer Tax (GSTT) limit what I can give to my children?

The IRS imposes a transfer tax at each family generation:

  • If an asset passes from a parent to a child, and then from the child to a grandchild, estate tax is imposed in both the parent’s and the child’s estates.
  • If a parent passes the asset to the grandchild to try to bypass the child’s estate and avoid estate tax,  it may be subject to another transfer tax, the generation-skipping transfer tax.
  • This tax is particularly onerous because it is imposed in addition to the estate tax incurred in the parent’s estate and is assessed at a flat 45% rate.

As a result, when the GSTT applies, it may result in more than 75% of the assets passing to the grandchild being consumed in estate taxes and generation-skipping taxes.

Q. At what amount does the tax kick in?

The IRS provides each individual with a “GST exemption” of $5.25 million. In other words, each individual may engage in generation-skipping transfers of up to that amount without subjecting those assets to the GSTT.

Q. Can I leave even more without losing much to taxes?

Many individuals who might otherwise leave their entire estates to their children allocate their generation-skipping exemption – currently $5.25 million – to generation skipping trusts for the benefit of their children and grandchildren.

Q. Would a trust help if I don’t have that many assets?

The trust advantages go beyond tax savings. Using the generation-skipping tax exemption offers two important advantages:

  • The trust will escape all transfer taxes when the children die and will pass to the grandchildren tax-free.
  • The trust may be protected from the claims of creditors and, to some degree ex-spouses. (some states protect inheritance in divorce proceedings.)
  • Gift, estate and generation skipping tax laws are constantly changing. The exemption amount has been as low as $1 million and the tax, as high as 55%.

Historical Generation Skipping Transfer Tax Exemptions and Rates

Year GST Exemption GST Tax Rate
1997 $1,000,000 55%
1998 $1,000,000 55%
1999 $1,010,000 55%
2000 $1,030,000 55%
2001 $1,060,000 55%
2002 $1,100,000 50%
2003 $1,120,000 49%
2004 $1,500,000 48%
2005 $1,500,000 47%
2006 $2,000,000 46%
2007 $2,000,000 45%
2008 $2,000,000 45%
2009 $3,500,000 45%
2010 No generation skipping transfer tax N/A
2011 $5,000,000 35%
2012 $5,120,000 35%
2013 $5,250,000 40%

In view of the uncertainty in tax laws and of the erratic nature of lawmakers in the United States, any grandparent with assets totaling more than $1 million should consider funding an irrevocable dynasty trust to take advantage of the current $5.25 million gift and GST tax exemptions. Even individuals with $1 million or less should consider placing high-growth assets in a dynasty trust, where they can grow insulated against creditors and against future estate taxes.

Q. How Do I Set Up a GSTT Trust?

1. Establish a trust. Appoint a trustee

2. Fund it up to the GSTT exemption.

3. Leverage the trust assets through life insurance.

The example below provides a brief summary of what a Dynasty trust can do for you. Please note that states may limit the term of the trust:

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Leverage Your Legacy

If you and your spouse are healthy and qualify for life insurance, the trustee can also purchase life insurance on you. The advantages:

  • The death proceeds go to your children and grandchildren, exactly according to your wishes.
  • The proceeds are generally received by the trust both income and estate tax free.
  • You can provide for multiple generations – including both children and grandchildren.

Speak With a Planner

Estate and GST taxes can be avoided using other useful techniques. For example, interests in a family limited partnership (FLP) or family limited liability company (FLLC) can be transferred to succeeding generations by simply gifting the assets to family members. Valuation discounting of family business interests can lower exposure to gift taxes. Under circumstances, a personal residence can be efficiently transferred using a qualified personal residence trust (QPRT). These other techniques, however, do not offer the asset protection and long-term wealth preservation and management possible with an irrevocable dynasty trust.

