Thursday, October 28, 2010

Four Security Best Practices That All Advisors Should Implement

Common sense security will make your firm a tough target for hackers

Advisor One
October 1, 2010 | By Dan Skiles
When you think about the security around your technology systems and your firm's data, what level of confidence do you have? … Unfortunately, the bad guys are out there, and they are working overtime to find ways to break in and grab your precious information. … You might also be surprised at how unfamiliar your staff is with security threats related to technology. … We all get comfortable when we use technology every day, and we sometimes (if not often) forget or simply ignore important security best practices. Education in this area is critical, and it is important that everyone at your firm understands their role in protecting your technology systems and data.
It would be best for most advisors to hire an IT professional--someone who worries about data security 24/7--to be responsible for protecting your systems. … Whether you have an IT professional or not, there are a number of best practices that you and your staff should follow in order to better protect your systems and your client data. A number of the best practical steps you can take are simple and basically common sense, but they need to be adopted across an entire firm.
This is a screenshot of windows password unloc...Image via WikipediaOne of the more common security oversights with advisors and their associates is transmitting personally identifiable information through e-mail. Standard e-mail is not secure and the information transmitted can be intercepted by a hacker. This includes information in the body of an e-mail, as well as any attachments (Excel files, Word docs, PDFs, etc.). If you must send an e-mail with personally identifiable information, it is best to encrypt it and assign a password to the attached file. …[There] are a number of password recovery software programs available that essentially try different combinations over and over until the password is identified. In the very rare case that your e-mail is intercepted by a hacker, you certainly don't want to make it easy for them by creating a password that is simple and quick to identify. The word "password" is unfortunately probably the first word that they will try, because it is the most commonly used password.
[Read more about why you should enable passwords on your mobile devices.]
Another important security best practice is to have a strict policy that prohibits your staff from using computers that they do not own or control for accessing networks that contain confidential client information. For example, … a hotel's business center … computer could contain a malware program, specifically a "keystroke logger," that tracks every keystroke and page visited on the computer. With these programs, it is possible for a hacker to obtain your user name and password and the exact Web address that the credentials are used for. Of course, the hacker could then use this information and log in as you. This risk is magnified when you consider the number of accounts that you could have access to when using your log-in credentials on the sites that house your clients' account information. …
…[Do] you know the level of access each member of your firm has to your technology systems, as well as to the external technology systems used by your firm? … [The] security best practice is to only give each associate the level of access that they truly require for their position. …
It is worth the initial time to set up different access profiles in order to better control and further secure your firm's client information. Make sure that you have a well-defined process to disable an associate's access when they are no longer employed by the firm. This process should be implemented on the same day that the associate leaves the firm.
[Read about the benefits of using a server rack to protect your physical investments.]
Another key security practice for your firm revolves around understanding how your systems are protected from virus attacks. Everyone at your firm must understand what virus software is installed on the computers they use and how the software behaves. One of the easiest ways for a hacker to infect your systems is through a counterfeit "alert" message. What generally happens is this: While you are navigating the Internet a pop-up message appears on your screen and says, "Warning! Your computer is infected by a virus. Click here to correct." Then, when you click on the "OK" button, instead of solving the problem, you are actually downloading the virus. But if your staff is familiar with the way your virus software works, they will know that the fraudulent alert message is very different from the one they would receive from the real anti-virus program. … Anti-virus programs are constantly being updated, but the challenge is keeping up with the introduction of new viruses. Therefore, instruct your staff to be suspicious, and to become familiar with the anti-virus program operating on their computer, especially the alert messages.
Overall, following security best practices needs to be part of the DNA of your firm. It is important that your staff does not have the false impression that technology security is not one of their job responsibilities. … Therefore, you must make security procedures a part of your regular training, and practice them until they become habits. Security problems by themselves can create a tremendous amount of work, and of course they carry potential financial and reputational risk, as well. Therefore, it is worth the effort to ensure that your firm is doing everything possible to protect your clients and your overall business. …
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Stress Makes Some Wary of Using Vacation

October 27, 2010 ( – More than half of those in a new survey say they are too worried and busy to take all their vacation days.

Taken by SimonP in August 2005Image via WikipediaA news release from Westin Hotels & Resorts about its vacation days poll said 58% of respondents feel they are in more need of vacation than last year, and 64% have canceled vacation due to work worries.
According to the news release, more than 67% feel healthier on vacation, while 64% sleep better while taking some time off. More than half feel taking vacation contributes to a stronger marriage. Forty-eight percent of respondents said they are happier in their workplaces after a vacation.
Thirty percent of respondents said that while on vacation they check in with work every day, and 25% said they check in every hour. More than two-fifths (41%) indicated they usually require three to four days to unwind on a vacation.
The Westin Hotel at Los Angeles International ...Image via WikipediaCommissioned by Westin Hotels & Resorts, the study is based on a survey conducted by STUDYLOGIC LLC via telephone of approximately 1,500 American adults who are professionally employed.
The hotel company said it has developed a Web site with more information about the advantages of using vacation time at
Fred Schneyer
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Tuesday, October 26, 2010

