Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Tuesday, August 31, 2010

It’s Only a Star-t!

If you are like many investors who invest in mutual funds you may put too much emphasis on Morningstar®’s star rating for funds. But is having a portfolio of all five-star funds really the most important thing in constructing a portfolio? Is it the magic potion for a successful portfolio? Do you even need a financial planner to recommend investments for you?

First of all, it’s pretty easy to pick a five-star fund. Just go to Morningstar’s website, click on “Tools”, then “mutual fund” under the “Basic Screener” heading, click the five-star box in the “Ratings and Risk” section and then select whatever other search criteria is of interest to you and voila!, you have yourself a list of five star funds.

Is that all you need to do to be a successful investor? We think not. Surely, it’s better to pick good funds than bad funds, but picking funds is only part of creating a solid portfolio.
You need a portfolio that is broadly diversified across a number of distinct asset classes that are not highly correlated with each other (i.e., their returns don’t move in lock step with each other. - one will be up when another is down, and so on). Picking several five-star funds that are all of the same type doesn’t do much for your portfolio.

Morningstar typically says that the mutual fund rating should just be the start of your search for a good fund. We look at ten to fifteen different factors, depending on the asset class, when we research our recommended funds. In two previous blogs, we outlined a number of factors investors should consider when searching for good solid funds in which to invest (Tips on Picking a Mutual Fund, Parts I and II, February 22 and February 25, respectively).

Can you expect five-star funds to do better than a three-star or four–star fund? In a June 1st, 2010 article in the Wall Street Journal titled “Investors Have Stars in Their Eyes”, by Sam Mamudi, Mr. Mamudi writes: “ The trouble is that investors seem to forget that star ratings are backward-looking, based on a fund’s past performance, and studies have shown the ratings have no predictive value.” It’s not unusual for a fund rated five stars this year, to be rated just one or two stars next year and vice versa.

The article discusses a study that showed during a ten-year period, starting December 31st, 1999, of the 248 funds with a five-star rating at the start of the period, only four retained their five star rating at the end of the period. Morningstar points out that they changed their methodology in 2002 to 48 categories instead of just the four categories they previously used.

Regardless of the criticism of the star ratings, we believe considering funds’ star ratings are a good place to start. In the article, Morningstar points out that higher rated funds typically have lower expenses and lower turnover, factors that bode well for fund performance. Whatever you do, don’t just focus on fund ratings. There are some great three-star and four-star funds out there that have served investors very well over the years.

Sunday, August 29, 2010

Too Young for an Estate Plan?

We’ve all been exposed to a young person who can’t imagine anything bad ever happening to them. They don’t use sunscreen until they have been badly burned. Only old people get skin cancer, right? They drive up behind you with the music from their CD player so loud that your car shakes. Hearing aides are for old fogies, they say! They drive in and out of traffic with reckless abandon. They drive motorcycles without wearing a helmet. They view themselves as impervious to any type of harm.

It’s understandable then, that they would never think of writing a will, let alone consider other estate planning documents. Those are for old people. Yet it may very well make sense for anyone over 18 years old to consider at least some basic estate planning: a will, a healthcare directive and power of attorney, at a minimum.

If one dies without a will (intestate), their estate will be distributed based on the law their state of domicile (jointly held assets, if any, would pass to the joint owner). Most young people have minimal assets to distribute, perhaps only a highly-valued collection of baseball cards, a pet or their car. Some may have some assets they inherited from a grandparent when he or she passed on. Nevertheless, without a will, they may not be happy with how those prized possessions may be doled out, since state laws differ on how those assets should be distributed.

It is particularly important for a young person who is married to have a will. In an article by Daisy Maxey titled “Planning for the Unthinkable” (Wall Street Journal, June 14, 2010), Ms Maxey points out that when one spouse dies without a will, in most states the property goes to the surviving spouse. However, in South Carolina, half the property goes to the surviving spouse and half to children of the deceased. Minor children must go to court to establish conservatorship. If the surviving spouse wants to refinance the house, they would have to seek court approval.