Takeaways

  • The uncertainty of tax laws means that any grandparent with assets over $1 million should consider funding an irrevocable dynasty trust to take advantage of the current $5.2 million gift and GST tax exemptions.
  • Grandparents with $1 million or less should consider placing high-growth assets in a dynasty trust, where they can grow insulated against creditors and against future estate taxes.
  • If you are healthy enough to qualify for life insurance, it can greatly multiply the amount that you leave to future generations.

Note: 2013 Changes to Estate Tax, Gift Tax, and Generation-Skipping Transfer Tax Laws

Under ATRA, the federal estate tax exemption has been indexed for inflation and  increased from $5.12 million in 2012 to $5.25 million in 2013, but the estate tax rate for estates valued over this amount has increased from 35% in 2012 to 40% in 2013. In addition, the lifetime gift tax exemption has also been indexed for inflation and increased from $5.12 million in 2012 to $5.25 million in 2013, and the maximum gift tax rate has increased from 35% in 2012 to 40% in 2013. The generation skipping transfer tax exemption has also been indexed for inflation and  increased from $5.12 million in 2012 to $5.25 million in 2013, and the maximum generation skipping transfer tax rate has increased from 35% in 2012 to 40% in 2013.

Warning & Disclaimer: This is not legal advice.

Is There a Ready Market for Your Business?

small businesses for sale

According to The Complete Guide To Business Brokerage By Tom West, the number of small to mid-sized, privately owned businesses for sale in the United States is estimated to be approximately 1 million – or 20% of them at any given time. But only a small number of them get sold:

  • 1 in 5 small businesses sell
  • 1 in 4 small to mid size businesses sell
  • 1 in 3.5 mid-size companies sell
  • 1 in 3 large companies sell

Shut Happens

There may be no ready buyers for your business, and you may lose your most hard earned asset. Consider this example.


out of businessExample:
 You and your partner  are 50/50 partners.  Your partner dies, and his wife or child inherits his share of the business.

  • Do you have the right or the obligation to buy them out? 
  • If so, for how much and on what terms?  
  • Can you strike out on your own, or are you stuck with the baggage of the old one? 

What if you die instead of your partner?

  • Will your partner pay your family a fair price for your share of the business?
  • Will he just walk away and start up a new business on his own?

The 3 Problems of Business Continuation


1. No buyers offering a fair price
 - There may not be a ready market for your business in even the best of economic times, and unforseen events like death or sickness can force a fire sale. You may work hard all your life to build a business, but have nothing to leave your family.

owner's son2. Forced Partnership with a spouse or child - If you don’t have the cash to buy out your partner’s interest,  you may find yourself in business with a spouse or child who may actually be a drag on the profits and viability of your business.

3. Can you leave a family legacy? - If you die before your partner, what assurance do you have that your surviving partner will pay your family a fair price for your share of the business?

Robert W. Wood, who writes about taxes and litigation issues for Forbes, sums up why a  buy-sell agreement is so important for anyone who owns any kind of business:

Without it, a closely held or family business faces a world of financial and tax problems on an owner’s death, incapacitation, divorce, bankruptcy, sale or retirement…A buy-sell agreement can ward off infighting by family members, co-owners and spouses, keep the business afloat so its goodwill and customer base remain intact, and avoid liquidity problems that often arise on these major events.

Creating a Market for Your Business

Business-succession specialists and financial planners often recommend an insured buy-sell agreement to ensure that your family can receive a fair value for the business you worked so hard to build, and allow you to buy out your partner’s share and continue the business as a going concern. It does two things:

  1. It creates an immediate market for your business (your partner or a successor employee.)
  2. It  can create immediate funds for a fairly valued buyout through insurance.

The 5 Guarantees of A Properly Structured Agreement

buysell.png

A properly-structured agreement will guarantee the following:

  1. guaranteed purchaser
  2. guaranteed sale
  3. guaranteed price
  4. guaranteed time
  5. guaranteed funding

1. Guaranteed Purchaser

Who will buy?

  • the surviving partners must buy

2. Guaranteed Sale

Who will sell?

  • the estate of the deceased partner must sell

3. Guaranteed Price

What is the price?

