As featured in The Wall Street Journal, Money Magazine, and more!

July 2012

A former boss of mine, high up the corporate ladder in an insurance company, often complained about his own industry. “Insurance companies make money by not providing a service to their customers.” That is, insurance companies make money by collecting premiums and paying out the least amount of benefits possible. Of course, there’s a tough balancing act; if an insurance company becomes known for not paying out benefits, they could lose many customers, although a good advertising campaign focused on low-price premiums could counteract that mass departure.

Shareholders are concerned with profits and dividends; customers are concerned with service and the product. If an insurance company were structured so that all owners were also customers, these two competing priorities would be better aligned.

Nationwide MutualRecently, Jay Frosting, host of the Consumerism Commentary Podcast, wrote on Twitter:

Been seeing ads for Nationwide Insurance highlighting their lack of shareholders. Hadn’t seen that before. And it might work on me.

Nationwide’s status as a mutual insurance company means that the owners of the company are its policyholders. In financial structure, it’s similar to a non-profit organization. The company wants its payouts to match its premium collection as much as possible. With mutual companies, excess premiums at the end of the year are often returned to the customers or are used to adjust future premiums. All policyholders have a vote in the company’s operations. Most importantly, there is no pressure from Wall Street to meet arbitrary financial targets every quarter.

A company I used to work for went through a demutualization process, where policyholders became shareholders and the company’s shares began trading on the New York Stock Exchange. With more external scrutiny on the company’s financial statements, the corporate executives reined in the spending. Benefits to employees were among the first things cut — not necessarily health benefits, but the extra events and activities companies organize that make working for a company something beyond ordinary. Then the company reduced its standard employee benefits like health insurance.

Going public allowed the company to grow in a way it hadn’t been able to before. It was quickly becoming an international company and continuing its expansion beyond insurance, and with its shares trading on the stock market, it’s possible that this access to equity markets allowed the company to expand its growth.

Existence as a mutual company has disadvantages, as well. While policyholders have a vote in the company’s management, many do not exercise that vote and are not involved enough in the corporation to know what’s best for the company and its owners. Policyholders are in a less powerful position than the institutional investors who have the most say among external shareholders in a public company’s operations.

Pressure from Wall Street to perform can be a good thing; while a mutual company may be free to spend as much as it wants on parties as long as policyholders receive a rebate, a public company would be encouraged to cut back expenses. Having shareholders is a bigger incentive for lean operations than ownership among policyholders.

Regardless of an insurance company’s benefits for being a public company, the bottom line is the conflict between shareholder and customer priorities. When the customer is also the shareholder, there is no conflict, and this should be a consideration when choosing an insurance company. There are certain companies who would like you to believe that the only important aspect of an insurance company is the cost of the premium. This is why there are so many advertisements practically guaranteeing that customers switching will save money. The endless search for the company with the lowest premiums ignores the fact that some companies are more likely to refuse to pay claims. You want a company that does more than collect your premiums.

Nationwide Mutual’s choice to focus on the non-public aspect of the company is a wise choice, but the advertising — and the fact that it is a mutual company — doesn’t necessarily mean that it would automatically be a better choice. The chosen emphasis highlights that Nationwide recognizes there is a conflict of interest between customers and shareholders among public insurance companies. Customers want their claims to be paid, while shareholders want only enough claims to be paid to ensure customers don’t leave. However, without Wall Street scrutiny, mutual companies may not be operating as efficiently as possible, providing smaller rebates or premium price decreases than dividends would be if the companies were public.

Choose an insurance company based on how you predict it will handle your situation. With automobile insurance, you want the company to have a good record of paying claims, whether it’s a mutual company or a public company. Don’t shop solely on price, and don’t become a policyholder of a company just because it doesn’t answer to Wall Street.

There’s no worldwide database that allows shoppers to compare insurance based on claim track records, but that is the best way to evaluate a company when choosing insurance, but there are a number of helpful resources online.

  • J.D. Power and Associates has a wealth of insurance related information from consumers’ perspectives. The magazine compiles claims satisfaction survey results for auto insurance and home insurance.
  • Most states put insurance satisfaction data online. The State of New Jersey Department of Banking and Insurance helps compare premiums and complaint ratios for auto insurance, as well as more information for other types of insurance.

