How to Fix Capitalism

Don’t get me wrong, there’s a lot to love about Adam Smith. Each person acts in his or her own self-interest in a free market…what’s not to love?

Well, take my industry, financial advising, for example.

Most advisors know a lot about financial products than the person purchasing their services or products.

the client is not in a position to evaluate the quality of what they are buying. They rely on the advisor, who might be serving their own interests, not the clients. Insurance companies in particular create life insurance products that are too complex for even other advisors to understand.

This basic conflict of interest is one of the elements at the heart of the 2008 market collapse. If mortgage brokers were required to sell people products in their best interest would the economic collapse have happened? I sincerely doubt it.

Two countries, Australia and the U.K., are now mandating that financial advisors stop charging commission. They are requiring advisors to operate in their client’s best interest. The U.S. is considering this, but we’re very far away, because a lot of big companies make a lot of money by conforming to a lower standard. A small part of the industry, which I proudly belong to, operates with a “fiduciary” standard, which means putting the client’s interest ahead of our own.

That got me thinking;
what if we changed capitalism? What if we required that when someone sold us something, it be in the customer’s best interest as far as the seller knew? What if most companies offered the lifetime warranties that a few companies do now? You could return any product at any time because you were unhappy with it.

As far as I know, it’s a radical idea!

I know a lot of people are going to say, Bridget, what are you trying to do, put Twinkies out of business? I mean who could sell Twinkies under that system? Wait! They’re already out of business.

Sure, this would change our legal code. Yes, there are a lot of practicalities to work out. But isn’t it worth considering and debating ideas that might improve the world?

Attorneys, CPAs, and doctors already have this standard of care. Why not the rest of capitalism?
Why not shift the responsibility to the seller? That way if they know they have a product that isn’t in the customer’s best interest, it would be their responsibility if they sell it, not the buyer’s responsibility to buy it.

by Bridget Sullivan Mermel

The Bitter Pie: Financial Advisors Industry Statistics

pie 2

The industry I am in confounds me. Why are so many consumers so poorly served?
Almost daily I hear stories of advisors hiding fees, not calling people back after initially selling them something, and having “advice” really mean selling people products they don’t need.

Most advisors operate with conflict-of-interest imbedded in the way that they operate. Advisors who make money by using a commission AND charge people for their advice, the “fee-based” advisors, are the worst. Next bad are the advisors who just charge commission. These business models are ripe for corruption; the advisor builds trust then recommends a solution to a problem that makes the advisor the most money.

Fee-only advisors operate with less conflict of interest. In fact,
most fee-only advisors pledge to put the interests of their clients ahead of their own. However operating fee-only generally means charging based on the amount of assets that you’re managing. That leaves clients with inadequate advice with their two of their biggest challenges—real estate and taxes. The ACA retainer model avoids the pitfalls of all the other business models. The advisors in ACA believe we have a better MO.

However, the pie chart above shows our market share in the industry.

Yikes! We’ve got a lot of work to do.

by Bridget Sullivan Mermel

The Five Steps “Say Anything” Advisors Use to Get You to Buy Products You Don’t Need

Consumers don’t know who to trust in the financial industry and the recent re-combinations and melt-downs haven’t helped. I look at how advisors operate on a continuum with two extremes: The Say Anything Advisor, and the Honest John.

The Say Anything Advisor

For the Say Anything advisor, the key goal is making the sale. Here are the five easy steps:

1. Gain trust by listening carefully to what a prospect says
2. Pick up on a prospect’s biggest fears
3. Harp on the fears
4. Offer a solution to the fear that entails using well-researched buzz words that appeal to a prospects emotions
5. Sell the advisor’s products.

Here are some common fears and corresponding buzz words that Say Anything advisors use to hook people into buying products they don’t need:

Buzz Words of the Say Anything Advisor:

Prospective Client Fear
Buzz words to hook you into the “Solution”--repeat often!
Reality behind the “Solution”
I’m paying too much in taxes
Tax loophole
Tax haven
Tax savings
Tax free
Low or no return mutual funds that are only appropriate for the top 1% of taxpayers
I’m might get sick and die

Take advantage of being healthy now in case you can’t get insurance later

Protect your “loved ones”
Life insurance that you don’t need
My investments aren’t returning as much as they could
Beat the market
Outperform the market
We can do better
Overly complex “investment strategies” that seem to go in one direction--down.

Some organizations focus on training Say Anything advisors and developing products to cater to the Say Anything Advisor side of the continuum. MorganStanley SmithBarney, Northwestern Mutual Life: I’m talking about you. I have met some Honest Johns among your ranks, but not many.

What the Honest John Advisor will say

On the other side of the continuum is the advisor I call the Honest John Advisor. The Honest John Advisor follows the following protocol:

1. Gain trust by listening carefully to what a prospect says
2. Pick up on a prospect’s goals
4. Offer solutions that help the client accomplish their goals that entail using well-researched, low cost strategies that take some effort to implement.
5. Help the client implement the strategies.

