Having That Awkward “Debt" Conversation with Clients

Nothing lasts forever. Unfortunately, many clients don’t believe that. The extended stock market rise led some clients to believe it’s the “New Normal.” Others might have resurrected the expression the “New Economy.” We’ve all heard the expression “Safe as houses.” You know how that turned out. When times are good, many clients take on debt. This is an area where you can provide some advice .

You might think this isn’t your role. You advise on the asset side of the ledger. You also charge fees. When the market misbehaves, people can get touchy about fees. Providing advice on the liability side of the ledger provides the opportunity to save them money. When the fee conversation comes up, you can also talk about the money you saved them, which can be substantial.

When we think of debt, credit cards, home equity loans and margin are obvious examples. If your client has a cash management type of account, their debit card and checkbook may have been borrowing against their assets, setting up a margin loan. If they don’t review their statements, this might be news to them.

Six Things Clients Should Know About Debt

Here are several points to make. You aren’t “calling the client out” about bad behavior, you are taking this opportunity to review things they already know. Let’s assume your client has revolving charge card balances, something outstanding on their home equity loan and has been writing a few too many checks on their investment account.

  • Debt only goes up. The market value of stocks rises and falls daily. The amount of a debit balance only rises, because interest is added on daily. It only goes down when you take deliberate steps to pay off the loan. According to creditcards.com, 38% of Americans carried a revolving charge card balance in 2018. (1) Your client is likely one of them.
  • The easiest way to earn 16% is… According to USA Today, the average credit card interest rate was 16.71% (2). That was written in May, 2018! If your client has idle cash, yet is also carrying a revolving charge card balance, the easiest way to earn 16% is to stop paying 16% to their credit card company.
  • Debt takes forever to pay off. Many people make minimum payments on credit cards. Read your credit card statement. It tells you approximately how long it will take to pay off the balance making minimum payments and a shortened timeline if you make bigger monthly payments. Unfortunately, most of us continue using our cards, running the balances higher.
  • Rockets vs. feathers. When the Federal Reserve raises interest rates, its likely many banks might take a while to raise the rates on savings accounts accordingly. It’s a pretty safe bet the increase in rates is passed onto credit card holders immediately. It’s human nature. You cash checks as soon as they arrive. You don’t pay bills the day you receive them.
  • Margin. If your client buys stock on margin, it amplifies the money they might make if their stocks increase in value. If the stocks fall in price, all the pain is felt by the client as their equity declines. You remember from your Series 7 exam the percentage clients need to sell if they get a margin call.
  • Not tax deductible. Credit card interest hasn’t been a deductible expense for years. According to the New York Times, under the new tax rules, interest on home equity loans isn’t deductible if used to pay off things like credit card debt and student loans. Some key words regarding deductibility of interest are “buy, build or substantially improve” the house that secures the loan. (3) If your home equity loan has been used for personal expenses, you have a problem.
  • Related: Prospecting: The Devil and the Angel on Your Shoulder

    Your advice might be to take advantage of balance transfer offers that feature a low interest rate for a grace period. Your firm might offer credit cards with lower interest rates. You might offer asset based lending at a lower rate. If the market declines and your client’s asset base shrinks, helping them reduce their debt load makes good sense.

    Once again, you are showing your value. They just need to lock those cards up.

  • https://www.creditcards.com/credit-card-news/credit-card-debt-statistics-1276.php
  • https://www.usatoday.com/story/money/personalfinance/2018/05/04/average-interest-rate-new-credit-cards-hits-record-high/577238002/
  • https://www.nytimes.com/2018/03/09/your-money/home-equity-loans-deductible.html