I’ve never given comparison shopping a chance. When shopping for auto insurance, once I had the freedom of choice, I followed AAA’s recommendations. For home/renters’ insurance, I chose the same company as my auto insurance. The company, Liberty Mutual, is a mutual company with, as far as I can tell, no immediate plans to go public.


While there are great advantages to buying a house with cash, sometimes the benefits of using other people’s money outweigh those advantages. While debt is often rightly characterized as bad for one’s personal finances, there are situations in which it can be less bad.

If you can qualify for a mortgage that starts out at 1.05%, you ought to take advantage of the opportunity.

There’s risk, of course. The low interest rate could be higher when the rate adjusts in three or five years, but if the same conditions that allowed you to qualify for that rate continue, you’ll most likely be treated as favorably when the time for adjustment arrives.

Unfortunately, you probably won’t be able to qualify for an interest rate that low, even on an adjustable-rate mortgage, unless you’re Mark Zuckerberg, literally. The founder and CEO of Facebook just refinanced his mortgage on his $6 million home in Palo Alto, California with First Republic Bank, and was offered a rate of 1.05% to do so.

Unless you have some special qualities, adjustable-rate mortgages operate more like bait and switch. As I’ve seen in the past, up-front interest rates sounds great, and are useful in encouraging customers to consider expensive refinancing, where banks make money today from refinancing fees and later when the teaser rates expire. Average consumers are hit with a major increase in monthly mortgage payments when the rates are recalculated. The rules are different for Mark Zuckerberg.

With the net worth and notoriety the rock star CEO has achieved, he doesn’t need to shop around for mortgages. Banks want his business and are willing to offer favorable terms in order to compete for Zuckerberg’s attention. First Republic Bank doesn’t need to earn money on this mortgage. Just the news that they offered this rate to the CEO of Facebook will give them enough press that other wealthy individuals are likely to seek out this bank’s services.

A loan with an interest rate of 1.05% is practically free money. If you have the opportunity to borrow someone else’s money at that rate in order to finance an investment that has a great chance of beating that rate in terms of income or appreciation, it only makes sense to do it. Mark Zuckerberg’s mansion qualifies in that category. As long as he retains his reputation, his name on the roster of past owners likely increases the property’s value without any help from improvements or market appreciation.

If you want the same advantages Mark Zuckerberg receives, you may want to consider some of these tips. Zuckerberg meets at least some of these conditions.

1. Be an executive or founder at a major corporation. If you can succeed in business without really trying as well as Mark Zuckerberg did by starting a dating website in his college dorm and growing it into one of the biggest companies in the world, banks will be crawling to you on their hands and knees for your business. They’ll want to underwrite your company’s IPO. They’ll want to offer you, personally, products reserved for the elite of the elite.

2. Have a sky-high net worth. In 2009, Mark Zuckerberg’s wealth dropped below $1 billion according to Forbes. He was out of the club, but he showed the world the following year with a net worth of $4 billion. The 2012 list of the richest Americans has not yet been released, but estimates would put his net worth around $16 billion this year, following Facebook’s public stock offering. You don’t have to have $16 billion ready to invest in order to receive preferential treatment from the finance industry. In most cases, $1 billion would be enough — perhaps not enough for a mortgage rate around 1%, but enough for select products.

3. Remain loyal. Banks, in an effort to generate more profit from each well-off customer, reward loyalty. The best terms are reserved for the “best” customers. This is true even at the smaller scale. Even Vanguard, an investment bank for everyman, offers significant discounts for those who invest over a certain amount in their mutual funds. The best expense ratios are reserved for this company’s Admiral Shares. If you have the capability of spending more with a bank, they will offer whatever is possible to encourage loyalty, and then reward that loyalty.

4. Be in the news. If everything you do is being watched by the public, companies will move mountains to work with you. Being identified with a celebrity in the press brings with it free public relations. Mobile Resource Card saw a potential in the Kardashian family when it released a co-branded prepaid debit card. The product was widely panned, and I called it possibly the worst financial product of the year thanks to its fees. The Kardashians, however, were likely paid very well for the association of their brand with the product — at least they would have been if they didn’t later speak out against the card.

