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1 “Flat World, Finance, Pensions, etc. ” Feb 13, 2007.

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1 1 “Flat World, Finance, Pensions, etc. ” Feb 13, 2007

2 2 Announcements; 2/13/07 –Class Project Concept // Class Project: “Is this a persuasive and credible business proposal”? “Does this seem reasonably well-baked?” Good analysis of competitors; competitive segments defined (e.g. sporting goods  Wal-Mart Clear Sustainable Competitive Advantage. Indication of how business would “scale up” Operational details thought through –Example: Food delivery – perishables, etc. Not just : “Would use advertising to gain users” but rather “would use advertising on web sites A, B, C, and D, and would use context-sensitive (search engine) advertising with search terms E, F, G, H, and I.”

3 3 WA2 / Preview: Katherine Schmidt Facts  Describe, List, Summarize Opinion  Analyze, Support Argument Your paper should combine facts and analysis

4 4 High-tech: Old Model vs. New Old Model: “Paternalism” (IBM, HP, etc.) –Notions of “Lifetime employment” & “No layoffs” –In Friedman’s term, lots of “fat” (IBM country club!) –Very large, vertically-integrated firms (“soup to nuts”) –Employee development as a “joint enterprise.” –Question: Is there anything good about “lifetime employment” concept for the employer?

5 5 High-tech: Old Model vs. New New Model: Message is “Employees must constantly prove their value in a competitive market” –Lifetime employment explicitly disavowed –More risks (less “parking” of poor performers) –Also more opportunities, more freedom, more flexibility (part-time, job-sharing, etc.) Best Buy example –Employees face competition from offshore –Much greater use of outsourcing (partners and agencies) –Hence, more opportunities for small business –Sometimes, large companies as customers, not employers

6 6 “Un-flatteners” (before world was Flat) Unions, Union Contracts, and Risk –Previous class session, “What must an employer prove/demonstrate to fire or lay off an employee?” –Correct answer: “Nothing.” (Unless there is a special contract in place). Often, these “special contracts” were union contracts. (GM “Jobs Bank”) –In practice, it was so difficult to fire an employee that many companies didn’t try. –Some companies extended these procedures to non- union employees, so they were also essentially impossible to fire –Union contracts also provided a “floor” on total compensation that generally impacted all employees

7 7 Financial Services and the Flat World Pensions in Flat World: “Defined Benefit” vs. “Defined Contribution” –What is a “Defined Benefit” pension? –What is a “Defined Contribution” (similar to “Cash Balance”) pension? –What is a 401k? –What is an IRA? –All relate to “portability” issue mentioned by Friedman.

8 8 Financial Services and the Flat World Question: –Why do employers generally prefer “Defined Contribution” approach? –Why would some employees prefer “Defined Benefit”? –Why would some employees prefer “Defined Contribution”? –Regardless of preferences, trends are clear... –Note: This change creates numerous potential opportunities for financial advisors and other financial service providers.

9 9 Shift of risk/responsibility With a Defined Benefit pension, whether you receive your promised pension is your company’s problem. With a Defined Contribution pension, whether you receive your expected pension is your problem. (There is no “promised” pension.)

10 10 Financial Services and the Flat World In Flat World, the primary value-added by a Stockbroker or Financial Advisor is no longer the ability to execute a transaction. –The Internet makes that fast and easy for anyone who wants to learn. Although some investors will prefer to remain “hands off.” –The Internet also makes it easy for investors to get fundamental financial information (e.g. Yahoo Finance).

11 11 Financial Services and the Flat World –Arguably, in Flat World the primary need for many individuals is someone to play role of Advisor and “Coach/Personal Trainer.” –Question: What are some of the biggest mistakes most individuals make in the realm of personal finance and saving for retirement? –Albert Einstein quote...

12 12 Who will be better off at age 65? Example: –Matt and Mary both graduate from high school at age 18. –Matt’s father puts $20,000 into a savings account for him, where he will earn 3% interest, which will exactly match inflation. –Then, Mary’s father puts $20,000 into a mutual fund for her, where she will earn 3% to match inflation, plus an incremental 10% per year. –Then, Matt’s father agreed to add $20,000 more to his account each year, which Mary’s father could not do. –Assuming they retire at age 65, who will be better off (in inflation-adjusted terms)?

13 13 Illustration of previous example Compound interest works miracles over the long term. But, must start saving early or the “long term” never arrives. (Data adjusted for impact of inflation) example from:

14 14 $1000 invested at 5% for 40 yrs. (half of the 40 yr. end value comes in last 10 yrs.)

15 15 Other serious mistakes The “Enron” mistake with 401ks The “T-Bill mistake” The “plastic” mistake

16 16 GM/Delphi: Worker’s view “They told us back then, if you did a good job, put your thirty years in, you’d retire with good benefits. I felt like I put my time in and did a good job. GM let us down, and now Delphi has let us down. Most of the problems GM and Delphi are having are a result of management problems, and yet they’re collecting their astronomical salaries, and we’re suffering... It’s not right, trying to take away benefits and pensions from workers who worked all their lives, and leave you dry.” (Paul LaBarge, Delphi worker, quoted in The Nation, 4/3/06, p. 26)

17 17 Efficient Market Theory What is the general theory that capital markets are “efficient”? What does this theory imply about “beating the market”?

18 18 Trading securities in the Flat World In general, trading securities is intensively competitive. “Rocket scientist at Merrill Lynch” Internet has created many new sources of information –Blogs –Chat rooms –Search engines (what company names are generating the greatest number of searches?) Positive and negative aspects to Internet –Negative: Internet used as a tool for “pump and dump” schemes?

19 19 Accounting, Finance, Financial Analysis Example of financial analysis challenges faced by a large company: –“Which of our customers are most profitable? –How do you allocate costs? Example of financial analysis challenges faced by almost all companies: –What were we spending our money on?


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