Debt: Clients in Trouble Need New Tactics :by Lisa Holton
BIHARILAL DEORA
A good read thought not directly relevant
Source : http://www.fpajournal.org/CurrentIssue/TableofContents/DebtClientsinTroubleNeedNewTactics/
Roberta Lee-Driscoll, a CERTIFIED FINANCIAL PLANNER™ professional
based in Honolulu, Hawaii, has always split new clients into two
camps: "Some have a goal to meet and others have problems to
solve."
Yet those with goals to meet have rarely been this challenged, and
those with problems to solve have never faced such threatening
obstacles. That's because in a time of dropping employment and
still-unsettled markets, Lee-Driscoll joins many other planners in
dealing with new, and even a few longtime, clients shouldering
significant debt.
Some are facing genuine crises that have triggered out-of-control
borrowing—sudden or lengthening unemployment, a medical
emergency that's left them with thousands in uninsured bills to
pay, shifting markets that have left retirement funds in
disarray.
Yet most planners point to years of bad behavior catching up with
these individuals, usually linked to an excess of credit card and
home-equity borrowing. As with most planners, Lee-Driscoll sees the
severest emergencies among newcomers to her practice, clients
ranging from their 20s to their 60s, who have never planned or
managed their money in a realistic sense.
"It's so easy to run a lifestyle that is way beyond what their
salaries can control," says Lee-Driscoll. "Yet the clients with
debt problems have larger debts than you would have seen two to
three years ago. Someone with $10,000 [in debt] a few years ago is
now facing $30,000. I'm seeing people with as much credit card debt
as $80,000."
By mid-2009, Bernstein Research reported credit card defaults at
high levels thanks to continued high unemployment and
"deteriorating macro [economic] conditions."
Planners are justified in feeling battle fatigue not only after
such a tough 12 months, but after nearly a decade with clients
seeing very little portfolio growth overall. According to a survey
earlier this year by Spectrem Group, only 36 percent of
millionaires think their financial advisers performed well during
the market turmoil of the past year, and only 14 percent said they
would increase their use of financial advisers in the future. This
disenchantment from planners' most loyal and lucrative customer
base signals a sea change in the planning industry that will likely
change the way many planners do business going forward.
With these conditions, planners need to build capabilities in two
areas—better analysis of client behavior and development
of a toolkit of localized solutions for clients who need to get out
of immediate trouble.
The Behavioral Conundrum for Planners
A September 2008 survey by the American Psychological
Association found that 80 percent of Americans said that money and
the economy were major stressors in their lives—an
increase of 14 percent from April 2008. A February 2009 article in
Counselor magazine, a publication for addiction treatment
professionals, described the current state of the debt crisis this
way: "With the accessibility of easy credit, no down payments, and
interest-only mortgages, the average American seems to have become
a credit junkie. And just like an addict who has run out of
resources, the average American is hitting a financial
bottom."
The Counselor article adds that "money disorders are maladaptive
patterns of financial beliefs and behaviors that lead to clinically
significant distress, impairment in social or occupational
functioning, undue financial strain, or an inability to
appropriately enjoy one's financial resources." In most cases, the
most pervasive and "chronically destructive" financial behaviors
"are rooted in painful emotions related to past relationships and
events."
Nearly all the advisers and mental health professionals interviewed
for this story believe that planners will need to do a better job
in the future of investigating what clients are saying—and
not saying—about what they're doing with their money on a
day-to-day basis. Simply, planners will have to pinpoint root
causes of money behavior with every client they have.
The basic financial planning rule is, "Get to know your client,"
says Lee-Driscoll. "The bottom line is that you can help them
control spending, you can find them ways to get control of their
credit card debt, but once they're out of regular contact, they're
just going to rack it up again. If I can't figure out why they are
in such bad shape, there is no solution. We need to be about root
causes."