  • have a formula or outside valuation

4. Guaranteed Time

When to transact?

  • automatically at time of
    • disability
    • retirement
    • death

5. Guaranteed Funding

How to pay?

Implementing A Simple and Cost Effective Solution

Cross Purchase vs. Redemption:  One type of agreement is a cross-purchase:  If you or your partner/successor dies, becomes disabled, goes bankrupt, etc., the other can buy his share.  With a redemption style agreement, the business itself would make the purchase so the owners don’t individually go out of pocket.

With either type of buy-sell, there’s lots of flexibility.  The price might be fixed, determined by appraisal or formula.  The price might be paid in cash or installments over time.  There can be different terms for different events, one price and terms for retirement, one for disability, one for death.

Insurance:  Insurance features prominently in many buy-sell agreements.  You don’t have to use insurance, but it can ensure there’s cash available when the time comes.  For example, whether you or your partner/successor dies first, a life insurance policy on each of you can fund the buyout so your business stays afloat and the spouse/heirs are bought out as agreed.  A buy-sell agreement is funded with life insurance on the participating owners’ lives can guarantee that there will be money when the buy–sell event is triggered. Using insurance to fund the buy/sell agreement has these advantages

  • funds are available when needed
  • least expensive solution
  • new owner does not incur debt when buying the business

Reciprocal Planning:  While you may find it difficult to face these issues and to make some of the decisions, any buy-sell agreement is better than none.  The best thing about buy-sell agreements are that they are reciprocal.  No one knows for sure if you or your partner will be the first to go by death, disability, retirement, or for other reasons, and this reciprocal nature makes negotiating and agreeing on these issues easier to do.

How to Get Started

You’ll need a business or tax lawyer experienced in buy-sell agreements to draft it.  However, these agreements can be surprisingly simple and cost effective. Whatever you pay for it and the insurance premiums on an insured arrangement will be small in comparison to what it can save you. 

One of the best starting points is a financial planner or insurance specialist. They may have prototype documents to recommend to your attorney, but, more important, they may have invaluable experience and can give you guidance in thinking out the key decisions before you meet with an attorney to get it done, which will save you time and money.

Additional Resources:

 

losing_contact

NewLink Consulting, Toronto found: 29% of U.S. life policyholders lost contact with the agent/financial planner who had sold them the policy, and 41% if the policy was purchased from an agent/broker.

Guest blogger Mark Weishaar

An orphan can be defined as “One who lacks support, supervision or care”.
How many do you have in your CRM database? How many customers have simply become dormant and shuffled into an inactive or unassigned category?

In a recent conversation with my client from a major life insurance carrier, I was appalled to learn that her company had well over 100,000 orphaned policyholders. In insurance-speak, these are folks who originally purchased a policy from an agent, but were never re-assigned after that agent left the company.

Many industries have a similar category in their database. Inactive bank accounts, infrequent flyers, one-time visitors… the list goes on. It gets me thinking: how many organizations could use a shot in the bottom-line? This category represents a huge untapped asset:

  1. Orphans are never contacted. You have forgotten about them, and they have forgotten about you. How likely are they to ever upgrade or buy another product or service from you? 
  2. If your competition is effectively marketing – and you know they are – how many competing offers can your orphans resist? Retention rates suffer when customers are ignored. 

The ROI of Marketing to Orphaned Policyholders

Let’s put some dollars and sense behind a simple illustration exercise: 

With the potential for this scope of increased revenue, it makes no sense to me that so many insurance companies do not devote any attention to their orphaned policyholders. Political turf issues over account re-assignment? Possibly. “Don’t rock the boat” and “Let sleeping clients lie” mentality? Maybe. Inertia? Most likely. 

Case Study: A short while back, I worked with a major hotel chain to develop a multi-pronged marketing campaign. Our objective was to revitalize their “dormant” clients: those who had not booked a room within the previous 24 months. Of the many successful initiatives we launched, the highlight was going back to the dormant customers.

