For many middle-class American families, Sunday mornings resonate with certain familiar sounds: the steady hum of social conversation over coffee; childhood squeals accompanied by chuckles from grandparents; or the banter of Sunday morning talk shows interrupted by seductive messages from trusted investment planners promising bountiful retirements.
TV ads featuring a 60-something film icon from Hollywood or former rocker from England are supposed to reassure folks like you and me – and every other baby boomer – that we can happily spend the rest of our solvent lives amassing an asset portfolio. Large investment houses offering personalized wealth management confined to just “You & Us” with only two locations – “everywhere and right next to you” – seek to bring comfort and reassurance into the investment equation.
These ads and their accompanying rhetoric fail to note that in the last three decades families with incomes of $80K + have watched their credit card balances increase 10,000 percent and their fixed expenses surge by 250 percent. According to the Federal Reserve Board, household liabilities over the past ten years have more than doubled, reaching over $8 trillion a year ago, and continue to climb. These multiple financial obligations comprise what we call a Liability Portfolio.
The Fed’s June 2006 report revealed that consumer credit, or non-mortgage loans to individuals, rose $10.3 billion to $2.19 trillion following a revised $5.89 billion increase in
May 2006 – the biggest two-month gain since September-October 2004. Meanwhile, the large credit card vendors reported high second quarter 2006 credit card profit, against a backdrop of a cooled-down housing market, soaring gasoline prices and new laws restricting personal bankruptcy protection.
No wonder some of your clients are confused – even frustrated – by those Sunday-morning promises to entrust what little savings they have to institutions that could place at risk that hard-earned cash. They are being saturated with messages about the wisdom of investing but can’t respond because their liability portfolio is consuming their disposable income.
In my 30-year career as a financial advisor I can offer one fact of “home economics:” You can never be sure of a return on an asset portfolio sufficient to overcome the costs of your financial liability portfolio. If health-care costs, tuition payments, auto insurance, mortgage and credit card balances have seriously impaired your clients’ lifestyles, ask them what would happen in an emergency. So many people in their fifties and sixties have come to me with dashed expectations. Anticipating a comfortable retirement, they’ve discovered that their savings are drained and their obligations have escalated.
These clients have further complicated their domestic financial woes with band-aid approaches to economic recovery. Consider the bank loan or home equity loan. When your client’s liabilities have escalated, the only one to profit from the bank loan is the bank, as it continually earns interest on the principal. And a home equity loan actually diminishes the chances that your clients will have that lovely house waiting for them free and clear upon their retirement. That may be the home that the family upgraded over the years, with the carefully tended garden, the custom-designed country kitchen and bath, or, for the city dweller, the two apartments finally combined into one sprawling urban manse.
Given the uncertain employment market, soaring cost of health care and mounting credit card debt, it’s not surprising that, according to the 2003 Employee Benefit Research Institute’s “Retirement Confidence Survey,” 7 in 10 middle class Americans have given up on the notion of retirement by age 65. Yet this very demographic is being courted by asset managers, well paid for their counsel.
Most people willingly spend good money for asset management services. Ironically, those same people adopt a do-it-yourself approach to the management of their financial obligations. While some have begun to seek the professional assistance of mortgage brokers to help them navigate the morass of details inherent in mortgage selection, they have not sought that level of assistance to manage the overall financial liability portfolio.
Why would you place your clients’ assets under management when their liabilities are soaring? Wouldn’t it be more prudent to look at what they owe and begin managing their liability portfolio? If they accelerate the pay off the full balance accumulated on their credit card, they effectively realize a saving of up to 24 percent by avoiding the payment of interest on the unpaid credit card balance. Can you guarantee them a 24 percent return on some of the risky investments sitting in their asset portfolios?
A liability portfolio operates on the same principle as an asset portfolio. Once a client accumulates financial liabilities in excess of $14,000-and-growing, and regularly makes only minimum payments, the situation qualifies as a portfolio demanding management. A qualified professional will sit down with his or her client and family to analyze their financial obligations and work with them to eliminate all liabilities including mortgages within seven to ten years. That goal can be accomplished with credit standing uncompromised, and with no increase in payments.
In my previous article for ProducersWeb.com, “Financial Liability Portfolio Management,” I described how to successfully liquidate a liability portfolio through a well-defined goal, plan, strategy and a three-step process. This is no more a job for a do-it-yourselfer than managing a complex asset portfolio.
Before your clients are taken in by those ads for beach-side vacations, endless days in their next career as poets, painters or pundits, or on shiny yachts skimming turquoise waters, they should think first about what they owe. Financial liability portfolio management needs to come before asset portfolio management. Doing anything less might be imprudent.
Download this article in PDF format: Manage Your Clients’ Liability Portfolio Before They Sink Earnings into an Asset Portfolio