By Nathan Munits, Accredited Investment Fiduciary (AIF®)

New research from Prudential finds Americans are questioning college debt more than ever before.  While a college education is still highly valued, many graduates end up questioning whether the cost of attending college is worth the financial sacrifice.

Among the findings:

• Only 1 in 4 surveyed graduates who borrowed for college call the debt they incurred “good debt.”
• Only 4 in 10 say that borrowing for college proved worthwhile.
• Many students borrow without understanding the terms of their debt.
• Student loans are causing graduates to delay or forego saving for retirement, building up emergency savings, or buying a home.

Read the full study here.

The student debt overhang is a big reason more kids are living with their parents later in life or receiving financial help from their parents into their late 20’s and 30’s.   However much of this “epidemic” is avoidable by students and parents simply making better educational choices.

If you have a child who will be selecting a college in the next few years, you will be soon be faced with a potentially challenging conversation.   Their first choice school may have a total cost of $60,000 per year or more!   As a parent you may be able to help some and financial aid may play a role too.   However, statistics suggest your child will likely subsidize any shortfall with a massive amount of debt.

Research has shown that while college has gotten much more expensive to attend over the past 10 years, investment in actual education has not increased that much.  What has increased has been administrative expenses and improving the college ‘experience’.   Many campuses seem more like high tech spas.  They now often compete based on which one has the most compelling amenities rather than which provides the greatest value.

Colleges however are not entirely to blame for the inflationary pressure.  They simply provide a service that reflects the demands of their student clients.  Only when students and parents begin demanding better educational value will colleges start to compete by keeping costs down.

Seventeen year olds are generally poorly equipped to make astute financial choices.   They often end up attending schools that will saddle them with debt they can hardly appreciate.   It is only once they graduate and enter the real world do they have to face up to the consequences of their decisions.

If you know a high school student, or the parent of one, have them read this study.  It’s a great first step in building financial responsibility and ultimately having financial success in life.

By Nathan Munits, Accredited Investment Fiduciary (AIF®)

 

Over the past year you might have seen articles about the Department of Labor’s newly issued Fiduciary Rule.   This rule, which went live on June 9^th, obligates financial professionals who work with retirement accounts such as 401ks or IRAs to work in the client’s best interest.   While this sounds like a no-brainer, it was a long, hard road to get this rule implemented and a lot of opposition to it still remains.

First some background.   For as long as finance has existed banks, brokerages, insurance companies and other financial institutions have been creating and selling investment products to the retail public.  All along investors simply assumed that their sales representative was obligated to work in their best interest.  However, in reality salespeople and ‘brokers’ operate under what’s called a “suitability standard” which means that if they are weighing two similar investments, they can recommend the one that pays them a greater commission even if it will hurt the client’s overall returns.

If this comes as a surprise, consider a car dealer.  They have no obligation to send you elsewhere if a different kind of car would be a better choice for your situation.   That is the nature of sales.

Over the past 30 years however many financial professionals looking to have a less conflicted relationship with their clients broke away from brokerages and banks to become financial ‘advisors.’   Like attorneys or accountants, fee-based advisors do not have to sell a product to make a living.   The client pays the advisor for their time and professional guidance.   As such, the client can expect the advisor to be objective, transparent and put the client’s interest ahead of their own.   This standard of client care is commonly called a fiduciary obligation.

More recently, fee-based advisors began lobbying the government and financial regulators to require all investment professionals to act in their client’s best interest.   A broad coalition of consumer groups such as AARP also joined in this effort.   Indeed, for much of the past decade, the SEC worked on a fiduciary rule but could not push it forward in the face of intense opposition by banks, brokerage houses and other product manufacturers.

However, in 2016, with encouragement from then President Barack Obama, the Department of Labor made an end-run around the SEC and Congress to create its own Fiduciary rule that applied only to retirement accounts (which courts deemed to be within their purview).   Despite nearly unanimous opposition by Republicans, including President Donald Trump, the rule went live on June 9^th, 2017.

While the DoL’s Fiduciary rule is now law, it is not perfect and much uncertainty remains.  There are complicated exceptions and its implementation has been extremely complicated and expensive.  It still does not apply to non-retirement accounts.  Many valuable investment products which are currently sold only by commission may now go away.  It could discourage advisors from working with smaller clients.  Meanwhile, the SEC has restarted work to create a more comprehensive and less complicated fiduciary rule.   The possibility also remains that Congress may void the rule altogether.

Despite all that, the fiduciary ‘cat’ is now out of the bag.   Financial institutions and professionals have begun to make the necessary adjustments.  Local politicians have also started to step in.  For instance, on June 2^nd the state of Nevada, with a Democratic Senate and Republican Governor, passed a fiduciary rule of its own that other individual states are likely to copy.

Most importantly however, the public at large now recognizes the importance of holding their advisor to a fiduciary standard.   More and more clients are asking their financial professional if they are a fiduciary.   That in itself, we have no doubt, will ultimately create much better outcomes for investors and savers.

Perhaps if Congress or the SEC mandated that all financial advisors simply acknowledged on their business card whether they are a fiduciary or not, it would save a tremendous amount of time and money.   Clients would be better informed to choose the advisor that is right for them and advisors could work however they wanted.

But, while the political battles continue, rest assured that Longwave has been and will always provide advice on a fiduciary basis.  We will disclose conflicts of interest, be transparent with fees and expenses and put client’s interests ahead of our own.   It’s no conflict to recognize that our success is 100% predicated on our client’s success.