April 25, 2013
Q&A: Maximize Your Legacy for Your Grandchildren
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
||GST Tax Rate
||No generation skipping transfer tax
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:
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.
- 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.
April 22, 2013
Is There a Ready Market for Your Business?
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
There may be no ready buyers for your business, and you may lose your most hard earned asset. Consider this example.
Example: 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.
2. 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:
- It creates an immediate market for your business (your partner or a successor employee.)
- It can create immediate funds for a fairly valued buyout through insurance.
The 5 Guarantees of A Properly Structured Agreement
A properly-structured agreement will guarantee the following:
- guaranteed purchaser
- guaranteed sale
- guaranteed price
- guaranteed time
- 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
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.
April 17, 2013
Gold Didn’t Pan Out
April 2013: Gold dropped to its lowest level in two years – on top of a 10% fall over the past six months.
Gold was supposed to be a secure investment in an uncertain time – so much so that an April 2011 Gallup poll found that 34% of Americans thought that gold was the best long-term investment, more than another other investment category.
Then, two years after its price reached a new high, it plunged to its lowest level in over two years, falling 19% since late 2011. This is the greatest decline in 33 years, amid record-high trading.
According to the New York Times, the crash of a golden decade of rising prices caught many investors by surprise. Morningstar reports that $5 billion had flowed into gold-focused mutual funds between 2009 and 2010, bringing those funds to a peak value of $26.3 billion in April 2011. These funds lost half of their value:
It is a remarkable turnabout for an investment that many have long regarded as one of the safest of all. The decline has been so swift that some Wall Street analysts are declaring the end of a golden age of gold. The stakes are high: the last time the metal went through a patch like this, in the 1980s, its price took 30 years to recover.
In a time of plunging global interest rates, why did investors flock to a traditional inflation hedge? Why were they willing to buy at such high prices? It seems that many investors mistook gold for a product that could provide them significant protection against economic risk – more in line with an insurance product.
What’s A Safe Investment?
It’s certainly understandable that people would seek a safe haven at a time when many are losing faith in their political and economic systems. However, given that there are few safe investments to turn to considering the low returns that interest-bearing products have been offering, the allure of gold was perhaps understandable:
Investopedia’s “4 Safest Investments Right Now” – which includes TIPS, I-Bonds, Short Term Bond Funds, and Bank CDs – have such modest returns that they essentially just aim to preserve principal. Investopedia states:
Any one of these options represents a low-risk low-return solution to preserving principal. You won’t earn much in returns with these securities though. In most cases it will be just enough to keep level with inflation. If you need capital appreciation over the long term, you’ll have to take on more risk.
A Different Approach to Wealth Preservation
One financial vehicle that has recently been enjoying a resurgence of interest is permanent life insurance.
2012 was a very big year for permanent life insurance sales according to research and consulting firm LIMRA, :
- Total individual life insurance new annualized premium grew 6% — the third straight year of growth.
- Total individual life premium grew 12% in the fourth quarter — the largest growth recorded since the downturn.
- Life insurance policies sold grew 1% — the second consecutive year of positive annual policy growth.
The fourth quarter of 2012 was the biggest quarter for life insurance sales in a very long time – in fact, there hasn’t been a quarter in which all of the major product lines experienced growth since 2006. And the last time individual life insurance policy count increased two years in a row was back in 1980-1981.
Creating Certainty In An Uncertain World
Why the sudden resurgence of interest in life insurance? LIMRA’s Product Research senior analyst Ashley Durham attributes growth to a few different factors, including a continued attraction to guarantees and growth potential. What differentiates permanent life insurance from other financial vehicles are 3 unique benefit features:
1. Competitive Return Potential
In today’s volatile markets, secure financial vehicles that provide competitive returns are hard to find. In an environment of such low returns, permanent life insurance’s cash value provides an interesting alternative. William Byrnes and Robert Bloink put it this way in Advisor One:
Considering the premium placed on stability in recent years, investing in a permanent life policy might be the best bargain on the market.
