By Bryce M. Sanders

Guess What Doesn’t Decline in Volatile Markets

What a surprise! Financial consultants who entered the business within the last ten years have discovered the stock market can go down! Many clients have benefited from the 10+ year bull market. Clients saw statement values rise almost every month. Some of these same clients started living large, spending more than they earn. They took on debt assuming this was the “new normal” and the good times will last forever. Early into 2020 these clients discovered “paper profits,” better known as unrealized capital gains, can vanish almost instantly. There is a lesson these clients missed: credit card debt seems to stick around forever. It’s time for you, their consultant to have a talk with these clients about debt.

Why Do I Owe So Much?

How did clients with assets suddenly get into the quagmire of debt? There are lots of ways. Some clients are paid with an annual salary plus a year end bonus. They assumed these bonuses would come in forever., enabling them to pay off their accumulated credit card debt with that annual bonus check. In my early days of production as a financial consultant in Brooklyn, NY many Eastern Europeans arrived in the US to start a new life. Some new arrivals came from countries with rampant inflation. Back in their home country, it made sense to buy today if the commodity would cost more next week. They transferred this logic to the stock market, assuming everything went up, just at different speeds. Sound ridiculous? After a 10+ year Bull market, many investors thought stocks only went in one direction. Other people got caught up in “keeping up with the Joneses”, leveraging their investments to buy luxury goods and buying on margin in the hopes of profiting by using OPM or “Other People’s Money.” That home equity line of credit (HELOC) looked so tempting.

Your Friend Is Overweight. You are concerned. What Do You Say?

Let’s leave our discussion about debt for a moment. If someone was overweight, as their friend you certainly would not try shaming them into losing weight. You would try to get them to join you in positive activities, like exercise classes or giving up alcohol for a month. You might ask how their annual physical went. You would be supportive and tactful.

Let’s get back to clients and debt. As their consultant you need to exercise this same tact when talking with your clients about debt. The consultant must be direct. The clients need to understand they must take action. The clients and consultant need to make a plan together. This was part of the initial financial planning process and should be discussed during the periodic plan reviews.

Clients Need a 12 Step Program

But wait! This isn’t getting any insurance or investments sold. As their consultant I’m not ringing the cash register. Why should I bother? This is a clients’ problem that will only get worse. Bringing this problem front and center will help the clients, bonding them to the consultant. It should bring in more assets and referrals, because this clients can see their consultant is looking after their best interests.

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4. Start by gathering the facts. As their consultant, you should delicately ascertain how much debt they are carrying. This includes credit card debt, the outstanding balance on their home equity line the outstanding margin balance on security accounts held with you along with those held away. The list the consultant is preparing should also include car loans and mortgages on real estate. The consultant should not show any alarm or surprise. This will be a difficult exercise for the clients.

Learn about the interest rate on the clients’ different debts. It’s not unusual to be paying 15%+ on revolving charge card balances. The rate on the clients’ home equity line might be pretty low by comparison. The exercise of organizing balances and interest rates may be eye opening for your clients.

What is the interest rate the clients are earning on free cash balances and savings? These cash reserves might be held at the consultant’s firm. The clients might maintain accounts at a bank or competitor. Learn how much cash the clients have on hand and the interest rates paid. The rate might be in the 1% range. That 1% is usually a taxable rate of interest.

Do your clients know how they can earn a 15% return? The easiest way for your

clients to get a 15% rate of return is to stop paying 15% to their credit card company. If it’s practical, the consultant should suggest the clients use some cash to clear those credit card balances.

Is this a time when balance transfers make sense? Your firm might offer credit cards. (especially if it’s a bank.) If your clients have multiple cards, you might learn card #1, charging 15% will give them a rate on a balance transfer of 0% for a six-month introductory period if they transfer the amount they owe from credit card #2, currently charging them 15%. The clients should be aware, credit card #2 will likely have some penalty charge for making this move.

Have your clients shopped around, comparing credit card rates? Not all cards charge 15%. The clients should do some research to learn if other credit card providers are offering lower rates. It might make sense for your clients to get a new card and transfer balances over, assuming the credit limit on the new card will accommodate that amount.

Clients need to learn the pay yourself first strategy. These steps should have reduced the clients’ monthly outlay for credit card interest payments. This means the clients should have extra money in their budget. The clients should use that money to make principal payments, reducing outstanding charge card balances. The best place for your clients to start is to direct extra cash to those cards charging the highest interest rates.

Your clients must hide those cards! Most members of the middle class can get through life with one Mastercard and one Visa card. Your client should lock the rest of their charge cards in a drawer. If your 9. 10. 11. 12. The clients should pay down their charged expenses every month. American Express cards have been popular for years. The rationale is the cardholder makes purchases during the month, settling up the entire bill at the end of the month. Generally speaking, this type of Amex card isn’t charging any interest. A good strategy for your clients is to make this type of card their primary card for monthly spending,

paying in full when the bill arrives. Do your clients understand the expression “cash is king?” It has several meanings, but the consultant is focusing the clients’ attention to their spending. When the clients go out for drinks after work, settling up their proportionate share of the bill in cash keeps them aware of how much they are spending. It also prompts them to leave the table, because your clients know

how far the cash in their wallet will stretch. Here’s a good habit: Keep a journal. Every night, the clients should write down where they spent money that day and how much. The little voice in the clients’ head will say “Did I really need to buy that?” or “What were you thinking?” Weight loss programs often work because counting or weighing keeps the program participant

accountable. The consultant should confirm the clients understand how margin works. This may be the most important lesson for your clients. People have heard the expression “Money talks. It says goodbye.” When clients buys stock on margin in a brokerage account, they are asking the firm to loan them money to buy more shares than that clients could otherwise afford. If the stock moves up, that’s great! It’s catastrophic if the stock moves down because the losses all come from the clients’ side of the equation. The loan only goes down when the clients add fresh money or pays off the margin balance entirely. If the stock declines too much, the firm will ask the clients for more money (margin or maintenance calls). If the clients don’t have it, stock must be sold. This often happens at the worst time.

People who are overweight sometimes take extreme steps like liposuction. It’s healthier to lose weight gradually. That’s the strategy the consultant is recommending to the clients concerning debt reduction. Get the interest rate under control. Help the clients get their spending under control or at least the clients should be aware of how much they are spending. The clients should use money saved to pay down debt.

Bryce M. Sanders Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book “Captivating the Wealthy Investor” is available on Amazon.

Contact: (215) 862-3607 brycesanders@msn.com www.perceptivebusiness.com

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