Sixty-percent of workers miss out on their full lunch break

Employee Benefit News
Attendees break for lunch.Image via WikipediaIs lunch time a sort of "witching hour" to workplace wellness? Employers already have a hard time ensuring workers have access to healthy lunchtime meals and snacks. Now, a new poll shows many workers fail to take a full lunch break.
Like what you see? Click here to sign up for Employee Benefit News daily newsletter to get the latest news and important insight into trends in benefits management.
"Taking a lunch break is very important to keep healthy and refreshed," says Jeffrey Quinn, senior director, Monster Intelligence. "Our bodies and brains need fuel to operate and many workers actually find they are more productive after some time spent away from their desk. If people feel they are too busy, they should take stock of their workload and try to plan it into their day," he adds.
Monster, the job matching Web site, recently conducted a poll that showed 60% of workers do not take their full lunch break. Of those surveyed, 7% admitted they do not take a lunch break at all.
The online poll asked participants: “Do you take a lunch break while at work?” Here is a breakdown of the responses:
  • Yes, I always take my full lunch break – 40%
  • Sometimes, only if I’m not too busy – 32%
  • No, I always eat at my desk so I can get more work done – 21%
  • No, I don’t eat lunch - 7%
Lunch break (after Millet)Image via WikipediaWhen examining the numbers through an international lens, Monster found workers in the United States were least likely to take their full lunch break, compared to workers in other countries.
For example, Europeans were more likely to take their full lunch break (49%), with 58% of French workers reporting they use the entire time and 48% of Italian workers admitting the same. Forty-eight percent of Indian workers also said they take advantage of the full time, while 45% of Asian workers said the same, according to the survey.
No surprise here, but workers brought their lunches back to the office, with nearly 30% of U.S. workers reporting they eat lunch at their decks, followed by 26% of Canadians and Belgium workers doing the same.
Yet only 8% workers in Mexico and 9% in Italy said they eat lunch at their desks, according to the survey, which was conducted in June 2010 and involved 17,967 participants.
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Friday, October 22, 2010

DoL Broadens Fiduciary Net

The seal of the United States Department of Labor.Image via WikipediaOctober 21, 2010 ( – For the first time in a generation, the Labor Department has taken another crack at the definition of a fiduciary under the Employee Retirement Income Security Act (ERISA).
The proposed rule was unveiled today by the Department of Labor (DoL), which noted that its adoption “would protect beneficiaries of pension plans and individual retirement accounts by more broadly defining the circumstances under which a person is considered to be a ‘fiduciary’ by reason of giving investment advice to an employee benefit plan or a plan’s participants.”
The proposed rule is designed to “take account of significant changes” in both the financial industry and what was described as “the expectations of plan officials and participants who receive investment advice,” as well as to protect participants from “conflicts of interest and self-dealing.”
Testing, Tested
Logo of the United States Department of LaborImage via WikipediaIn explaining the proposal, the Labor Department noted that while Section 3(21)(A) of ERISA provided a “simple two-part test for determining fiduciary status,” a subsequent (1975) regulation served to “significantly narrow” the “plain language” of the legislation; effectively replacing the two-part test that would impose fiduciary status when a person renders investment advice with respect to any moneys or other property of a plan, or has any authority or responsibility to do so and receives payment (direct or indirect) for that advice, with a 5-part test that included conditions that: the advice regarding plan investments be rendered “on a regular basis,” that the advice would serve as a primary basis for investment decisions with respect to plan assets, that the recommendations are individualized for the plan, that the party making the recommendations receives a fee for such advice, and that it be pursuant to a mutual understanding of the parties. Moreover, the Labor Department noted that it further limited the definition of “investment advice” in a 1976 advisory opinion, when it concluded that the valuation of closely-held employer securities in an employee stock ownership plan (ESOP) relied on in purchasing those securities would not constitute investment advice.
…[The] Labor Department noted that the financial marketplace and the types and complexity of services have expanded dramatically. The proposal notes that although professionals such as consultants, advisers, and appraisers “…significantly influence the decisions of plan fiduciaries, and have a considerable impact on plan investments,” if they are not deemed fiduciaries under ERISA “…they may operate with conflicts of interest that they need not disclose to the plan fiduciaries who expect impartiality and often must rely on their expertise, and have limited liability under ERISA for the advice they provide.”
In essence, the Labor Department now says that ERISA does not compel it to apply its own five-part test, and that new facts and circumstances mean it is now time to update the investment advice definition. Specifically cited is that the proposal no longer requires that the advice be provided on a “regular” basis, not does it require that there be a mutual understanding that the advice will serve as a primary basis for plan investment decisions. [emphasis added']
Advice Description
As for what constitutes advice, the proposal now includes the provision of appraisals and fairness opinions as a type of advice [emphasis added], noting that the incorrect valuation of employer securities was a “common problem” identified in the DoL’s recent national enforcement project, including cases where plan fiduciaries have “reasonably relied on faulty valuations prepared by professional appraisers.” The proposal also makes specific reference to advice and recommendations as to the management of securities and other property, including such things as voting proxies or recommendations regarding the selection of persons to manage plan investments.
Finally, in what was described as reflecting “the Department’s longstanding interpretation of the current regulation,” the proposal makes clear that fiduciary status “may result from the provision of advice or recommendations not only to a plan fiduciary, but also to a plan participant or beneficiary.” [emphasis added]
Distribution Advice
The proposal notes that while the DoL has previously taken the position that a recommendation to a plan participant to take a permissible plan distribution would not constitute investment advice, even when combined with a recommendation as to how the distribution should be invested, “[c]oncerns have been expressed that, as a result of this position, plan participants may not be adequately protected from advisers who provide distribution recommendations that subordinate participants’ interests to the advisers’ own interests.” As a result, the Labor Department is now seeking comment “on whether and to what extent the final regulation should define the provision of investment advice to encompass recommendations related to taking a plan distribution.” [emphasis added] The proposal notes that the agency is specifically interested in:
  • information on other laws that apply to the provision of these types of recommendations,
  • whether and how those laws safeguard the interests of plan participants,
  • the costs and benefits associated with extending the regulation to these types of recommendations.
The proposal says that the definition of advice does not include “the preparation of a general report or statement that merely reflects the value of an investment of a plan or a participant or beneficiary, provided for purposes of compliance with the reporting and disclosure requirements,…unless such report involves assets for which there is not a generally recognized market and serves as a basis on which a plan may make distributions to plan participants and beneficiaries.” [emphasis added]
Other Points
The proposal says that the DoL believes that explicitly claiming ERISA fiduciary status, orally or in writing, is sufficient to result in fiduciary status, if provided for a fee (in that it “enhances the adviser’s influence, and gives the advice recipient a reasonable expectation that the advice will be impartial and prudent”).
Consistent with existing regulations, the proposal acknowledges that the provision of investment education materials (plan information, general financial and investment information, asset allocation models, and interactive materials) would not be deemed advice.
The proposal notes that the “marketing or making available” investments or an investment menu (e.g., through a platform or similar mechanism) “without regard to the individualized needs of the plan, its participants, or beneficiaries…will not, by itself, be treated as the rendering of investment advice within the meaning of section 3(21)(A)(ii) of ERISA”—if the person making those investments available “discloses in writing to the plan fiduciary that the person is not undertaking to provide impartial investment advice.” Additionally, the provision of information and data to assist a plan fiduciary’s selection or monitoring of investments isn’t deemed to be rendering advice “if the person providing such information or data discloses in writing to the plan fiduciary that the person is not undertaking to provide impartial investment advice.”
The proposal does set aside some limitations, exempting from the fiduciary umbrella persons that can demonstrate that the advice recipient “knows or, under the circumstances, reasonably should know, that the person is providing the advice or making the recommendation in its capacity as a purchaser or seller of a security or other property, or as an agent of, or appraiser for, such a purchaser or seller, whose interests are adverse to the interests of the plan or its participants or beneficiaries, and that the person is not undertaking to provide impartial investment advice.” [emphasis added]
Finally, noting that a necessary element of fiduciary status is that the advice be rendered for a fee or other compensation, the proposal states that that includes, but is not limited to, “brokerage, mutual fund sales, and insurance sales commissions,” [emphasis added] and that it includes fees and commissions based on multiple transactions involving different parties.
Effective Dates
The proposal is set to take effect 180 days after publication in the Federal Register tomorrow, but the Labor Department is first seeking comments on the proposal. The comment period for the proposed regulations will end 90 days after publication of the proposed rule in the Federal Register. That means that the comment period will end January 20, 2011. Comments can be submitted electronically by e-mail to (enter into subject line: Definition of Fiduciary Proposed Rule) or by using the Federal eRulemaking portal at
The DoL notes that persons submitting comments electronically are encouraged not to submit paper copies. More information on paper submissions is available (along with the proposal itself) at
Judy Ward
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Thursday, October 21, 2010