Strategies of the Honest John:

Prospective Client Fear
Solution proposed by the Honest John Advisor
Additional Comments
I’m paying too much in taxes
Have a qualified professional review your tax returns and see if they can offer suggestions on how you can save money.
Often you can employ strategies retroactively and file amended returns. Also looking at your tax situation in advance often helps know what tax strategies to employ in a particular year.
I’m might get sick and die

Live life to the fullest now! Get life insurance if you have dependents.
Most people don’t need life insurance, but if you do, low cost term is generally available.
My investments aren’t returning as much as they could
Nobel-prize winning research indicates that you can’t beat the market and that relatively simple investment strategies yield the best results.
Your money is better spent getting comprehensive advice rather than overly-complex investment advice from advisors trying to justify their fees.

by Bridget Sullivan Mermel

Breaking up with My Bank

Dear Bridget,

Although I like a good vampire movie, I don’t like it when I feel like my big bank has fangs in my neck. Between high fees, low interest earnings, and lousy service I am fed up. Don’t get me started on the way they game the political system and the foreclosure crisis. I’m ready to change. Help!

Not heartbroken

Dear NH,

Wow! Call me Bridget the Big Bank Slayer.

If you want to switch banks, here are some suggestions:

Suggestion one: stop auto-pays at your current bank.
The big banks focus on convenience; they were the first to figure out banking online makes it difficult to switch institutions. Auto-pays make it that much tougher to leave.

To prepare for the break-up, stop auto-pays; paying everyone manually through your online banking system is fine. Consider getting a regular paycheck instead of direct deposits. Or, find out what your payroll department will require for you to change the direct deposit of your check. Once you’ve switched to a new bank and you feel good about it, go ahead and start up the auto-pays again.

Suggestion two: Explore your local community banks
Local community banks are privately owned local banks. That means that they take deposits and loan them out to the local community. Large national banks may do some community lending, but with local community banks your dollars on deposit should help the local economy, not trickle off into corporate never-never land or the derivatives market.

If you look around when picking banks you can typically find a local community bank that is convenient to where you live or work. Online banking will probably be available, perhaps with an interface that seems more basic than as with the too-big- to-fails. When I got fed of with my big bank, I checked the ratings on Yelp before picking North Community Bank in Chicago for a lot of my banking.

Suggestion Three: Explore Credit Unions
Credit unions are created when groups of people pool their resources, hire a manger to run the operation, and provide banking services to themselves. Credit unions are owned by their members and can limit their membership.

They are run typically in a straight-forward manner with transparent agendas. They’re not trying to lure you in and extract fees. They’re trying to provide the best service to the most members.

Often credit unions originate with employers. I’m still a member of Summit Credit Union in Wisconsin, which I joined because my coworkers at my part-time job working for the state government when I was in college told me it was a good deal. Other credit unions have geographical boundaries. Here’s a website to help you locate a credit union that might work for you:

Suggestion Four: Find a Community Development Bank
Just add “development” to a community bank and you’ve got another type of bank. The difference between a community bank and a community development bank is that a community banks lend money to the community at large and community development banks focus their lending on people who don’t have access to regular banking. In other words they reach out to the economically disadvantaged.

Community development banking has taken off since legislation that encourages it was passed in the 90s. Although a rapidly growing sector of banking, there are far fewer community development banks than either community banks or credit unions. While deposits up to $250,000 are insured by the FDIC, this type of bank typically lacks some of the convenience factors of other banking institutions.

I posted a listing of community development banks on my website from Green America:
Green America Listing of Community Development Banks

For many people, the ideal would be banking at a community development bank down the street. Unfortunately, most people don’t have that available. Just like many decisions, picking a bank requires striking a balance between idealism and pragmatism.

So how to make decisions? Here’s my recent experience. I have one account I’m interested in moving right now: my high-interest Internet savings account.

I recommend high-interest Internet savings to stash emergency funds. Personally I’ve had this type of account with ING Direct for over 5 years. These accounts pay about 1% right now. That might sound pathetic until you open up a Chase statement and see the interest on their savings accounts: .01%. That’s right, the Internet accounts pay 100 times more.

From the bank’s perspective, I think these accounts are a marketing tool to get deposits. As a customer, my big concern is that a high-interest account will suddenly and silently become a not-very high-interest account. The biggest risk I’m taking in switching is that the bank will withdraw the high-interest.

So what are my options? My local community bank and my credit union don’t offer high-interest Internet savings. I haven’t found many that do. If I’m going to bother switching, it’s going to be to a local bank.

Chicago was home to one of the pioneers in community development banking, ShoreBank. Politicians of almost every ideology like banks that help people who can’t get loans, and ShoreBank was located in the community where Barack Obama got his political start as an Illinois state senator. I would venture to guess that somewhere there is a photo of a young-looking Obama smiling in between the founders of the bank.

ShoreBank got in trouble like a lot of banks did and ended up being taken over by the FDIC and selling its assets to a group called Urban Partnership Bank a few years ago.

Urban Partnership Bank is the ultimate political hot-potato. When ShoreBank was in trouble, some folks on the right claimed that because of the bank’s association with Obama, they were getting preferential treatment.

But the folks on the left have a lot to hate, too. Because who owns Urban Partnership Bank? It’s a private bank owned by a consortium of foundations and companies (including Goldman Sachs and Citibank). The owners sounds like fat-cats with questionable motives to many on the left.

So back to my banking decisions. When it comes to what I call sustainable personal finance, I’m not a purist; I’m a pragmatist. Urban Partnership Bank has a high-interest Internet savings account. Their mission is to loan to people who can’t get loans. They’re paying 1% and are FDIC insured. Political hot-potato or not, I’m going to give them a try.

by Bridget Sullivan Mermel