After modeling their data against the frequent guests and re-soliciting a predictive-modeled group with an offer, we generated an ROI of 1,090%!

Unheard of? Yes. But true. And I could predict similar successes in your own organization.

So take a look at your entire customer file. Find those pockets of orphaned customers who have been ignored for whatever reason. Develop a strategy to solicit them with a product offering using a predictive model-driven approach. The incremental revenue generation and low acquisition costs are likely to amaze you, and will demonstrate once again the truism that:

Your Best Customer is Your Current Customer.

Mark Weishaar is a veteran financial services direct marketer and senior executive delivering broad range of leadership responsibility, experience and accomplishment across brand strategy, marketing, loyalty programs, customer data analytics, distribution, CRM, and social media on a worldwide basis.  He has directed the sales & marketing of a wide variety of financial services products and programs and held senior level roles in start-ups and  Fortune 100 companies in direct marketing environments, and  traditional agent/advisor companies. He has a unique ability to analyze and develop actionable marketing and sales programs with measurable ROI improvements.
Want to chat with Mark? Reply to him here or leave a comment on the blog.

advisor-trust-chart2

Who Do You Trust?

 notes in HealthLifePro, that Americans’ trust in advisors has declined. A study by Hearts & Wallets, Hingham, Mass titled “Trust-Building Practices: Updated Empirical Analysis of What Drives Trust,” gauged trust on a scale of one to ten (one signifies very little trust and ten very high trust.) The study’s findings:

  • Just one in five Americans fully trusted their financial advisor in 2012 – a four-point decline since 2010.
  • Those awarding their advisors 9 points declined from 18% in 2010 to 13% in 2012.
  • Those awarding their advisors 8 points declined from 21% in 2010 to 17% in 2012.

The most trusted advisor practices are full-service brokerage and insurance practices versus self-service brokerages and banks:

  • 74% rate  insurance and full-service brokerages a 9 or a 10 (37% each.)
  • Only 60% rate self-brokerages and banks a 9 or a 10.

What Drives Advisor Trust?

The top trust drivers of trust were ranked as follows:

  • improving investor understanding of how the provider earns its money (by a wide margin)
  • the perception that an advisor is unbiased
  • clear and understandable fees
  • responsive
  • understands and shares the client’s values
  • has made money for the client
  • has produced a “positive experience” for friends and family members.

Takeaway:

Transparency, responsiveness, understanding the client’s values and putting the client’s interests above one’s own are all core to trust in an advisor.

Bri Bauer  of iMedia Connection provides some interesting tips on how to get customers to open emails and act on them.

Understanding the ROI

An effectively implemented email marketing program can drive significant traffic, According to the 2012 Channel Preference Survey, conducted by the digital marketing group ExactTarget, email is the preferred permission-based marketing and service channel:

  • 76% prefer email over all other channels for customer service messages.
  • 66% of teens (ages 15-17) prefer email over all other channels for permission-based marketing.
  • 96 percent of online consumers use email at least weekly.

It’s also highly effective:

  • 66 percent have made a purchase after receiving an email marketing message
  • Email marketing drives more consumers to make a purchase than Facebook and text messaging combined.

Once people have signed up to hear from your brand, they want to be kept informed. You want to provide them with communication that gets opened and drives them to take action. Here are 5 practices that drive results.

1. Refresh Your Address List

A recent Experian survey found that more than 90 percent of companies suspected that up to 25% of their data is inaccurate. Look at the number of bounce-backs or routinely un-opened emails.

2. Create An Engaging Title

To avoid getting preempted by a spam filter, avoid spam filter-friendly language such as “free,” “act now” and “limited time”.

3. Develop User-Friendly Design

Make the communication responsive and scalable to  multiple platforms, allowing users to take action, whether they are viewing it on their mobile device or desktop computer. “Avoid the sophistication trap - email marketers see the most success with layouts that have  little noise (graphics, photos, video and scrolling)  with a clearly visible call to action.