Just Out of Reish - Too Safe Is Too Bad

Safe investments may not be safe…for fiduciaries
…For fiduciaries, safe means that they are protected from lawsuits either because they complied with the law or because they have a legal safe harbor. Safe—for most participants—means an investment that has very little, if any, volatility. In the investment world, volatility measures how much the value of an investment fluctuates. For example, stable value or money market accounts are intended to have a fixed principal that does not fluctuate in value.
Another important definition is time frame. When the market is highly volatile, …people tend to measure their investment results in weeks or months. However, that is inconsistent with ERISA’s approach, which would measure investment results over years, or decades, or working careers.
With that in mind, how can safe be risky for 401(k) fiduciaries, and vice versa, particularly for default investments?
Risky can be safe for 401(k) fiduciaries when selecting qualified default investment alternatives, or QDIAs. …QDIAs are the investments that can be used for participants who …fail to direct their investments, as a fiduciary safe harbor under ERISA section 404(c)(5). While there are three categories of QDIAs, this column discusses only target-date funds, or TDFs.
By legal definition—and common application—QDIAs, and therefore target-date funds that qualify as QDIAs, must have a material allocation to publicly traded stocks and, therefore, are volatile when compared with, for example, stable value investments.
The first step of our analysis is that risky or volatile investments in equities are safe for fiduciaries when used in QDIAs even though they seem less safe—or more volatile—to participants.
Seal of the United States Department of the Tr...Image via WikipediaHowever, what about the use of safe investments, such as stable value and money markets, as default investments? In that case, what feels safe for participants is risky for fiduciaries. …Succinctly stated, the DoL viewed the riskiness of inadequate benefits at the end of a working career as being more important than the riskiness of stock and bond market volatility in the short term.
If you accept the DoL’s view on this issue, or if you want the fiduciary safe harbor protections for QDIAs, the prudent course of action is to invest default money for the long term. Based on conventional investment thinking, that means that fiduciaries should place defaulting participants in diversified portfolios consisting of, at the least, stocks, bonds, and cash.
In some recent papers, researchers argue that ...Image via WikipediaYet, what if an employer wants to avoid possible employee criticism for investment losses? Isn’t that permissible?
It may be permissible based on the demographics of a particular work force, but only after the fiduciary has engaged in a prudent process and reached an informed and reasoned decision that a long-term investment in stable value or money market vehicles is likely to produce equivalent or superior retirement benefits. However, in that case, the fiduciaries have lost the safe harbor and, as a practical matter, the burden will be on the fiduciaries to prove their case—that is, to overcome the common belief that is expressed in the DoL language.
Even there, is it possible that there could be a lawsuit where participants have small gains, but no losses?
Yes, it is. In 1986, the DoL filed a lawsuit against a union pension trust and subsequently entered into a settlement of that lawsuit. In the press release regarding the settlement, the DoL stated, “The department has charged that the trustees caused the plan to sustain financial losses by investing virtually all of its assets in ordinary savings accounts during the period of time covered in the suit.” To help you understand the quote, ERISA considers insufficient gains to be losses. So, there you are. Risky is safe and safe is risky.