2. Lifetime Guarantee
In addition to providing a cash value savings element, permanent life insurance provides a feature that other financial vehicles do not: lifetime guarantees.
Given increased life expectancy and declining health over time, there is no guarantee that the money you put aside for your beneficiaries will ever reach them. You are likely to need it first for medical or other expenses. However, if you own permanent life insurance, you can access policy cash values without surrendering the death benefit. There is also little chance of outliving a permanent life insurance policy, because permanent life policies can remain in force to age 100, and with some policies, to age 120. And, although you may be living on a fixed income as a retiree, life insurance premiums remain fixed for life, or can be paid up in advance.
3. Potential for Explosive Growth
A Wealth Multiplier: The transfer of risk is essential to life insurance. The risk of a payout to you at death isn’t retained by you alone, but spread out among all policyholders that the insurer does business with. All customers contribute money to the general account, which is invested, and then claims are paid from it when an individual dies. As a result, the annual or monthly premium you pay is a small fraction of the benefit that will be paid to your beneficiaries at death.
Example: The chart shows a 65-year-old man who purchases of a policy with a $1,000,000 death benefit for a $26,000 annual premium. In the year of his life expectancy the adjusted Internal Rate of Return (IRR) of his death benefit is 5.88%, or, since he is not taxed, 8.17%.
If he passes away earlier, his IRR will be higher – as high as 108.28% at age 79.
- In other words, you don’t have to be a big saver to leave a substantial legacy to your beneficiaries. The death benefit paid to your beneficiaries can be many times what you paid into it.
Tax Efficient Transfer: The policy proceeds bypass the often lengthy and costly probate process, and are released to your beneficiaries immediately – which is when they are likely to need it the most – without taxation.
Short on Glitter – Long on Performance
This resurgence of interest in life insurance is a reminder of the uncertainty of our times, and an indicator of changing consumer attitudes. Consumers are more knowledgeable, and LIMRA research indicates that more knowledgeable people are on the subject, the more likely they are to own life insurance. LIMRA found that:
Respondents who knew the most about life insurance. citing multiple sources of information attributing to their understanding of life insurance, either owned life insurance themselves or had heard about it through work, a seminar or financial planner. Most were older, more educated and viewed life insurance as important.
It seems that the smart money is leapfrogging gold. Life insurance may lack the psychological appeal and rich associations of gold – no pirate ship ever went down with universal life insurance contracts in their hold – but what it lacks in luster, it makes up for in substance and performance:
- Many gold investors bought high and sold low. However, life insurance is actuarially designed to be bought low and sold high – the premiums represent just a fraction of the proceeds.
- While the price and value of gold fluctuate subject to general economic conditions and investor sentiment, permanent life insurance usually offers a guaranteed level premium and a guaranteed death benefit.
- For your beneficiaries, life insurance represents “inevitable gain” tax free.
A dull, plodding performer, life insurance nonetheless provides dependable benefits – it provides down payments to help young families buy their first homes, college educations to launch bright careers, hard cash to pay bills when the earner is not there to provide.
Gold certainly may have a place in your portfolio. Financial planners typically recommend that you allocate a small portion of your portfolio to it to serve as a hedge against financial risk. However, consider how much more protection investors would have by placing a portion of that into permanent life insurance.
April 16, 2013
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:
- 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?
- 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:
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.
Your Best Customer is Your Current Customer.
April 13, 2013
Benefits Are More Costly – But More Important
Employers are struggling with employee benefit decisions.
In addition to the challenging economic and competitive environment, employers now face three key difficulties
- healthcare reform,
- precipitously rising benefit costs, and
- a less loyal workforce.
The conundrum employers face is that employee loyalty has been steadily declining, while employees are demanding benefits more. The ninth annual MetLife Study of Employee Benefits Trends, respectively, showed that employees reported:
- a 12% decline in “strong loyalty” to employers from 2008 to 2011.
Voluntary Life Benefit Programs Help Bridge the Gap
There is renewed interest among employers in voluntary benefits as a means of promoting loyalty and retention while curtailing benefit costs. And the eleventh annual MetLife Study of Employee Benefits Trends reports that employees are keenly interested in them as well:
- 61% say benefits meeting their individual needs would make them more loyal.