4. Understand Their Motives for Signing Up

Knowing what motivated people to sign up for your emails in the first place will help you understand them as a community and facilitate delivering what they want:

  • Are they looking for discounts?
  • Do they want something to do?

Based these insights, you can provide them with relevant content to inspire their curiosity.

5. Provide Value

Your emails should offer relevant substance and value to your readers, including news, brand insights, and customer survey information and spare body copy.

happiness

Outstanding FB Page

Proving that Marketing isn’t about creating messages, but embodying them, Sivana (meaning Oasis of Enlightenment) is based in the yoga beach culture of Encinitas Ca., rooted in Eastern spirituality, and providing support for yoga and higher living. Their products include such goods as Yoga Clothing, Active Wear, Yoga Equipment and Accessories, Bags, Incense, Statues, and Malas.  They have an amazing Facebook page.

Most Hated Advertising Slogan:

smuckers slogan

Best Selling Jam!

jamSmucker now owns the No. 1 brands in coffee, jams and jellies, peanut butter, and cooking oil.

According to Fortune, the secret of Smucker’s success is keeping it in the family.  Contributing editor Marc Gunther fills in the blanks: here’s a synopsis of Marc’s article:

Since Ohio farmer James Monroe Smucker began selling apple butter from the back of a horse-drawn wagon in In 1897, the company has had five chief executives, all named Smucker.

Sales have skyrocketed from $632 million in fiscal year 2000 to $4.6 billion in 2010, as the company acquired iconic brands Jif, Crisco, and Folger’s and profits grew from $36 million to $494 million. Shareholders have received a total return of 309% over the past 10 years, compared with -15% for the S&P 500.

Their secret ingredient? Al Yeagley, a vice president who has been with Smucker for 36 years says:

“The real secret is the family. They treat people the way you want to be treated. It’s the old golden rule.

In fact, Smucker ranked No. 1 on Fortune’s list of Best Companies to Work For in 2004.

Brand Integrity

According to Richard Smucker:

We’re really all about managing and marketing brands.

Smucker’s family-friendly values are its brand, its philosophy and its practice. Smucker won’t buy TV commercials on shows with violent or prurient content. It sponsors the birthday greetings for centenarians on NBC’s Today show. And, moreover, Smucker spends more than industry rivals on advertising and promotion. Its slogans are as iconic as its brands:

  • “With a name like Smucker’s, it has to be good”
  • “The best part of wakin’ up is Folger’s in your cup”

Ascending the Brand Pyramid

Smucker wasn’t always as brand-centric. It originally focused on buying jam and jelly companies in Brazil, Britain, and Australia and producing fruit for products like Dannon yogurt and Kellogg’s Pop-Tarts.

The company undertook a sweeping strategy review in the mid-1990s, involving top executives, middle managers and factory workers, and shifted its focus to brands. Smucker understood that “real money in supermarkets is made in the middle of the store, where processed foods and well-known brands reign supreme.” Richard Smucker summarizes Smucker’s brand-focused strategy:

To own and market No. 1 brands, sold in the center of the store, in North America

This drove the company to numerous acquisitions including:

  • Jif
  • Crisco
  • International Multifoods (including Pillsbury and Hungry Jack)
  • Folger’s

Businesses that were inconsistent with the company’s core were sold, including its ingredient businesses, overseas operations, and weaker brands. For instance, on the theory that Smucker can have an impact on what Americans eat for breakfast and lunch (PB&J), but not at dinner, it kept Hungry Jack pancakes and syrups , but sold off dried potatoes. Coffee has become the company’s biggest segment.

And now you know why with a name like Smucker’s, it has to be good.

 

 

 

 

 

Conveying The Unique Value Proposition

Brands convey the identity of a company or organization and create a visual/brand personality. The logos pictured above are among the most recognized brand symbols in the world today. Still, over time, as times and people change,  brands need to be updated. Here are the stories of how the logos were updated over time.