Fred Reish is Managing Director and Partner of the Los Angeles-based law firm of Reish & Reicher. A nationally recognized expert in employee benefits law, he has written four books and many articles on ERISA, IRS and DoL audits, and pension plan disputes. Fred has been awarded the Institutional Investor Lifetime Achievement Award and the PLANSPONSOR Lifetime Achievement Award. He is also one of the 15 individuals named by PLANSPONSOR magazine as “Legends of the Retirement Industry.”
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Friday, October 15, 2010

Henry Kaufman Roubini And Other Prophets Of Doom Say Financial Crisis Continues - Industry News -

Economist Henry Kaufman became famous in the 1970s as the bear with the dire view. Now he and his heirs warn that the financial crisis is far from over and that systemic risks threaten to spread from the markets to the geopolitical realm. - a bizjournals property
by Suzanne McGee Oct 15 2010

Image:; designed by Sean Driscoll
Henry Kaufman is far from upbeat about the outlook for the U.S. economy or the financial system.
That should come as anything but a shock to anyone familiar with Kaufman’s background as an economic pundit. After all, he earned the nickname “Dr. Doom” nearly four decades ago for his bearish outlook on interest rates and the bond market and for his fear that financial havoc might spread to the political environment and society as a whole.
Even as politicians and others try to take comfort from the passage of the package of financial reform measures known as the Dodd-Frank Act, Kaufman is reluctant to relinquish his pessimism …“It’s a very cumbersome piece of legislation and creates a tremendous amount of uncertainty,” the economist and financial consultant says. “Many aspects will take years to come into effect, and there are many issues that still have to be resolved by regulators in negotiation with the private sector.”
That, Kaufman says, means that the Dodd-Frank Act has at least two major flaws … In the short term, he argues, rather than accelerating the rate at which credit is created in the economy, the uncertainty means credit growth will actually slow. The longer-term problem is more acute, he says: The legislation doesn’t address the problem of financial institutions that become “too big to fail,” as the saying goes.
“Over a longer period of time, the result of Dodd-Frank will be to increase the size of the government’s role in the economy and in the financial system specifically,” Kaufman says. “Instead of adopting policies that help to downsize financial institutions, we are making this more like the European or Japanese system.” That, he argues, is not a good thing for the financial system or its users. …
Nouriel Roubini, Turkish economist, professor ...Image via WikipediaBut while Kaufman may be the original “Dr. Doom,” these days he is just one figure in a pantheon of prophets of doom. Among his heirs are figures like Nouriel Roubini, a professor at New York University and head of his own economic-forecasting consulting firm, who was one of those who diagnosed the credit bubble and forecast that it would come to an early end. Since 2008, Roubini has warned repeatedly that the financial system and the economy haven’t yet emerged from the crisis and that an intractable public debt problem still looms.
While Roubini has emphasized sovereign-debt problems of the kind that became all too evident in Greece this year, others are trying to draw attention to a different source of concern: … It is the emergence of cash-rich and commodity-rich states as political powerhouses rivaling—and in some cases trumping—traditional geopolitical powers such as the European Union and the United States.
Cover of Cover via AmazonThat is the focus of two recent books, one by Ian Bremmer, president of the Eurasia Group (The End of the Free Market: Who Wins the War Between States and Corporations?), and the other by journalist Eric Weiner, entitled The Shadow Market: How a Group of Wealthy Nations and Powerful Investors Secretly Dominate the World.
As the titles imply, the next generation of prophets of doom are focusing on different sources of systemic risk than those that brought the financial system to the brink of disaster in 2008. Weiner, for instance, suggests that if the problems associated with the shadow financial system (all the mortgage originators and architects of structured products) were scary, the problems that could follow the evolution of a “shadow market” composed of countries that view their economic power as something to be deployed in their geopolitical interests could prove far more threatening to the U.S. financial system.
Weiner chooses some well-known examples to prove his point. Among them are China’s ability to use its importance as a source of liquidity in the global markets and as a large investor in U.S. government securities to win favorable treatment in some disputes and fend off criticism of its human-rights policies. … He envisages a secretive new financial world emerging, one in which transactions take place outside of the public arena and end up being hard for regulators or the public to monitor. …