- 51% are willing to bear more of the cost to have more benefits to choose from.
Voluntary life insurance benefits are highly valued. A special advantages of life insurance benefit programs is the flexibility that they provide employers in structuring a plan to meet their needs:
- Avoids complicated reporting and nondiscrimination requirements, giving employers control over whom to reward.
- Costs and benefits can be split among employer and employees to fit the needs of the business.
- Employers can control the incentives by designing their plan with or without “strings.”
Here are 3 popular ways that employer-sponsored life insurance benefits are offered to select key employees
1. Split-dollar – for Cost and Benefit Sharing
Benefits: The costs and benefits of a policy are shared between the employer and a select key employee.
During employment: The employer and a select key employee each pay an agreed percentage of the premium. This could be called a “consumer-directed plan” because it allows the employer to provide an executive with a life insurance benefit with low outlay.
At death: A tax-free death benefit is paid to the employee’s beneficiary, and a portion goes to the employer to recoup it’s contributions.
At separation from service: the policy’s cash value may reimburse the employer for his share of the premiums and allow the employee to purchase and keep the policy.
According to National Underwriter, this continues to be a vital and popular planning tool.
Anticipated Results: Costs and benefits can be split according to the employer’s needs. The “rollout” of the benefit to the employee upon separation of service can be used to tie the employee to the company for a long period, encouraging loyalty and retention.
2. Deferred Compensation – for Executive Retirement
Benefits: Non-qualified Deferred Compensation plans can create tax-leveraged financial security for key employees by allowing them to defer a portion of their income into a cash value life insurance policy. The plan can provide benefits in lieu of or as a supplement to a qualified pension plan.The employee elects to receive less current compensation and defers receipt of that amount to a future tax year.
- The cash value can provide supplementary retirement benefits, even if the employee is already receiving the maximum benefits under the company’s qualified plan.
- The employer gets a tax deduction when the employee receives the compensation.
- The employer can avoid the cost and administration of a qualified plan and the cost and complexity of covering all employees.
- The death benefit can allow the business to recover costs.
Anticipated Results: The deferrals provide a way for employees to save for retirement. The employer can select who receives benefits, when they receive them and how much they receive, and there are fewer administrative issues than under unlike tax qualified plans – since the Department of Labor has ruled (Advisory Opinion Letter 90-14A) that this arrangement is not subject to Labor Regulations Section 2510.3-102, which requires participant contributions to an ERISA pension or welfare plan to be held under a formal trust arrangement.
3. Executive Bonus – for Trusted Key Employees
Benefits: The employer provides additional monthly compensation to the employee, and receives an annual tax deduction.
The bonus pays for the premiums of a life insurance policy owned by the key executive – a valued personal asset giving the employee access to the cash values and providing a death benefit for his/her beneficiaries.
Anticipated Results: A Section 162 Executive Bonus Plan is one of the simplest and most transparent plans. For a more personal organization, it provides transparency and trust. It’s tax deductible to the employer, and provides a fully paid, fully vested life insurance benefit for a particularly important and trusted key employee.
A Good Broker/Benefit Specialist Is Key
Given the flexibility of these plans, it is important to have a qualified benefits specialist or broker, knowledgeable in life insurance planning to:
- help the employer select the implementation strategy that fits its specific needs and objectives.
- provide a prototype agreement for plans that require one.
- promote participation and appreciation for the employer’s sponsorship.
Research indicates that 68% of employees spent little time or effort in making their benefit selections; however, employers who provide outstanding communications are more highly effective in enrollment and are more likely to report that their employees are highly satisfied with their benefits (82% vs. 61%.)
Voluntary Life Insurance Benefits can help give employers an edge in retaining valued, qualified key employees – who are often the engines of growth for a business or practice. Retaining superior key employees also means retaining a superior benefits broker who can help with the planning, the implementation and the communication.