Apple

brand appleThe Rainbow Apple: Apple is one of the most successful biggest consumer electronics brand, best known for products like Macintosh, iPod and iphone. When Steve Jobs, Steve Wozniak, and Ronald Wayne set up Apple in 1976 to sell their hand-built computer Apple I, HP declined to carry the line.  Success takes time, and when it didn’t prove easy, Wayne liquidated his share in the company for $800.

Success came with the launch of Apple II in 1977, a product that owed much of its success to colored graphics. Apple established its USP (Unique Selling Proposition) from the with great and simple design. But the first logo, designed by Jobs and Wayne, was a complicated picture of Isaac Newton sitting under a tree bearing the lengthy and heady inscription: “Newton … A Mind Forever Voyaging Through Strange Seas of Thought … Alone.”  Steve Jobs then hired Rob Janoff to simplify the logo, and the ‘Rainbow Apple’ personified the UVP so well that it remained in use until 1998.

One of the rumors about the origin of the Rainbow Apple logo was that it was a tribute to Newton that also reflected Apple’s colored graphics. Another explanation is that the bitten apple pays homage to the Mathematician Alan Turing, regarded as the father of computers, who committed suicide by eating an apple he had laced with cyanide, while the rainbow colors of the logo were a reference to the rainbow flag, reflecting Turing’s homosexuality.

Janoff has said that he  designed the logo to “prevent the apple from looking like a cherry tomato,” and was reflecting the “byte/bite” pun, as Apple’s slogan at the time was: “Byte into an Apple.”)

Monochromatic Apple: When Apple launched the new iMac in 1998, they changed their logo to a monochromatic apple logo, reflecting changing times and the simplicity of the iMac. Today the logo has been updated from a flat 2-dimensional symbol to a 3-dimensional gradient chrome silver design, which appears to bring the sense of technological evolution to the fore.

Mercedes-Benz

brand mercedesThe Mercedes-Benz was formed by the merger of two car companies – DMG (Daimler-Motored-Gesellschaft, founded by Gottlieb Daimler) and Benz & Cie, founded by Karl Benz after the World War I.

In 1902, the logo for Mercedes was simply the company’s name. However, it adopted the iconic 3-pointed star in 1909. The origin of the star was taken from a postcard by Diamler, where he had scribbled a 3 pointed star to represent ‘making vehicles in land water and sky’. With the merger of the two companies in 1926, a new symbol for Mercedes-Benz merged the logos of both companies into one,  combining the Mercedes 3-pointed star with the Benz laurel wreath. Over the years, the symbol has been improved vastly in design and simplicity, and, like Apple’s, is now a 3-dimensional monochromatic metallic silver. It reflects the tasteful luxury of a top tier car that stands on its own merit without need for embellishment.

Ford

brand fordHenry Ford founded two companies before settling on Ford, and neither venture went well. He founded his third company in 1902, called Ford & Malcomson, Ltd. When he was unable to pay the bills for parts in his third company, some investors agreed to put money in the company. It was renamed as Ford Motor Co., and the name was reflected in the first logo of 1903. The 1909 logo, which has a similar font as today’s logo, was borrowed from Childe Harold Wills, who had made this font for his business card.

In 1912, the Ford logo was given a makeover and the famous blue oval was introduced in the logo. The company experimented with different shapes, including the ellipse, circle, and even a diamond like-shape in 1957, and the 1976 logo, very similar to their current logo, was the last major change in the symbol.

In recent years, American car companies have experienced a rebirth after becoming rather old fashioned and stodgy in comparison to Japanese imports. The logo seems to reflect this transition. In 2003, the company released its new  “Centennial Blue Oval”. The current design is also shares  common design elements with the current Apple and Mercedes logos: it is simple, bold, 3-dimensional and monochromatic, with a metallic sheen.

BMW

brand bmwThe famous white and blue symbol of BMW stems from the company’s origins as airplane engine manufacturers. Many aircraft were painted in regional colors and those of the Bavarian Luftwaffe were the Bayern white and blue. It is said that the pilot’s view through the propeller was one of white and blue

Through the years the image become stylized into solid quarters of blue and white. Since the end of the 1970s BMW has worked to create a standardized international image in terms of statement and presentation so that whenever people encounter the company’s symbols they can easily recognize it. Like the other logos shown above, the BMW logo has recently taken on a 3-dimensional metallic sheen.