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Tech Professionals Say Venture Capital Model Has Changed Forever - a bizjournals property
A slower market for initial public offerings is likely the new norm, and venture capitalists are likely to make smaller bets on smaller companies and make their returns from mergers and acquisitions of their portfolio companies.
That, at least, is what tech honchos surveyed by DLA Piper expect. That’s a major change for one of the most glamorous corners of the innovation business.
It may well mark the end of the big, bold, VC plays, said Peter Astiz, global co-head of the DLA Piper Technology Sector Practice.
Diagram of venture capital fund structure for ...Image via Wikipedia“This is a profound, game-changing development," Astiz said Tuesday in a statement. "If there is a long-term expectation that the IPO market will not rebound, that means a reduction in the number of dramatic ‘home runs’ for venture capital investors and lower overall returns. Fewer IPOs also means fewer small and medium-size public technology companies, which traditionally have been the acquirers for venture-backed company exits.”
Astiz went on to say that tech companies would continue to move forward and investors would still be active, but that the venture model is changing. "For startup tech companies, the bar is being raised, capital will be harder to come by, and pressure to perform will increase.”
Those expectations are reflected in the third-quarter report on venture exits by the National Venture Capital Association’s report in conjunction with Thomson Reuters. (Download a PDF of the report by clicking here.)
Image representing Google as depicted in Crunc...Image via CrunchBaseThe market for public offerings of venture-backed companies is recovering from the disastrous 2009 period. But it’s nowhere near the levels seen in the boom times of the late 1990s, and there haven’t been any blockbuster IPOs like that of Google.
Instead, venture capitalists have made their money through the sale of their portfolio companies to other firms. In the third quarter, there were 27 deals with disclosed values worth $3.8 billion, up from 22 deals worth $2.9 billion. As for IPOs, there were 14, worth $1.2 billion, in the third quarter. …
The technology professionals surveyed by DLA Piper agree. Nearly 60 percent say the venture model has been permanently altered. But that’s not all bad news, because with technologies like cloud-based computing available, it’s cheaper now to build a company. So VCs may be able to make smaller bets across more companies and get high rates of returns on those small bets.
In other topics, tech leaders told DLA Piper they expect:
  • The economy will continue to grow, albeit slowly, with 85 percent of those surveyed expecting at least a couple of percentage points of growth in the coming year.
  • Seventy-two percent expect sales increases in the coming year.
  • Forty-three percent expect to keep staffing levels flat.
“While some economists and headlines question whether the U.S. economy is headed for a double-dip recession, technology leaders seem confident of a sustained recovery,” Astiz said. “Tech leaders are forecasting stronger sales and earnings across the board, yet they are not planning to invest in hiring nor R&D. This suggests that we may be in for a prolonged period of guarded investment and slow growth.”
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Finding the Right Job Still Challenging for Many

October 14, 2010 ( – Thirty-six percent of workers with college degrees in a new CareerBuilder survey now say they wish they had studied something else when they were in school.

NEW BRUNSWICK, NJ - JANUARY 07:  A line of job...Image by Getty Images via @daylife
Image representing Careerbuilder as depicted i...Image via CrunchBaseA CareerBuilder news release about the poll said 26% saw the market for jobs in their field get worse from the time they started their college studies to when they actually hit the job market.
Fifty-six percent of respondents found a job in their field within 12 months of graduation, but others were apparently not so lucky. Nineteen percent of college-educated workers still have not found work in their desired profession, according to the poll.
Not only that, 27% who graduated from college 10 years ago or longer say they still haven’t found work in their field, while 21% say it took three years or longer, and 12% five years or longer.
"The job market has been challenging for all workers, regardless of degree level, and has prompted many to think about learning skills for high demand and emerging jobs," said Rosemary Haefner, vice president of human resources at CareerBuilder, in the news release.
Building new skill sets is a priority for more than one in (13 %) workers who said they have plans to go back to school this year to make themselves more marketable.
This survey was conducted online within the U.S. by Harris Interactive among 2,042 U.S. workers with college degrees (employed full-time, not self-employed, both government and non-government), age 18 and over, between August 17 and September 2, 2010.
Fred Schneyer
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Wednesday, October 13, 2010

Why I Hire Former Convicts and Gang Members

By John Shegerian, Electronic Recyclers International, Fresno, Calif.
Photo of John ShegerianImage via Wikipedia