If, however, you’re in the news for something more noteworthy than reality television, and if you have a strong reputation, the products you’ll be able to align yourself with will be of a higher quality. Whether these come in the form of spokesperson opportunities or just great terms on products you need, your celebrity status will be a great asset. The asset, however, will be as fleeting as your positive image. Break a few securities laws, murder your spouse, or intentionally damage the environment in an unpopular way, and the preferential treatment will disappear in an instant.

Perhaps you, too, will qualify for a 1% APR adjustable-rate mortgage, assuming you offer the same benefits to the bank as Mark Zuckerberg does.

Photo: Donkey Hotey
Bloomberg, Forbes


How are your prognostication skills? Do you have a direct connection to the spiritual world or an uncanny ability to predict the future? Someone with these skills and an individualistic drive, and perhaps an advance edition of Gray’s Sports Alamanac, could ensure the financial stability of his or her future.

The rest of us without supernatural powers and without help from a time-traveling friend can only make financial decisions affecting the future on assumptions and best guesses. When it comes to choosing between the two flavors of IRAs, Traditional or Roth, that’s the best we can do.

Looking at my balance sheet, I’ve had IRAs all over the place. I didn’t start one until I was 26 years old, and I wish I had started earlier. Motivational speakers say that you can find a way to invest regardless of your income, even if it’s just a tiny portion. Out of college, I wouldn’t have ignored such advice as my initial salary at a non-profit did not even pay for my commute to work. (I could have moved closer to work, which I eventually did, but then rent costs would have hurt me just as bad; I could have shared a house with a multitude of roommates I didn’t know, but I drew the line there. There’s always an excuse to make, but there’s also a line.)

Since then, I’ve chosen mostly Roth IRAs, though I’ve ended up with Traditional IRAs after changing jobs from each employer to the next. And while I worked on my own, I invested in Traditional IRAs.

The IRA (Individual Retirement Agreement or Account) would be one of the fundamental retirement vehicles available in the United States. It is designed to encourage people to think about the future by providing tax incentives for investing or saving. Social Security, a system designed to assist an aging society, can’t on its own keep those who are too old to work out of poverty. The IRA encourages some personal responsibility.

An IRA can contain just about any type of investment. You can use it for risk-free savings, particularly in the form of certificates of deposit, or you can invest in individual stocks, ETFs, and mutual funds. You can even find opportunities to use your IRA to invest in hard assets like real estate and precious metals.

Traditional IRAs offer savers and investors a tax deduction today, with Roth IRAs push that tax advantage until retirement, when you can withdraw your principal and earnings tax-free. The first question in this decision does not require future assumptions.

Is your income under the tax-deductibility limit? This year, your ability to take advantage of the tax deduction begins to phase out once your modified adjusted gross income reaches $58,000 ($90,000 if you’re married) and completely disappears at a level of $68,000 ($110,000 if you’re married). If your income is above these limits, you can contribute to a Traditional IRA, but you won’t receive the full tax deduction.

Are you allowed to contribute to a Roth IRA? There is another income limitation. Roth IRAs are only available to people earning under a specific amount. Single filers can contribute the full $5,000 to a Roth IRA if their income is below $110,000 ($173,000 for married filing jointly). The maximum investment phases out until income reaches $125,000 ($183,000 for married filing jointly).

Will your tax rate be higher when you’re in retirement? Ever since the regulation that allowed for Roth IRAs was enacted, financial professionals began encouraging young workers to enroll. At the start of a career, a young employee could likely be at the lowest income level of his or her life. They could also be in the lowest tax bracket they’ll ever see. A tax deduction on $6,000 of income in the lowest tax bracket is not as worthwhile as a deduction on $5,000 of income in the highest tax bracket. If you expect your tax rate to increase, pay tax on the $5,000 directed to your Roth IRA today in order to withdraw your principal and earnings tax free when you retire.

There are many assumptions built in to the above reasoning as well as variables that might change. Congress may decide to change the rules for Roth IRAs, making withdrawals in retirement taxable. That could defeat the purpose of forgoing the Traditional IRA deduction today. If you presume you won’t be in a higher tax bracket in retirement, you may be wrong, as some economists believe tax rates will need to be much higher in the future in order to support society’s needs.

Is there a possibility you might need to use your investment soon? With a Roth IRA, you can withdraw your contributions before retirement without paying a penalty in some circumstances. With a Traditional IRA, you’ll need to pay tax on your withdrawals. This could come in handy if you don’t have an emergency fund (you should have an emergency fund) or if your cash becomes depleted for some reason.