April 11, 2013
Posted by stevensonfinancialmarketing under Behavioral Economics
| Tags: Consumer Behavior
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Commentary by Joel L. Franks
April 10, 2013–
This past week, I had the unique opportunity to attend and hear Daniel Kahneman discuss his best-selling book, Thinking, Fast and Slow, during a speaking engagement that took place at a Barnes and Noble Bookstore in New York City. Many of you may be familiar with the Nobel Prize-winning psychologist and his ground-breaking work with Prospect Theory and behavioral economics. His most recent book addresses two modes of human thought: the quick, emotional kind and the pondering, logical type. In the book, Kahneman shares his views around several heuristics and biases from anchoring to framing to, of course, loss aversion. But during his discussion at this New York City event, it wasn’t what was written in the book that captured my attention as more the learning lessons he conveyed from his own life experiences.
While there were several fascinating anecdotes Daniel shared with the audience that night, there are two points I found of particular interest and unexpected. One is what he believes captured the attention of the public in his early studies of psychology and second is what he feels is an error in our society with the pursuit of measuring happiness.
How do you challenge rationality in the face of hardline economists?
The moderator asked Mr. Kahneman about the early impact of his work and why others experienced such a profound curiosity in his field. Kahneman attributes the interest in his research and behavioral economics as a direct result of HOW the study was published in Science magazine many years ago and perhaps not as much on the content.
The way we presented on the theory was by having questions in the body of the text…which means the reader can appreciate their own reaction to the question as they [experience] making the errors something that they experience [too]…it’s the fact that they are prone to make errors and they come to recognize it. It is a personal experience and a personal response. This [written] work had more impact than most other psychological work at the time because there is hardly any other psychology studies [published] that will generate from the reader of your paper a personal experience that validates what you are conveying.
We thought we were writing in a fun way to write, but it turned out to be the key to the impact of the theory.
Unbeknownst to Kahneman was the profound concept of “framing” in the way he conveyed his own research—the simplicity of introducing a study in terms of dialogue. Is this not where we find the field of marketing today? We once categorized marketing as either a push or pull strategy, but it has been replaced by the conversation age, which has proven to be far more impactful when it comes to building relationships with customers (or in Daniel’s case, interest in his readers). Think about marketing today and your own personal experiences; it’s all about dialogue. Tell me one company in one industry that does not have a social media plan in place seeking to engage consumers in a conversation.
Stop Focusing on Happiness
The second revelation during Kahneman’s discussion was his view on using measures of happiness as an alternative to economic measures on societal progress. He sees a fundamental issue with regard to how we spend a great deal of time, energy and money on the pursuit of happiness.
I think the focus on happiness is misguided and I think the focus on happiness in part is an accident of language. We measure length and not shortness, we measure depth and not shallowness, and we only see in dimensions that are marked on the one side we are thinking of. We should be measuring suffering. And we should act as a society to reduce suffering… I am much less concerned about happiness and [in favor of] reducing human suffering.
Based on the round of applause he received in response, I think the general audience would tend to agree. Kahneman expressed these thoughts on the coattails of how society would reap greater benefits if we put more effort toward such an endeavor. I cannot help but put on my own behavioral finance spin on these sentiments. I believe that many people exclaim that they are in the pursuit of wealth (which they may equate with happiness and what money can buy), but maybe all they really want is not to be poor (and avoid financial suffering and the inability to acquire essential needs)?
Of course this is a leading question, but hey, the idea is to be engaging, enrich the conversation, and hopefully have others share their personal views.
Joel L. Franks is a Behavioral Finance and Financial Marketing Professional. His background in behavioral economics and his extensive experience in banking, brokerage and insurance has enabled him to combine both the science and the art of creating innovative marketing strategy, create positive customer experiences and the ability to sell more product, to more people, more often.
April 10, 2013
Content Marketing vs. Traditional Advertising
A Nielsen survey of OECD consumers found:
- Only 10% said they trusted messages from display advertising.
- However, 90% said they trusted brand recommendations from friends or users they trusted online.