Another aspect of estate planning for the young that was not addressed in the Journal article, is that of the healthcare directive, sometimes called a power of attorney for health care. Several years ago a young woman named Terri Schiavo in Florida was in coma-like state for fifteen years while relatives and friends argued whether or not to cease life support. Had she thought to prepare for such an event, it would have eliminated the undue stress her situation caused her family. With the young so oblivious to risk, just having a healthcare directive, is reason enough to do some basic estate planning.

While it seems on the surface that the young would be difficult to motivate regarding the creation of estate planning documents, the Journal article put a different light on the subject, as the article quoted Peter Bielagus, a former financial adviser, who gives speeches to young people about managing their money: “Broaching the subject of a will is not as difficult as some parents think. Young adults are generally excited about anything that solidifies their recent adulthood, so parents can bury the topic of wills among other financial tasks…, it’s playing to the idea of being an adult.” The bottom line is that basic estate planning for a young adult gets them started on a solid financial foot and gets them thinking about their future and the assets they will acquire throughout their careers.

Wednesday, August 25, 2010

Are Your Parents Prepared?

We recently had a conversation with a married couple regarding the wife’s elderly mother. The wife had attended a meeting with her mother’s financial advisor. Only recently had the mother begun to involve the daughter in the mother’s financial affairs.

The advisor had served as the mother’s financial advisor for years and was recommending some significant changes for the mother’s portfolio that after just a few minutes of questioning on our part, seemed ill-advised, at best. The advisor had not addressed his client’s financial needs or tax situation. It appeared to me that the advisor was not acting in his client’s best interest but rather was motivated by the potential fee he would earn if the mother accepted his recommendation.

The daughter and husband asked questions about the mother’s trusts. It was clear to me that they had little knowledge of the mother’s estate plans.

The point of all this is that as your parents age, it’s important for you to have a heart-to-heart talk with them about their estate plans. This is a difficult topic to bring up, but we believe, is a necessary one.

Some of the questions you need to ask include:

(1) Have your parents done any estate planning?
(2) Do they have wills, trusts, powers of attorney, patient advocate forms?
(3) Where are their documents located?
(4) How long has it been since they have been reviewed?
(5) Are their assets titled properly?
(6) Have they considered sitting down with all of their children to review their
estate plans? (Such a meeting can help to avoid disagreements among siblings
once the parents pass on).
(7) Who are the parents' advisors (attorney, financial advisor. accountant)?
(8) How do they wish to distribute their financial assets and personal assets?
(9) Have they made plans for their funerals? If not, what are their wishes?

Once you break the ice and get them sharing information, it may make sense to offer to go with them to update or review their plans with their advisors. This will allow you to assess whether or not the advisors are really acting in your parents’ best interest. Often we hear people describe their advisor in the following manner: “Oh, my advisor is so nice!” That may well be but is he/she acting in their best interest or their own best interest?

Tuesday, August 24, 2010

Not All Interest Rates are Low

Just when you think interest rates are really low, it was reported yesterday in Monday’s Wall Street Journal that credit card interest rates have hit a nine-year high. Mortgage rates are currently below 4.5 percent and savings account and CD’s are paying next to nothing, yet according to the article, the average credit card rate in the second quarter of this year was 14.7 percent, compared to 13.1 percent in the previous year.

Why the difference you ask? According to the Journal article, “New credit-card rules that took place Sunday limit banks’ ability to charge penalty fees. They come on top of rule changes earlier this year restricting issuers’ ability to adjust rates on the fly.”

The latest rule changes are a result of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (also called the Card Act). These rules have resulted in less flexibility for credit card issuers and essentially forced them to focus more on the risk profile of cardholders. This has made it more difficult for Americans to obtain new credit cards and impacted small businesses, since they use credit cards, in many cases, to fund their operations.

With many cards charging variable rates and interest rates eventually headed higher, credit card rates will only rise higher, down the road.

It’s clear that financial institutions will always find a way to get around regulations to avoid a decrease in their revenue. Representative Carolyn Maloney (D-NY) sponsored the Card Act. In the Journal article, she explains how the Act benefits consumers regardless of the rising rates: “Better that consumers should know up-front what the interest rate is, even if it’s higher, than to be soaked on the back-end by tricks and hidden fees.”

