Thursday, July 19, 2007

Eliminating Credit Card Debt

I’ve received a lot of questions recently related to credit card debt … What is the best strategy to repay it – loan consolidation? Balance transfer? Other? Obviously there are a lot of individual questions and factors involved in the decision. There are times when any of these options may be advisable. A few questions I would ask before proceeding:

- Is the reason I’m in debt behavioral (i.e., spending problem)? If so, I should address this problem before proceeding with anything else.
- What are the costs/fees associated with this decision?
- Is the interest rate offered temporary or permanent?
- How am I with making payments on time? [Most cards will bump your rate with one missed payment – even if it is a payment missed on another debt].
- Do I have good credit? If so, I should be able to find an alternative with a ‘respectable’ rate and cost …

An interesting tool I came across recently helps you compare offers from other credit cards to assist you in determining whether a different card or a balance transfer special would result in financial savings to you. This credit card “savings agent” gathers some basic information regarding your situation: what is your current card, how much do you owe, annual fee [if any], interest rate, whether or not you currently use the card, what you pay monthly on the card, if you know what your credit score is, and whether or not you’ve declared bankruptcy. From these questions, the tool examines about 200 different credit card offers and will rank the ten that will save you the most money (based upon its current ‘offer’ – includes any balance transfer fees, transfer rate or intro rate, etc.) … Looks like it could be helpful if you find yourself in credit card debt and are trying to find a viable financial alternative. The tool is free and doesn’t require any personal information [by personal, I am referring to your name, address, phone, e-mail, etc. – obviously it requires “personal information” such as how much you owe, etc.]. The site is located at:

*FYI – The Financial Tip of the Week blog will join me on vacation until mid-August.

Thursday, July 12, 2007

Compensation for Financial Advice

The idea of ‘you get what you pay for’ is as true today as it ever was. If you want objective advice, you’ll likely have to pay for it. How much you pay will vary according to the compensation method used by your financial professional. The value of this information will likely hinge to some extent upon the ‘fiduciary’ relationship; a fiduciary responsibility is one in which there is a requirement to place the needs of the client above that of the company/advisor. Many people assume this is always the case. There are, however, financial relationships where a fiduciary duty is not required.

It is important to understand [and be comfortable with] how your financial advisor gets paid. You need to make sure their compensation method is suited to your specific needs and situation. The International Association of Registered Financial Consultants provides a nice summary of these general compensation methods. Generally, financial advisors are compensated in one of four ways – solely by fees, a combination of fees and commissions, solely by commissions, or through a salary paid by an organization that receives fees. In some cases, you may be offered more than one payment option.

Fee Only.
Fee-only advisors charge an hourly rate (often $75 - $250/hour) for time spent in research, reviewing a plan with you, discussing implementation, etc. Some may charge a flat fee for a quoted service (such as developing a financial plan, drafting a will, etc.). More and more are moving into this category that don’t charge an hourly rate for services, but rather manage assets and charge a fee of 1% to 2% of total assets under management. They receive this classification because they make money from the management fee, not the sale/purchase of products. Obviously entirely different services, so categorizing them the same is confusing to many.

Fee & Asset Management.
Some financial advisors charge a planning fee and then will advise you on investments, insurance, and other financial vehicles; most will help with the implementation of recommendations using mutual funds and other investments. The fee for helping select and monitor these investments is usually a percentage of the assets assessed monthly or quarterly.

Fee + Commission.
Some advisors charge a fee for assessing your financial situation and making recommendations. The fee covers the data collection, analysis, recommendations and delivery of the plan. They may then help you implement their ideas by offering certain investment or insurance products. They typically earn a commission on the sale of those products. If so, that should be disclosed to you at that time. Commissions and other sales charges can vary dramatically from product to product. Don’t hesitate to ask your advisor for the amount of the commission and to explain how the commission will affect the return over the life of the investment.

Commission Only.
Some financial advisors charge no fee but rather are compensated solely by the commissions earned by selling investments and insurance plus services necessary to implement their recommendations. A commission-only advisor will develop recommendations for your situation and goals, review these with you and discuss ways to implement these recommendations. The only way they receive compensation is when you choose to buy the products and/or services being offered. The ultimate quality of any financial professional is independent of the method of compensation used. Competence and compensation are not necessarily correlated. No matter the method of compensation, the possibility of conflict of interest always exists. An advisor should be honest and straightforward about how they are compensated.

Helpful Resources.
- Checklist for interviewing a financial professional.
- Find a financial professional.
- Find a professional based on area of specialty.
- How a financial planner can help and choosing the right one.
- NAPFA – the National Association of Personal Financial Advisors – primary organization that represents fee-only financial planners. You can search for fee-only professionals in your area via their site.
- Your rights as a client.

Thursday, July 5, 2007

Payment Myopia

I was reading some articles this morning written by Dr. Jack Guttentag, Emeritus Professor of Finance at the Wharton School of the University of Pennsylvania. One of the issues he wrote about was ‘payment myopia’ – a phenomenon where people base decisions solely upon the affordability of monthly payments. Myopia is ‘near-sightedness,’ a defect in the eye where one can see close objects clearly but distant objects appear blurred (wikipedia, not an opthalmologists definition). What a great analogy for examining a very common mistake …

Unfortunately, many people are payment myopic when making major purchases. The questions are often “What will the monthly payment on that house be?” or “How much would my payment be if I want this car?” What is wrong with those questions? Loan products can easily be manipulated to provide almost whatever monthly payment you’d like (just take a closer look at some of the available products – 40 year [or 50 year] home loans, interest-only mortgages, negative amortization loans, etc.). Focusing on the payment is a short-term ("near-sighted") focus. Short-term decision making seldom results in long-term success. So what would be a long-term perspective in this example? Contact the lender after having already reviewed your budget to determine what YOU can afford based upon how quickly you would like to repay the debt. Ensure that YOU are comfortable with that payment relative to your other financial goals (savings, investment, and other objectives should be considered).

The “Mortgage Professor” (as Dr. Guttentag is referred) has a website with a lot of great housing resources. The site isn’t the prettiest, but the content is solid. Here are a few links to direct you to some of his resources:

- Homepage
- Mistakes in Buying, Financing, and Refinancing a Home
- Mortgage Calculators
- Mortgage Spreadsheets
- Table of Contents

Additional homeownership resources are available from the OFS website