When I took over Electronic Recyclers International in late 2004, it was a failing company. I decided to restructure and rebrand it. And when it came time to hire new employees, I saw an opportunity to hire individuals from what have typically been marginalized segments of society: former convicts, former gang members, the homeless, people recovering from drug addiction, and people coming off of welfare.
Laura Bush talks with members during a discuss...Image via WikipediaIt wasn’t the first time I’d hired employees looking for a second chance. Back in 1993, I co-founded Homeboy Tortillas and Homeboy Industries — two small businesses that train and employ former gang members, helping them transition into the workforce. It was a landmark moment in my life, and from then on, I wanted to make sure any business I took part in had a bottom line for profit and for social responsibility. I felt strongly about continuing that mission at the recycling company, which safely dismantles and recycles electronic waste.
Everyone at our company buys into that mission. … We all agreed that we need to make money, but also that we can seek to turn people’s lives around by opening our doors and our hearts to those in need.
Hiring marginalized workers
We hire our workers through a temp agency, and all different types of jobs — from scraps sorters to management positions — are open to applicants. It just depends on their skills and education level, and what they’re interested in doing. They go through extensive background checks, drug testing, and questioning. We put them through a skills test to see if they’re as capable as they claim to be. Depending on the position, they’ll generally start at the bottom, but if they prove themselves, they’ll have the chance to work their way up.
We partner new at-risk employees with those who’ve been on the job longer. They’re able to mentor the new hires and help them adjust to their work situations. But we emphasize personal accountability, so the workers are aware that they are responsible for making the right choices. … I’ve generally found that when you hire someone who’s looking for one last chance to turn his life around, he’ll roll up his sleeves and give you everything he’s got.
Sometimes people don’t work out, but in the 17 years I’ve been hiring people from disadvantaged backgrounds, I’ve never had a major problem. Most of the time, if someone we’ve hired is slipping back into old habits, he’ll just stop showing up or he’ll give notice to his supervisor. …
From drug dealer to top salesman
About four years ago, a former convict came in for an interview. He was a smallish guy with over 100 tattoos over his body. … I talked to him for a while and he told me he’d had 60 interviews, but no job offers. He said, “They don’t even want to talk to me after they see all the tattoos.”
He’d been in prison for dealing drugs, but he seemed very intelligent, so I hired him. He did a great job working his way up on the line crew, and after a while, my wife, who is our COO, took notice of him. She said, “He’s a really smart guy, he’s got some good skills. If he could sell drugs years ago, what’s so different about selling commodities for our company?”
Now, he’s our top commodities salesperson. He’s taking calls 19 hours a day from places around the world, buying and selling plastics, glass, copper, and other materials. …
Building a stronger company and a better world
Photo of John Shegerian and Jim CostaImage via WikipediaBetween 50 and 60 of our 400 employees come from traditionally marginalized groups, and we’re receiving some tax incentives for hiring workers through the welfare-to-work program — depending on the state, employers can receive up to $9,000 in tax credit for each employee who meets certain criteria through the Work Opportunity Tax Credit program.  …
I think our hiring practices make our company stronger because they show that our management is sensitive to the human condition. We’re all one accident or one tragedy away from being in a tight spot. Business can be a battle, but when a company shows its DNA this way, it makes for a very tight-knit group and helps us work together.
There’s not a community in America that isn’t suffering from drug, gang, and recidivism problems. … If every business owner hired just one person from the margins, it could make a world of difference within the community. Helping people get that second chance is our great opportunity and our great challenge.
John Shegerian serves on the California Governor’s Gang Advisory Committee, helping state legislators create policies to reduce gang violence.
– As told to Kathryn Hawkins
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Do you have a long-term pricing strategy?

Actively pricing products across their life cycle is increasingly important, particularly in innovation-intensive industries. Failing to do so may forego potential profits or even destroy value.

McKinsey Quarterly
OCTOBER 2010 • Walter L. Baker Michael V. Marn, and Craig C. Zawada

long-term pricing strategy article, new-product prices, Marketing
In the late 1990s, the world’s three major independent producers of hard-disk drives invested about $6.5 billion in research and development in the course of just four years. During the next decade, the bytes that can be stored per unit of a drive’s surface area increased a thousandfold—while the price per unit of that surface area dropped 70 percent. The three companies created enormous value for customers. Yet their failure to price products correctly throughout this period of significant innovation contributed to net losses totaling almost $800 million.
pricing of joint productsImage via WikipediaEntire industries can suffer when companies fail to grasp the importance of pricing products or services across the life cycle, particularly in innovation-intensive sectors such as consumer electronics and consumer durables, IT hardware and software, medical devices, and pharmaceuticals. … Companies introduce products more regularly, with life cycles often measured in months, not years. There’s external pressure for low prices from customers expecting more for less and internal pressure from the belief that pricing is a make-or-break factor when products launch. And a company may have a number of related products in the marketplace simultaneously, which complicates their life cycle pricing.
Figure 22: Pricing strategies matrix (Source: ...Image via WikipediaTwo points are essential to price effectively throughout the life of a product or service. First, companies should actively manage the trade-off between price and volume (or profit and market share) to maximize returns. Most businesses fail to test customer value perceptions and price sensitivity after products launch and have no idea how the critical trade-off between price and volume shifts over time. Second, companies must make pricing decisions in the context of their broader product portfolios because when they have multiple generations of a product in a market, a price move for one can have important implications for others.
With these two principles in mind, companies should consider how they respond to pricing challenges during the three major phases in the life cycle of a product or service: launch, midlife, and late life.

The launch phase

Earnings Expectations Life Cycle 1Image via Wikipedia… In the launch phase, it’s critical to concentrate on three imperatives: setting a launch price that maximizes the long-term capture of value, avoiding “anchor effects” from older products, and working the product portfolio to a company’s advantage.
One prerequisite for setting a launch price that maximizes long-term value is conducting scenario-based analyses that incorporate different pricing models, potential responses by customers and competitors, and the implications for earnings. This approach can help companies avoid common mistakes, such as setting the launch price too low or reducing a product’s price soon after launch. The careful adjustment of prices for existing products also can minimize the degree to which they drag down prices for new ones. More broadly, businesses should assess new-product pricing in the context of their existing product portfolios. (For a step-by-step example of how to use pricing strategy to manage a product portfolio, see the audio-enhanced interactive exhibit, “Pricing new products in a portfolio.”)