If you are like many Americans, who are carrying high credit card debt, it has become even more imperative that you focus on paying it down as soon as possible. The Journal article reported, for example, that Capital One Financial Corporation increased the rate on its Classic Platinum for Young Adults card by 2.9 percentage points just prior to the Card Act limits taking effect. The old rate was 16.9 percent! If you are carrying an ongoing credit card balance and paying that kind of interest, you need to do everything possible to cut discretionary spending and reduce your credit card balances.

Friday, August 20, 2010

Happiness Requires More Than Money

Note: We originally wrote this article in April 2008. With the current, continuing economic crisis, many are now adopting a simpler lifestyle reminiscent of years past. We felt this article, updated to reflect some changes since we wrote it, might be of interest to our readers who may be considering a return to the “simpler life”.

Everyone seems to think that having more money will make them happier. Clearly, everyone needs a sufficient amount of money for food, shelter, health care, education of their children and so on, but do they need to be rich to be happy?

To the contrary, Sophocles, the Greek philosopher warned of the perils of money: “Of evils current upon earth, the worst is money. Money ‘tis that sacks cities, and drives men forth from hearth and home; wraps and seduces native innocence, and breeds a habit of dishonesty.”

In his book Your Money and Your Brain (Simon and Schuster, 2007) Jason Zweig, currently a weekly writer for The Wall Street Journal, quoted the results of a survey of 800 people with a net worth of at least $500,000: 19% agreed with the statement that “Having enough money is a constant worry in my life.” Zweig went on to say that among those worth at least $10 million, 33% still worried about money. He stated: “Somehow, as wealth grows, worry grows even faster.” Fewer than half of those with a net worth of $10 million felt that as they accumulated more money they became happier.

Working people always want a raise but studies show that the satisfaction we get from a raise is very short lived. After all, in most cases people feel they deserve more than they are being paid. Therefore, when they finally get a raise they often still have a feeling that they’ve been short-changed, since raises are seldom, if ever, retroactive.

One of our favorite columnists, Jonathan Clements, previously wrote a weekly column for the Wall Street Journal. In his final article, he focused on the reason people save and invest. He said: “You save now so you can spend later.” He went on to say: “People dream of endless leisure and bountiful possessions. Unfortunately, after a few months, endless leisure seems like endless tedium.” And, people quickly tire of the material things that money can buy. Jonathan went on to say: “The ’rich life’ of popular imagination is no great shakes.”

So what does money do for you? Clements points to what he believes are three key benefits. The first is that if you have money you don’t have to worry about it. The second is that money can make it possible for you to pursue your passions. And the third is that having money allows you to spend more time with friends and family.

What is somewhat ironic (and Clements pointed this out), is that the second and third benefit of having money don’t really require money to achieve. As we noted in our past article titled “Rethinking Retirement” (available on our website in the “In The News” section), if we pursue a profession that we truly love, then how much we make is less of a concern. If we truly love what we do, we can continue to work beyond the common retirement age of 62 to 65. Doing so reduces the amount of money we will need for retirement by reducing the number of years in retirement and at the same time increasing the amount we will receive from Social Security. With less stress in our work life and less need to work long hours, we can spend more time with friends and family.

Regardless of the evidence that there’s more to happiness than being rich. People will still continue to be slaves of the mighty dollar. Perhaps Sylvia Porter, famed economist and journalist (1913 - 1991), summed up best the dichotomy of views about money: “Money never remains just coins and pieces of paper. Money can be translated into the beauty of living, a support of misfortune, an education, or future security. It can also be translated into a source of bitterness.”

Thursday, August 19, 2010

Should You Consider Refinancing Now?

Today, interest rates on fixed-rate 30-year mortgages were reported to be 4.42 percent, the lowest rate we’ve seen in years. So, this begs the question: “Should you consider refinancing your home mortgage loan?” Before even analyzing this, in general, you have to have at least a 90% loan to value (current market value) ratio in order to qualify for a refinance. For many people, especially those who bought their houses in the last 10 or so years with little money down, refinancing is not an option, unless they have somehow increased their equity position by making extra payments or by improving the property.

In the past, when mortgages were not as large as they are today, the rule of thumb for refinancing was that you needed to be able to obtain a new mortgage with at least a two percent lower rate of interest. Now, with mortgages typically larger (although in many cases not as large as a couple of years ago, due to the decrease in home prices), many advisers say that a one percent lower interest rate can justify a refinance.