"Food, sex, money. Everybody's got a trigger," says Laura Davies, a
psychiatrist based in San Francisco who, like many of her peers, is
spending much more time talking to her patients about money these
days. Like most therapists interviewed for this story, Davies notes
that mental health professionals hear a lot of what planners only
wish they could hear—the emotional reactions and
motivations that personal experience and economic conditions can
produce.
Shane Perrault, a Silver Spring, Maryland, psychologist, has worked
with financial planners in the past on estate issues—he
counsels special needs children and their families—but
finds that they often fall short with regard to right brain skills
that could tell them so much more about the people with whom
they're dealing. "I think there's a natural barrier for people in
finance to go too far into the touchy-feely end of understanding
money behaviors," Perrault says. "It's not like they don't ask the
tough questions, but there's a sense that moving into the emotional
and behavioral realm might be going a bit too far, and for some
people, that's exactly where the answers are."
The Difficulty in Facing Reality
Matthew Reading, a CFP practitioner at MTR Consulting in Austin,
Texas, says his longtime clients have not gone unscathed with the
past year's market turmoil, but the real eye-openers are the
referrals and the do-it-yourselfers who have finally given up and
come out of hiding to get some help.
"I've lived in the same town for a long time, and I know people
with varying economic sense. I'm seeing people coming in who are in
their 50s who have been investing on their own and now they're
asking if they can retire. Or they're sending in kids, relatives,
and friends who are now realizing that big mortgage was not a good
idea or that they've made some other huge mistake with credit.
Everyone on the financial scale of life is being tested right
now."
Peggy Fisher, a CFP certificant and certified estate and long-term
care adviser based in Los Angeles, has a solid, long-term client
base as well, but she's been taking a lot of referrals from
bankruptcy attorneys who don't have the time or ability to reset
the spending, saving, and living priorities of their clients. They
send those clients to her for a reality check.
"There are an incredible number of scams out there right now," says
Fisher. "We're bombarded out here with ads that say bankruptcy is
the best idea or it's something that can be avoided if you pay a
fee to this or that service. These are clients who come to me not
convinced of where the attorney says they are, so we do a cash flow
analysis and I can say, 'This is where you are. If you don't do
something now, in 30–60 days, the bank is going to take
your house and take control of your life.'"
Fisher says she's working with newer clients who are not only in
trouble, but still clueless about the behaviors that got them
there. She offered an example of a successful couple in their
30s—the husband a photographer, the wife a
model—who had seen themselves as wealthy and spent
lavishly on themselves and others.
"They were generous donors to various charities. When the market
plunged, the husband realized that he couldn't control his wife's
spending and things were heading down fast. But I can always trace
it back to where they went wrong. They had a kid three years ago
and couldn't make that connection that starting a family accounted
for the biggest change in their spending," she said. "You hear a
lot of stories like that."
As clients start waking up from the financial nightmare that was
the first decade of the 21st century, advisers will obviously have
to become better crisis planners. Industry watchers say planners
will have to become better networkers in their local communities to
find qualified, face-to-face experts in lending, human resources,
job recruitment, insurance, and other products and disciplines that
are not precisely in the sweet spot of what a planner might do.
Providing the Emergency Tactical Solutions
As existing clients and newcomers work to rebuild their
financial fortunes, planners need to widen their knowledge and
create a broader support system to serve them. Some ideas:
Get backup for mortgage emergencies. Many financial
planners do not work day in and day out in the real estate
industry, but they need a collection of local experts in lending,
bankruptcy, and estate issues for when a client shows up with a
foreclosure notice or a threat to cancel or revise a home equity
line or loan. In that case, the planner can provide an emergency
referral within that institution for emergency assistance. Louis J.
Schwarz, a CFP certificant based in Bethesda, Maryland, has advised
some clients who anticipate difficulty paying their mortgage for
any reason to rent out rooms in their residence to responsible
people they've screened, as a way to help manage those future
payments.