Pricing new products in a portfolio
With the right pricing strategy, a company can avoid discounting and instead compete at higher average price points based on product benefits.
Launch Interactive

  • Interactive: Pricing new products in a portfolio

    • Consider the case of a medical-device manufacturer that launched new versions of all major products every 6 to 18 months. Each version—whether it was a significant innovation or a minor improvement—was priced only a few percentage points above the existing one, in an effort to encourage migration and mitigate potential customer backlash. The company would then drop the price of older products precipitously (by 20 to 40 percent) while continuing to sell them for an extended period because of ongoing demand from some customers and the company’s desire to provide a lower-cost alternative to the new products.
      This approach dragged down the prices of new products because their incremental value versus the old ones remained more or less constant. As happens at many companies, the average price for each product line declined every year despite annual R&D investments in the hundreds of millions of dollars. … Once the company recognized what was happening, it eliminated “fire sales” on older products, changed the incentives of the sales force to support the new life cycle–pricing strategy, and carefully launched subsequent products at greater premiums.

      The midlife phase

      Once a product has launched and gained stable market acceptance, it enters the midlife phase. This phase … often occurs when companies earn a majority of a product’s operating profit but also when “me too” products may appear and when price compression is most extreme. Organizations rarely revisit their price–volume trade-offs or value maps at this point, nor do they undertake essential market-based customer research. If they did, they could more effectively fine tuning price–volume trade-offs, anticipate internal and external pricing triggers, and identify and adopt new pricing models that capture more value. …
      Earnings Expectations Life Cycle 2Image via WikipediaCompanies should change product prices in midlife carefully. Managers need to analyze whether the changes are appropriate (for example, whether lowering prices will raise life cycle profits) and, if so, the most effective timing. One personal-computer company, for example, conducted weekly market price tests, implementing cuts only when unit sales had declined and the tests showed that a lower price would significantly increase unit sales. Managing prices in this way (rather than by steadily reducing them) during the midlife stage has allowed the company to generate tens of millions of dollars in additional operating profit over the lifetime of most of its computer models.
      There are many midlife trigger events for pricing: internal (such as the launch of a new model or a change in cost position) and external (price moves and product introductions by competitors or shifts in customer demand, for example). Companies need to monitor the market so they can anticipate such events, or they will face the consequences of failing to take advantage of changes in their rivals’ behavior. Take the case of a medical-device company that, after enjoying a period of product exclusivity, decided to lower prices simply because that had been its standard practice. The company then failed to respond when its two main competitors introduced products similar to its own but at much higher prices. Instead of raising prices to capture a larger margin—or at least maintaining them—the company continued to discount, hurting prices and margins for everyone, without gaining market share.
      …[A] new midlife-pricing model can reinvigorate a product. Maintenance services for jet engines, for example, were historically undertaken by engine manufacturers using a standard pricing model of “time and materials” associated with each visit to a service shop. As third-party service providers entered the market at lower prices and began to gain prominence, one engine manufacturer introduced long-term service agreements based on hours of flight operation, which roughly correlates with engine wear and tear. Airlines liked the new model because it made their service costs highly predictable, the manufacturer’s volume and margins grew substantially, and industry price compression slowed.

      The late-life phase

      Counterintuitively, the late life of a product may be an opportune time to raise rather than lower prices. The reason is that its “all in” costs may have increased or its inherent value for the remaining customers may not have decreased as much as it has for those that moved on. … All this may translate into a willingness to pay higher prices. … Organizations should be guided by three late-life pricing imperatives: capitalizing on pockets of customers with a high willingness to pay, minimizing competition with next-generation products, and actively working to reduce unfavorable product proliferation.
      Certain customers may be fairly price insensitive for an older product because they are more comfortable with it, see more value in it, or regard switching costs as prohibitive. A semiconductor manufacturer that profitably managed the transition from a legacy product to a new one wanted customers to adopt it but recognized that the older product still had strong value for some users. The company actually raised the price of the late-life legacy product after the new one launched. By continuing to sell the older product at significantly higher margins for several more quarters, the company captured at least $250 million in additional profits. …
      Even if a company’s first instinct is to discount older products before or just after the launch of a new one, excessive markdowns may hurt newer offerings by making older products seem like a better value. A way to hasten the exit from older products and to achieve higher margins on their remaining sales is to follow the lead of the semiconductor manufacturer above … although companies must guard against the risk that higher prices will create obsolete or expired inventory. Another approach—simply eliminating products—can reduce needless complexity in supply chains, service operations, and customer service.
      Finally, many companies, especially those selling to businesses, do not manage product proliferation well: … In addition, few companies carefully evaluate their products’ economics over time, especially during the late-life stage. While doing so is troublesome for all companies, it is especially problematic for those using a cost-plus methodology, in which prices are set by applying standard margins to standard product costs.
      An industrial-equipment manufacturer, for example, ignored life cycle differences and spread its costs across all products—making it appear that it was still making a reasonable margin on older ones. A closer examination of the company’s costs in each phase showed that older products cost substantially more to produce than expected and that many were actually unprofitable (exhibit). Once this came to light, the company eliminated some older, unprofitable products and charged more for others so that it was paid appropriately for producing and stocking them.

    • Exhibit: Ignoring life cycle differences, one company overestimated the profitability of some of its older products.