The bottom line is: How long will it take for you to recoup the cost of obtaining the new mortgage (i.e., cover the closing costs: points, appraisal costs, etc.). If it will take only a year or two, it’s probably worth considering. If it will take more than a few years, it may not be appropriate. Also, if you only plan to be in your home for only a few more years, refinancing is not likely justified.

There are many reasons that might motivate you to refinance besides obtaining a lower interest rate:

(1) If you’ve had your mortgage for some time and the payment is constraining your budget, refinancing for another 30 years could lower you payments significantly and give you some breathing room.
(2) You may currently have an adjustable-rate mortgage (ARM) and are concerned about the real possibility of rising interest rates. A fixed-rate mortgage at today’s low rates could protect you from the threat of rising interest rates many worry are not far down the road.
(3) You may have improved your credit rating significantly. Refinancing could give you a significantly lower rate than you currently are paying due to both the current lower rates available and the fact that you have improved your credit worthiness.
(4) If your income has increased significantly, (you received a raise or your spouse went back to work), you may want to refinance to take advantage of the lower rates and to take out a shorter mortgage (15 years instead of 30 years). The total cost of a fifteen-year mortgage is substantially less than the total cost of a 30-year mortgage even though the payments may be higher.
(5) If you are currently paying for private mortgage insurance (PMI) because you couldn’t put 20% down when you took out your mortgage but have since made major improvements to your home or prices have increased such that your equity is now more than 20%, you should seek to have the PMI coverage eliminated. A current appraisal will be required. If your lender won’t eliminate the PMI, you can consider refinancing with another lender.
(6) If you have significant other debt, you may want to refinance to consolidate your debt and take advantage of the fact that home mortgage interest is deductible while other personal loan interest is not. This may be OK to do if you are a very disciplined person and can avoid racking up new debt. In many cases, however, people have a lot of personal debt because they are in fact not disciplined. We do not generally recommend refinancing to consolidate debt.

If you do decide to look into refinancing, get quotes from several lenders. Check out each lender with your state financial regulator and Better Business Bureau. Ask for a good faith estimate, which shows what all the costs of closing are and how much the lender will make. If there are no closing costs, the loan will typically have a higher interest rate. Determine what you will have to pay at closing. If closing costs are rolled into the mortgage principal, it will reduce your equity and take you longer to pay off the loan. Request a re-issue rate on your title insurance.

Your monthly savings will be equal to your new payment (Principal, Interest plus PMI, if any) minus your current payment. The payback period is obtained by dividing your total closing costs by the monthly savings. The longer the payback period, the less desirable it would be to refinance.

You also need to consider the total cost of refinancing. If the cost of the new mortgage plus what you’ve already paid on the current mortgage is more than the total cost of the original mortgage, then refinancing is generally not advisable. Whatever you do, don’t let just one lender talk you into refinancing based on monthly payment alone. You need to look at the whole picture and get quotes from at least three providers.

Tuesday, August 17, 2010

No Road Will Take You There

There’s an old saying that “If you don’t know where you are going, any road will take you there.” With your finances, it’s more like: “If you don’t know where you’re going, you’ll likely get nowhere.”

It seems to us that more than a few Americans plod along day to day, without any real plan in mind regarding how to achieve their goals. In many cases, they don’t really have any defined goals, let alone plans to achieve them. They are just living paycheck to paycheck, paying their monthly bills, saving little, running up credit card debt, buying the latest toy or new electronic gismo, while running up cell phone and cable bills of $100 to $150 a month.

To get ahead, one has to have some specific financial goals that guide their spending and saving. There are so many “nice to have things” out there that if one doesn’t have their spending prioritized and use goals to guide their spending, they will likely end up with lots of nice things that provide short-term satisfaction and many regrets regarding their unfulfilled life.

One of the first things we do with clients is to ask them to fill out our Life Planning Questionnaire, to help them sort out what they really want out of life and what they really value. For married couples, we ask each one to separately fill out a copy and then get together to discuss each other’s responses. This helps them to better understand what is important to their partner and lays the foundation for establishing and prioritizing their financial goals. One question we ask really gets at the heart of what’s important in their lives: “If you only had two days to live, what would be your biggest regret?”