Build a database of local credit support agencies you
trust. Elisabeth C. Plax, Ph.D., CFP®, of Plax
& Associates Financial Services in Beachwood, Ohio, does not
renegotiate credit for clients but regularly recommends
organizations and nonprofits that can. One is the Consumer Credit
Counseling Service of Cleveland, and the other is the United Way.
"The Consumer Credit Counseling services provide free counseling in
most communities around the country, and I constantly have to
remind clients that they should never go to the ones they see on TV
because they have to pay for those services," says Plax. "But I
also find that United Way has reliable listings for credit support
agencies and related services in most cities."
Always start with expense tracking. Like most
planners, Lee-Driscoll makes her clients present their credit and
checking statements and then fill out a fact finder on which they
report what they think they're spending on various items.
Lee-Driscoll makes sure they start tracking spending on Quicken or
some other tracking software or system. "People talk about
budgeting but you can't effectively budget until you get a handle
on spending, so that's the first step," she says. One of her most
effective tricks is to take a client's initial assumption about
what they're spending on nonessential items such as restaurant
meals or clothing or shoes and tell them to put that amount in cash
in an envelope and use only that cash source to pay for those
items. "That money will last only 10 days out of that first month.
By the third month, they're closer to a match. It's all about
behavior modification and understanding what people are really
spending. The driving force in our financial lives is instant
gratification, and this is just one exercise that forces people to
look at that and change that behavior." She instructs clients to
work with only one envelope at a time so clients can get a handle
on overspending one category at a time.
Make sure clients understand the tax consequences of
tapping various assets. Plax makes sure her clients have
an emergency fund as well as a diversified portfolio, but for those
in tight straits who have to tap qualified accounts, it's essential
to work with a planner to minimize both tax and investment
loss.
Never assume what clients know about saving and
spending. It makes sense for planners to record everything
they know about money-saving and spending tips and make that
information available to clients, either on paper or online. Many
clients don't know the best days to buy certain items—for
instance, gas on Wednesday (before prices go up for the weekend)
and cars on Monday (after heavy weekend traffic dissipates). Basic
money-saving education isn't being taught in the home, and society
isn't supporting those ideas, so the education function often falls
to the planner. It's best to start saving these ideas and sharing
them regularly.
Counsel clients on simple money-making
opportunities. Schwarz believes that clients with general
debt concerns need to be counseled to at least consider the
benefits of taking on odd jobs, selling unwanted or unneeded home
items, or perhaps taking on a second job to help bring their
finances under control. "I tell people to take on jobs in their
immediate communities that don't involve a big investment in
transportation, clothes, or other work-related expenses so they are
able to keep more of what they make," Schwarz says. "But if they're
concerned about their friends seeing them, perhaps they should find
a way to work a job outside the neighborhood."
Consider behavioral training. Whether it's a
specialized planning industry workshop on how to better understand
client motivations or a lunch with a local psychologist or
psychiatrist who deals regularly with money issues, it makes sense
for planners to better understand how humans behave with money, and
generically, what kind of stories therapists are hearing. Planners
are not therapists, but they can benefit enormously from
understanding the investigative techniques therapists bring to
their work. It might also make sense to partner with certain
trusted therapists on a two-way referral policy to make sure
clients in need have access to those services.
Outsource and cross-refer. Though many planners may be
licensed to manage and invest funds, now is a good time to reassess
whether that part of the business might be better done by someone
else so more emphasis can be placed on the planning function. The
same goes for referring clients experiencing depression or panic
over their financial circumstances to qualified mental health
professionals or at least encouraging clients to consult their own
friends and associates to get this help.
Be ready to reset retirement expectations. Schwarz
notes that much of his e-mail consists of clients worrying "My
[retirement] money is going to run out in five years." He says it's
time for clients to sit down and plan for a better-paying job or
career once the economy recovers, and take time to look
realistically at their current retirement plans and set a new plan,
even if it means retiring significantly later.
The New Behavioral Planning Era?