2. More Lead Conversions
Traditional advertising methods are generally directed to a broader audience, while content marketing’s ‘narrowcasting’ strategy focuses on a smaller, core group of potential, high quality consumers. As a result:
- Content marketing can convert 30% more organic traffic into high quality sales leads, according to MarketingSherpa (See case studies here)
- Content marketing is aimed at high value customers who will return for more content.
- Content marketing produces 3 times more leads per dollar than SEM and costs 30% less, according to Kapost & ELOQUA (ebook here)
3. Greater Influence Over Consumer Decision Making
A study by McKinsey Consulting shows that consumers are already well along in the sales process when they engage directly with a brand. Traditional advertising aiming for brand recognition may occur far too early in the sales process to make a difference at a critical juncture in the decision process. Additionally, heir search is more focused, targeted and active. According to a Roper Public Affairs study cited in Forbes:
- 80% of business decision makers prefer to access company information via a series of articles over advertisements.
- 70% of decision makers said content marketing made them feel closer to the brand.
- 60% said content marketing helped them make better purchasing decisions.
4. Enhanced SEO and Social Media Effectiveness
Search engines are steadily improving in delivering the right information to seekers of content. And as today’s search engines heavily weight relevance, social sharing and link buzz, the more engaging, shareable and targeted your content is, the better your SEO rankings will be.
Content is also the basis of social media strategy, because compelling content is what drives consumers to engage with your brand on social networks.
5. Greater ROI
Expensive paid advertising campaigns typically only run a few weeks. Content can last for a much longer time, which enhances your return on investment. Revisions in content marketing can keep it relevant even longer. Content marketing can also generate earned media because users and media outlets may share your content to many more users, potentially producing millions of dollars in free brand exposure.
“Content Is Queen”
Because good content marketing aims to help, inform, inspire and entertain a more skeptical, engaged and demanding audience, it is not experienced as a pressure pitch or disruptive. This is why major brands are heavily investing in content marketing. This helps brands capture mind share and position themselves as leaders in their category.
But if content is queen, it also demands to be treated as one. Content strategy requires many months of planning and strategic development to build the most effective content platforms, inventory and engagement streams.
Overcoming the Challenges
According to a Marketing Profs & Content Marketing Institute study in 2012, the top 5 reported challenges are:
- Producing enough content: 29%
- Producing the kind of content that engages: 18%
- Lack of budget: 14%
- Lack of buy-in / vison: 7%
- Lack of knowledge, training, and resources: 6%
Overcoming these challenges requires ownership, consistency and measurement.
1. Ownership: Some committed organizations have appointed a Content Marketing Officer to drive these efforts and to be accountable for their success. As companies are slowly but surely becoming their own media, they will have to appoint an Editor in Chief responsible for overseeing this part of Marketing, and managing internal as well as outsourced resources.
2. Consistency: It takes consistent efforts to build a captive audience through the creation of a body of content worthy of the attention of search engines and of your target audience. Understanding what content types and what channels create the most engagement and generate leads takes consistent effort and experimentation. Generating interest and engagement for your brand, products and services requires a commitment to sustained and continuous investment in producing various types of content on a regular basis. By way of illustration:
3. Measurement: Naturally, the defined success metrics (KPIs) will vary according to the market, media and product. However, the ROI of content marketing is generally defined not by generic Web activity metrics, but by a sales conversion funnel.
A typical conversion funnel could look like:
Step 1: user lands on homepage
Step 2: user reads a blog post
Step 3: user reads a product or service page
Step 4: user fills in a contact form
Defining performance in terms of web activity such as overall visitors and pages views of a website won’t reflect performance as much as much as measuring how many users start at step 1 (arrive on a landing page) and progress to step 4 (conversion).
Takeaways: As shown above, the realities of today’s markets demand that a very focused and robust content marketing effort is put in place for an organization to position themselves as a thought leader, differentiate themselves in a crowded market space, and reach the buyer at the critical stage in the purchase decision process to make a difference and drive conversions. Since companies are struggling beneath the weight of the sustained effort needed to become thought leaders through content marketing, investment in dedicated resources is increasingly recognized as indispensable.