Excessive Borrowing Threatens Clients’ Security
By A. I. Schweitzer, Founder & CEO Gulfstream Financial Corporation
The TV stays on at our house all the time on Sundays. In the morning, with pancakes and coffee, we hear the political talk. As the day moves on, the background sounds are of golf, tennis, baseball, football or the NBA. There are kids in perpetual motion and friends stopping by.
Interspersed between TV offers to drink this beer or drive that car are messages from investment firms proposing global private client services, wealth management, tailored asset management, and so on.
The Federal Reserve Bank recently reported that approximately two-thirds of U.S. households have less than two months earnings in reserve. The Fed also reported that the savings rate is now a negative 1½% while credit card debt has climbed from 4% to 12% of income.
The Chicago-based Woodstock Institute, a nonprofit group that reports on economic matters, says that household debt has reached 126% of disposable household income.
What do these stats mean? They mean that most people are now spending more than they earn as they finance their purchases and then withdraw from their savings account to service their debt.
The concerns raised by a majority of Americans with no meaningful savings extend to various sectors, both public and private. This, combined with a trend towards increased extensive financed purchases of consumer goods and shrinking bank accounts, has many worried, both in and out of government.
So when we hear the ads for tailored global asset and wealth management, we may well wonder how many people the advertiser is trying to reach.
The Dust Bowl
What can be discerned by the bulk of data coming from researchers is that a dust bowl of equity is occurring in America.
When was the last time you heard someone say they’re saving up to buy something or to take a vacation? Can you remember the “Christmas Club” account? With consumer debt rising at rates matched by fuel prices, medical costs and college tuition, we have to ask who will repay all this debt?
The National Reverse Mortgage Lenders Association reports that reverse mortgages grew by more than 100% in 2005 compared to the year before. Local press reports show a similar pattern emerged regionally in 2006. Reverse mortgages allow the home-owner to essentially annuitize home equity. As a result, the expected inter-generational transfer of wealth from older Americans to the baby-boom generation may be far less than expected.
According to the Woodstock Institute homeowners’ equity in their homes declined from 67% of their homes’ value to 57% between 1979 and 2004 despite rising home values that would add to an owner’s equity.
Lost in this dust bowl are core essentials to good financial health: value, equity, cash on hand. All that good topsoil gone to waste – traded in favor of credit lines, more aptly named debt lines.
Financial Liability Management
Traditionally, consumers have been able to access professional management in three key areas of personal finance: tax, insurance and investments. Financial professionals now face the need to provide their clients with a “holistic approach” to their personal financial statements and offer services that address their growing creditor obligations.
The State of Ohio recently certified a course in Financial Liability Portfolio Management for continuing educational (CE) credit for licensed insurance agents. The certification process included representatives of the National Association of Insurance Commissioners (NAIC) from twelve states. This process of certification of a new course of study for CE credits enjoys reciprocity in most states.
The Financial Liability Portfolio Management course details processes that, when expertly applied, can reliably eliminate a client’s creditor obligations quickly and efficiently, including mortgage loans. In many cases, all financial liabilities can be liquidated in less than ten years without increasing payments or compromising credit standing.
The course reviews three key operations of financial liability management. The first is liability restructure in which tools normally used in corporate finance are applied to reduce the demand on the household budget stemming from the liabilities. The second step is the application of technology, which directs all cash-flow resources to their most efficient use. The third key step is the administrative function that professionally manages the client’s liabilities. This step is an entirely passive operation for the client, who simply deposits a check into his or her account monthly and nothing more.
The risks of a burdensome portfolio of financial liabilities extends beyond mathematical concerns because it threatens the client’s security. If a client must continually service a liability portfolio, it becomes difficult to accumulate assets for retirement. Furthermore, there is also a documented correlation between financial difficulties and marital instability, which threatens family unity and the home.
In the face of the dust-bowl of equity where savings are declining, financial liabilities are ballooning and expected inheritances are shrinking, financial professionals have a social responsibility to assist in the management of their clients’ financial liability portfolios.
Check with your state licensing bureau to see if a course in financial liability portfolio management is offered in your area.
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