The 2008–2009 market debacle has rekindled some of the
oldest arguments about portfolio management—look at the
recent rush to active management in a variety of investment
products, including ETFs. Doug Lennick is a CFP certificant
formerly with Ameriprise Financial and today managing partner of
Lennick Aberman, a Minneapolis-based consulting firm that
specializes in training planners to do a better job of querying,
assessing, and monitoring client behavior. He believes that
planners will have to become more "active" in terms of
investigating their clients' actions and needs—getting the
right training to dig deeper with questions that go beyond the
typical risk tolerance questionnaire new clients fill out for their
first visit.
Lennick doesn't argue that planners need to become
therapists—but they need to become better acquainted with
the emotional drivers in their clients' lives and for that matter,
the emotional drivers in their own business practices.
"Markowitz, after all, was just a theory. Human behavior is the
factor that skews traditional theories of portfolio management, and
we've certainly seen a lot of that lately," says Lennick. "When our
behavior is stimulated from outside forces, you find emotional
intelligence taking precedence over market intelligence. That's
dangerous. Emotional intelligence sacrifices accuracy for speed.
And that's why you'll find clients begging to get out of the market
when they should put more money in and vice versa."
James Barnash, CFP®, a former FPA president and now a
practice management consultant in the Chicago area, says planners
need a deeper understanding of their clients' values and goals, and
that those views are likely to be knocked around by events. "In
2000, we had planners and money managers advising clients to buy
into tech stocks at the top of the market. In recent weeks, we've
seen people still going to cash at a time when they might be
picking up the best bargains the market will see for years," says
Barnash. "Planners not only need to be intimately knowledgeable
about their clients' goals but about ways to stop sudden movements
that can damage their finances long-term."
Barnash, who has worked with Lennick, talks about a technique
called the "freeze game," a way for planners to slow down the
action so both sides can review a client's long-term goals and make
sure those values are being followed. By pausing the discussion on
the phone or by agreeing to get together at the earliest
opportunity to meet, planners can get clients to get over their
panic moment and review the circumstances that might cause a sudden
divergence from the client's plan.
"A client calls and they're angry after another market dip and they
demand to get out now, no matter what the circumstances," explains
Barnash. "Planners can't just say 'no, stick to the plan.' They
need to better understand what other drivers might be at work here.
It might not be all about the panic raised by what they see on
television or what their friends are worried about. There might be
additional stressors like job fears or troubled relationships
between spouses over money or other problems at home. A planner
needs to get the client to stop and think their money actions
through and explain them if they can."
Exploring behavioral cues and actions isn't meant to replace
traditional financial planning, says Barnash. It's just adding more
skills to the toolkit that can help planners become better at their
jobs.
Therapists Are Reaching Out to Planners
Mary Gresham, an Atlanta psychologist, has included financial
questions in her patient intake interview for the better part of a
decade. "A huge percentage of my younger patients were coming into
my practice with credit card or student debt, and money was always
a critical factor in the way they handled and discussed their level
of stress." Gresham will refer patients with their permission to a
group of financial planners she has used for years in her practice
as a sounding board. "These are experienced people with good
credentials and significant experience," she explains.
"We refer back and forth, and I've worked with these people over
the years based on their reputation," says Gresham. "We're very
careful to make the patient the decision maker in what we can and
cannot share with each other." The scope of any discussion
between Gresham and any financial planner working with one of her
patients has to be described and approved in writing by the
patient.
"The best decisions in life are made with both logic and
emotionality. You need to engage both systems to solve problems,
particularly with money," Gresham says.
Richard Shadick, Ph.D., director of the Pace University Counseling
Center and adjunct professor of psychology at Pace, has worked with
financial planners occasionally when money issues are at the center
of a patient's therapy, and does so, like Gresham, only with
written permission from the patient for referrals and
consultations.
"I always talk about the implications of bringing someone else into
our relationship, because even though the three of us are not
sitting together talking, it does change the relationship. If the
patient agrees he wants to see a planner, he or she always signs a
release indicating that I supplied that referral information,"
Shadick says. As for conversations directly between financial
planners and therapists, he explains that it is usually a "short
and discreet conversation that takes place only once, for the
therapist to give some guidance to the planner. It's a momentary
relationship at best, with permission, and no interference from
that point forward."