Conclusions

Each of the above company and logos reflects a unique, recognizable identity, but share some remarkably common attributes – their histories and their ability to evolve with consumers. They all represent advanced technologies and somehow stand for more than themselves: Apple and Ford are identified with American innovation, as Mercedes and BMW are with exacting German standards. All have made transitions, reinventing themselves to fit the needs and desires of the consumer, and, in doing so, stand out as 3-dimensional brands in a flat field. When all of this can be captured in a single image, something remarkable is happening, marketing at its most effective best.

image

Saving to Keep Up With the Joneses

In the Wall Street Journal, Carolyn T. Geer highlights recent surveys of investors by entities including T. Rowe Price and ING.

The Question: Does the knowledge that your friends and neighbors are saving more than you cause you to boost your savings?

The Answer: It works, but the effectiveness varies very much with the approach.

The “Lake Wobegon Effect”

People have a natural desire to avoid being average and ordinary. This phenomenon is known as the “Lake Wobegon Effect,” named after a fictional town created by writer and radio host Garrison Keillor, where:

All the women are strong, all the men are good looking, and all the children are above average.

The question is for financial consumers is: Will consumers be more inclined to maximize their 401(k) contributions or increase their insurance coverage amounts if provided peer comparisons?

What the Studies Show

Matt Fellowes, founder and chief executive of HelloWallet, which works with employers to provide financial guidance to their employees via the Web and mobile devices, confirms that peer comparison is one way that economists and others are attempting to modify financial behavior. He believes that cluing investors in on their peers’ financial decisions can influence the decisions they make about their own money, if you show them convincingly that what they’re doing doesn’t meet the norm, but “it doesn’t work for everyone. It’s not a silver bullet.”

According to an ING study of U.S. consumers:

  • More than half of respondents say they would be motivated to save more for retirement if their sagings didn’t measure up to those of their peers.
  • Yet one-third say they would not be motivated to save morel.

Why the mixed results? Apparently, the approach can be quite effective if done right, but the wrong approach can also be demotivating. Stanford University economist John Beshears and colleagues say that when some employees are told of their co-workers’ higher savings rates, they are actually less driven to save. But the companies that have studied the effect also say that the approach can be fine-tuned to avoid demotivation, which I will explain below.

Marketing Applications

Web-Based Tools: ING has created a free, Web-based tool that lets investors measure themselves against others on a range of saving, spending and personal-finance matters called INGCompareMe.com. Deb Dupont, director of the ING Retirement Research Institute, conducted a test market of the concept with employees of several of its retirement-plan customers, that yielded the following results, which were promising enough to launch the tool:
  • 21% increased their contributions or joined a plan.
  • HelloWallet members showed similar results, according to Matt Fellowes.

The Right Approach: Two Important Variables

The right approach needs to take into consideration two important variables:
1. Don’t Demotivate: Fellowes explains that you must be careful not to use “shock and awe” tactics that demotivate consumers:

We’ve tried: ‘You are $5 million behind on your retirement savings! What is your problem?’ But emotionally what happens is people shut down and move on.

2. Don’t Set The Bar Too Low: One problem with peer comparisons that reference  average workers is that it can set the bar too low.

To strike the perfect balance, “HelloWallet has reframed the issue for consumers as follows:

You are making $5,000 a month now. In retirement, you’re only going to be making $2,000 a month, based on your current savings rate. On average your peers will be making $4,000, but the very best savers among them will be making $7,000.

This highlights what the best, most financially healthy people in a peer group are doing and provides a more realistic target, while piggybacking on the natural desire to avoid being ordinary.