      • Sustaining returns across the life cycle

        Companies that capture price advantages across the life cycle of their products have several distinct characteristics. Their perspective on pricing is not myopic: they continually strive to think across life cycle stages, building all their questions and analyses into that framework. Managers regularly scan internally and externally for information about potential trigger events. …[The] ability to undertake fast, deep customer research or to produce insightful analyses on a multitude of variables—is higher than that of most companies. …[Their] capabilities reflect the more dynamic and interdependent pricing environment that prevails when companies manage product life cycles. Businesses can take a number of steps to manage and price their products in this way:
        • Examine life cycle pricing up front. … [Savvy] companies … consider alternative price–volume trade-offs and strategies over time and envision how each scenario might play out across different customer segments. The process explicitly incorporates price moves during the life cycle and anticipates internal or external triggers that might prompt the company to shift prices up or down.
        • Maintain a longitudinal view. … Organizations that capture the price advantage escape the common “launch and forget” pricing pitfall once new products hit the market. Their review processes explicitly monitor life cycle pricing performance, while properly aligned incentives keep employees focused on the opportunity. Much of life cycle pricing inherently involves setting expectations about the way prices and volumes may play out. Sophisticated companies track these assumptions and regularly check performance against them.
        • Find ways to increase life cycle value. Companies that manage life cycle pricing well are dynamic and adaptive. … Beginning with a high-level plan for managing a product to the end of its life cycle, these companies refine their approach by constantly monitoring market conditions, the moves of competitors, internal operational changes, and customer perceptions.
        Companies that master pricing do so across the three phases of a product’s life cycle—launch, midlife, and late life—and make decisions in the context of adjacent products in their portfolios. In this way, these companies ensure that they reap the full rewards of their innovations by creating price advantages for themselves.

        About the Authors

        Walter Baker is a principal in McKinsey’s Atlanta office, Michael Marn is a principal in the Cleveland office, and Craig Zawada is a principal in the Calgary office. They are coauthors of the second edition of The Price Advantage (Wiley Finance, June 2010).
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        Tuesday, October 12, 2010

        How Are You Unconsciously Directing Your Clients? - Financial Planning

        Dan Ariely speaking at TEDImage via Wikipedia Financial Planning magazine
        By Pamela J. Black
        October 12, 2010
        Dan Ariely, author of “Predictably Irrational,” kicked off the festivities at the FPA Annual Conference in Denver with a keynote speech about how people frequently make mistakes because we rely on input from our senses that often give us biased information. This process is totally unconscious.
        The Duke University professor of behavioral economics gave many examples of how we do this. One was a chart showing what percentage of people in different European countries who were willing to donate their organs….
        What was the difference between the low percentage countries and the high? The enrollment forms.
        Cover of Cover via AmazonThe former were presented with a form that asked them to check a box if they wanted to be an organ donor, the latter were presented with a form that said check the box if you don’t want to be an organ donor. The fact was that no one checked any of the boxes because when confronted with such an important choice most people don’t know what they think and don’t make a decision. The information box was an environment in which doing nothing led to a decision by default.
        Ariely called such environments or contexts “choice architecture,” and said it’s hard to see how much people are influenced by them. “Defaults influence behavior when decisions are hard,” he said, “People don’t know their biases very well, so they follow the form.”
        The number of choices a person is faced with also will unconsciously drive behavior. Ariely cites an experiment in California, where psychologists tested consumers at a market with a free jam tasting. One day there were six jams to choose from; another,  there were 24. All  the consumers were given a discount coupon to buy jam. While 30% of the those who saw six jams used it, only one or two who saw 24 jams did. “Twenty-four jams seemed too complex,” he said.
        This is not unlike getting people to save in a 401(k) plan. You could offer people an opt-in to the plan, send them a letter saying this was the most important decision of their lives and offer lots of investment choices; or you could offer a target-date fund invested in stocks and bonds that rebalances regularly and an opt-out. The former would tend to drive them away from savings while the latter would encourage them.
        He showed also that to the extent people don’t know their preferences, you can change their attitudes based entirely on the context. For example, you can ask one client how he felt on the days when his portfolio lost 5% of its value. He would think about this and get kind of depressed. You could talk to another client about retiring in the Bahamas and they would feel in a good mood. If you then ask them what their attitude toward risk is, the first person will be more conservative and perhaps go for an all-bond portfolio, which may not be in his long-term interests, while the person imagining themselves in the Bahamas is more optimistic and willing to take on more risk. “The question ‘What is your risk attitude is incredibly hard to answer and therefore they will be influenced by things in the background.”
        Yet another example of how people are unconsciously biased is comparative analysis.
        For example, the Economist magazine had a subscription offer of the for $59, the print edition only for $112 and the print and online editions for $125. Twenty percent chose the first option, no one chose the second and 80% chose the third, but when you take out the print only option, the numbers reverse; 64% chose the and 32% chose the combination. Once you take out the option by which they framed the combination decision—the two subscriptions are better than just one— it became a less popular option. People may not know what they want, Ariely said, but they do know the combination option is better than the single option.
        Ariely gave many other examples of how context determines human behavior. One critical example was about the pain of spending money. There is pain involved in paying for things and you can help take that away where it makes sense or not. Someone who pays for a trip in advance enjoys the experience more than someone who gets the tab on the last day of the trip even though the cost is the same. Likewise, if given a choice between getting $1000 extra a month and a $12,000 bonus at the end of the year, who will enjoy the money more? The one with the bonus because the money won’t get eaten up in everyday living even though it’s the exact same amount. …
        His ultimate message: question your own biases because they may well be wrong.
        “You have to question your assumptions based on intuition and experiment with trying something different and seeing if another way might not be much better,” he said.
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