Conclusion
Planners will be facing a prolonged recovery period for all
their clients in the coming months, even the ones who have taken on
minimal debt but suffered substantial investment losses in the
recent downturn. Widening the range of local debt-assistance
resources will certainly be necessary for planners, and many will
have to broaden their role as teachers for basic smart financial
behavior.
Says Lee-Driscoll: "I think everyone's going to have to return to
the core values many of us learned from our parents. They worked
like crazy to build what they had. People spend and borrow with
this idea that they're going to get an inheritance from parents or
relatives to help them pay it off," she says, adding that planners
will have to redouble their efforts to convince clients not to
focus on future windfalls, but instead getting back to "work,
saving, and spending only what we can afford."
Lisa Holton heads The Lisa Company, an Evanston, Illinois-based writing, editing, and research consulting firm founded in 1998. Her new book, For Members Only: A History and Guide to Chicago's Oldest Private Clubs, was published in June 2008 by Chicago's Lake Claremont Press.
Sidebar
It's Not the Question, It's How You Ask It
Richard Shadick, Ph.D., director of the Pace University
Counseling Center and adjunct professor of psychology at Pace,
deals with money issues in his private practice and believes
planners can benefit from an examination of how therapists
investigate and disarm individuals who keep their problems deeply
under wraps.
One of his suggestions is to adapt the therapeutic techniques
therapists use with patients at potential risk of suicide, one of
the toughest risks to detect in mental health. He points to some
specific techniques created by Shawn Christopher Shea, M.D., a
medical doctor who has developed a system of asking questions to
get patients talking about their degree of willingness to commit
suicide.
Why is this relevant for financial planning clients? Because money,
next to sex, promotes some of the most deeply hidden emotions and
motivations we have, and we're not likely to give this information
up easily. Shea's six interviewing strategies for suicide risk
assessment focus on pulling detail from the minds and mouths of
clients that they might not otherwise offer to the therapist
willingly. These strategies are derived from Shea's 1999 book,
The Practical Art of Suicide Management:
- Focus on the behavior, not the incident or problem. The purpose here is to ask enough questions that draw out the detail of how an individual started doing himself or herself financial harm. In Shea's context, a therapist wouldn't ask the question, "Why didn't you kill yourself?" but would ask, "How many times did you go to the parking garage," or, "How many inches were you from the ledge?" The details of behavior can lead the questioner closer to why the behavior is happening in the first place.
- Diminish the shame behind the behavior. Money issues can be an enormous source of shame that might go back to childhood. Shea's procedure attempts to remove shame from the equation by steering around the complaints of others to focus on what hurts the patient. A planner who might ask, "What are you doing wrong with your money?" might recast the question to ask, "What makes you nervous about money?" and see where that line of questioning goes.
- Overblow reality so the client can rein it in. Humans have a natural tendency to correct things said about them that they feel are wrong. Planners might use overblown suggestions to get clients talking more specifically about reality or problems. For example, a planner might approach a debt question by quoting balance figures that might be wildly above what a client has hinted at, just to give the client a chance to add specificity. It's a way to get clients to admit and detail their problems without demanding specific answers.
- Explore consequences without blaming. Instead of asking, "Have you thought about how your bankruptcy or foreclosure would affect your kids?" it might be a better idea to ask clients what they know about the process. It's better to focus on facts and detail rather than blame for the situation.
- Have you ever thought about…? This is another way to word questions without assigning blame for a situation.
- Normalizing. By starting out a question with the phrase, "Many people have gone through this," or, "Many people say," the questioner immediately suggests that the client or patient isn't alone in his problem, which can make it easier to get specifics.
Regards
Biharilal Deora, CFA, ACA
Cell: +91-988 637 7698
www.linkedin.com/in/deora
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