Will you live until retirement? If you love high-risk, extreme activities, perhaps you won’t need money in retirement. In fact, the farther you are from typical retirement age — the younger you are — the more likely there is a chance of your retirement being very different from what Americans have known as retirement over the last couple of decades. You may need to work longer, though saving today for retirement can partially offset that need. You may never want to retire, working on something you enjoy until the day you die. It’s hard to say what life will look like 30, 20, or even ten years from now.

Don’t let this decision stop you from investing. The best thing to do is open an IRA as soon as possible if you haven’t already. To generalize, because sometimes that’s easier than actually thinking, if you’re young, investing in a Roth IRA; if you’re older and have established retirement assets already, a Traditional IRA may be the better choice. Work with a company like Fidelity, Vanguard, or TIAA-Cref (avoiding their annuities) that lets you open an IRA immediately even without a sum of money ready to invest. Some companies allow you to start with a small amount as long as you set up a recurring investment.

Photo: Pop Culture Geek


Facebook recently went public. Mark Zuckerberg and the other owners might not have wanted to open the company up to a wide pool of investors, but the company had grown so large in terms of the number of private shareholders that it would have needed to release its financial statements publicly anyway. Through this process, a company that was founded as a social online hang-out and meeting place, not a money-making business, is forced under Wall Street pressure to have a better revenue strategy.

In Facebook’s case, it may be too soon to judge whether going public would have a positive effect on the company. Certainly, from a business perspective, additional pressure to generate revenue increases the value of the company, and that’s what shareholders, including the original owners who still have a large portion of shares, want. Users don’t notice when Facebook takes a percentage of every financial transaction in every game, but that isn’t generating the bulk of the company’s revenue. Other companies pay Facebook for advertising, and users generally notice advertising. And when under pressure to generate more revenue, Facebook will emphasize advertising further.

Peet's CoffeeRather than focusing on the core mission, Facebook engineers are developing more ways to take users’ money. Recently, the company has starting moving towards becoming a payment processor — accepting credit card transactions from users directly. This change in focus is typical when building a business, but is certainly more apparent when Wall Street analysts are breathing down the management’s neck. With 900 million users globally, Facebook doesn’t have much room to build its user base unless astrophysicists discover an intelligent extraterrestrial life form interested in socializing with Earthlings. The only solution is to grow revenue from each user, and depending on how aggressive the company is in answering Wall Street’s demands, users might be driven away to a competitor who isn’t digging in users’ pockets for lunch money.

Working with Wall Street means your business must answer to analysts — whose petty words can greatly affect the value of a company on paper, the capital that company has available for reinvesting in itself, and the company’s ability to borrow money at good rates — on a quarterly basis. Some companies, particularly those in a growing stage, need to be able to focus on a more distant horizon. Facebook may have passed the growing stage of its business many years ago, so perhaps the time is right for that company to face the music every three months.

When a company goes public, it’s like there are new people in charge, people who care about nothing other than impressive results every three months. They don’t want to hear excuses about poor investments or low consumer confidence, but if you pay attention to companies’ earnings reports, you’ll find they mostly follow a pattern: Unless a company had a widely publicized problem, public companies attribute any good financial results to their management and practices while they attribute bad financial results to external forces like the economy or government regulation.

I don’t see how this behavior is good for a business. It’s a waste of time of energy, it encourages creative accounting to make results look for favorable, it gives too much power to Wall Street analysts and takes that power from the company’s management, and it stifles serious long-term planning. The upside of going public is that it can raise a significant amount of money for a company to grow in ways the founders might have only dreamed of, but there’s a cost.

The management of Peet’s Coffee and Tea recently decided that the company would have better success if it operated outside of Wall Street, so it engineered a deal to go private, taking the company’s shares off the market. Shareholders were paid a premium over the stock price and thanked for their time. Rather than being owned by the public at large, a German conglomerate already deeply involved in the food sector will have the final say in the management and operation of Peet’s Coffee.

The drive for quarterly results can occasionally conflict with the need to build a meaningful business or a financially successful business in the long-term. Companies give up their flexibility in return for access to a significant amount of money through Wall Street. Not every company will find the trade-off worthwhile.

Photo: LWY


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