Assisting Complex Financial Product Decisions

Having applied this approach in product comparisons, I have found that the approach can be a valuable aid in helping consumers make complex financial products. In particular, I find that when presenting consumers with their choices, it is even more helpful to include not only a comparison to average consumers but a “best practice” comparison. For example, employers considering an employee benefit program can be shown what kinds of benefit plans their most successful competitors are adopting. Individual consumers considering a plan of insurance can be shown what kinds of options successful peers have chosen.

Choice Architecture: Marketers and sales professionals can improve the effectiveness of their approaches by making use of an effect known in behavioral economics as “choice architecture.”

Marketers and sales professional should be aware of certain behavioral tendencies that tend to impede decision making involving complex insurance and other financial products.  Consumers are reluctant to make a switch to a different insurance carrier or among different plans when the choices are complex – something known as status quo bias. Inertia, or the tendency not to change, is especially significant when choices are complex.

Other studies show that by reframing the choices for the consumer, you can help guide decision making for consumers facing complex decisions in selecting better plan options.

Implications For Financial Marketers

The implications for companies in crowded markets such as insurance and investment products and services are great. It can mean steering consumer toward decisions that will ultimately save them and the company money and improve consumer outcomes.

Companies like Progressive Insurance, for instance, use comparison shopping tools to differentiate themselves in a crowded field as a more consumer-oriented and trustworthy choice. Their “name your own price” message conveys that the consumer can save time comparison shopping through the use of their online tools. Their perky spokesman, Flo, and her price gun personify consumer values such as friendly, good spirited personal service and a personal touch. This is all intended to break down consumer resistance to switching companies, and has generated incredible recognition.

The response to these advertisements demonstrates that the message can generate strong brand associations with core consumer values that can be illustrated in sensory terms.  But an important question remains – how to turn brand recognition and leads into conversions?

In other words, once the consumer reaches out to their local agency or makes an online query, how can the sales professional better parlay this into a consistent consumer experience that results in conversions to more profitable product lines and cross selling opportunities/share of wallet.

This is where choice architecture can be vital. In providing comparisons with other carriers, the sales professional has invaluable opportunities to more effectively clue in consumers on their peers’ financial decisions and influence their buying decisions.

Related Articles:

For more information about how behavioral economics can help guide consumers’ buying decisions, with research results from Sibson Consulting, reference my related articles below.

The Aflac holiday duck being sold at Macy's stores this year to raise money for pediatric cancer hospitals was designed by  Monica Sandoval, a young cancer patient.

Aflac is trying to generate a deeper emotional connection with consumers through its big annual holiday season charity fund-raiser.  Each November since 2000, Aflac has worked with Macy’s to sell plush-toy Aflac ducks and donate the net proceeds to nearby pediatric cancer hospitals. The cost: $10 for a six-inch duck and $15 for a 10-inch duck.

Promotional efforts make innovative use of social media.  Aflac has established a presence on TwitterFacebook, Foursquare, GetGlue, Pinterest and YouTube.  This year, they made use of some innovative new approaches.

Fine Tuning Its Approach to Social Media

Aflac’s disappointing results with its September charitable campaign, called Swim With Friends, prompted them to analyze why they fell short of their goal of raising $500,000. Executives decided to make several changes in their social media approach to promote the holiday ducks sales.

To personalize the campaign, Monica Sandoval, a 17-year-old cancer patient from Winder, Ga., was chosen to design the 2012 duck and serve as the centerpiece of the social media initiative. Her photo was posted to the Facebook fan page and she participated in a one-day Twitter party, during which time Aflac donated $2 for each comment with the hashtag “#AflacKids.”

Another change was the addition of mom bloggers to generate attention.

Another innovation in the use of Twitter derives from Aflac’s Swim With Kids initiative. During that campaign, Aflac executives found that it was more effective when comments posted to the Twitter feed were kept to just 120 characters, rather than the  140-character Twitter maximum. This allowed for people to re-Tweet without going over the maximum.

Aflac has set a goal of $1.5 million for the 2012 holiday duck. Last year, the goal was $1 million, and the total raised was slightly more than that. I’m anxious to report back to you on this year’s campaign results.

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