Once you’ve spent the time to define what’s really important to you, the next step is to track your spending to see where your money is currently going. You’ll probably find a number of expenses that have no relation to your goals and can easily be cut out. Is that morning latte really necessary? Perhaps a “staycation” (stay-at home vacation) could save you a bundle. Or maybe you don’t really need that fancy cell phone with the expensive digital service plan.

Take a moment to think about how you’re spending your money and what’s really important to you and your family. You may find that you’re just spinning your wheels and aren’t really going anywhere. Having established and prioritized your financial goals can help you find the right road to a more meaningful life.

Saturday, August 14, 2010

A Risk Often Overlooked

Often, when we work with new clients, we find that their portfolios include stock holdings that constitute 10 percent or more of an individual stock. Why does this happen and what added risks does it create for their investment portfolio?

Excessive holdings of a particular stock can happen for a variety of reasons. In many cases, the stock is that of the company the client works for. They may have a generous stock plan that allows them to purchase company stock at a discount (often 15 percent). They may be required to invest a portion of their 401(k) account in the company stock. They may have received and executed stock options for their company’s stock or they may have just purchased the stock because they were confident in the direction the company was going and believed the stock would do well.

When times get tough, your company may be forced to lay you off or offer an early retirement. At such times the company stock is likely depressed in value just when you may need it most.

In other cases, clients may have inherited a chunk of stock from their grandparents or perhaps from Aunt Lillie. The stock may have been in the family for years and they have an emotional attachment to it. Aunt Lillie did well by it. How could it possibly drop in value?

In other cases, clients have purchased the stock themselves and held it for many years. The stock may have split several times, pays good dividends and they are sure it will continue it meteoric rise. They can’t stand the thought of missing out on it’s continued growth.

Whatever the reason, all of these situations can lead to added risk for your portfolio. We recommend clients keep their holdings of individual stocks below 10 percent, and preferably 5 percent of their total portfolio’s value. Doing so can protect them from unanticipated risks.

A case in point is Hewlett-Packard Company’s stock which has fell 8 percent in just one day (August 9th), following the news of the resignation (firing?) of their CEO, Mark Hurd. Mr. Hurd was reportedly “fired” by the H-P’s Board for ethical issues involving improper expense reports discovered when a female contractor filed a sexual harassment suit. Mr. Hurd had improved H-P’s operating margin from 6 percent when he took over to 12 percent as of last quarter.

It seems likely that the stock will recover once a suitable replacement is named. Yet in the interim, it’s unclear what the stock will do, especially if the economy continues to struggle. If someone was over-weighted in H-P stock, they may be emotionally driven to sell out of fear of losing more or perhaps can’t wait for a recovery because of an urgent need for cash.

Who could have anticipated such an event? Yet, history tells us that stocks tumble unexpectedly more often than we might think (Think BP, for example). It’s easy for a stock over-weighting to creep up on you. So take some time periodically to check out your portfolio to see if you are exposed to this often-overlooked risk.

Thursday, August 12, 2010

Expect More Days Like Yesterday

Yesterday, the Dow Jones Industrial Average (DOW) dropped 265 points, 2.5 percent, to 10,378.83. It is now negative for the year. This is naturally unsettling for investors, yet not at all surprising with all the uncertainty both in the U.S. and abroad. The market has been up and down all year. It seems that just when the market starts to make a move upward, some news comes out that sends it right back down.

Yesterday, the Euro dropped 2.3 percent, the S&P 500 dropped 2.82 percent, the Dow Jones Transportation Index dropped 4.27 percent and the Russell 2000 Index of small cap companies dropped 4.02 percent. All thirty components of the DOW were down, yesterday.

The media, of course, always has an explanation for the daily ups and downs for the market. Yesterday, it was a continuing concern about a global economic slowdown. While we sometimes roll our eyes at some of these daily pronouncements, it seems clear that few investors have any confidence that our economy will return to better days, anytime soon.

We expect to see continued high volatility such as we saw yesterday, with the market jumping on signs of good news and pulling back hard on signs of bad news. We worry about a double-dip recession but remain convinced that the best thing for investors to do is stay broadly diversified.

If the market swings keep you awake at night, you need to consider reducing your equity exposure, so that you don’t panic during a market downturn. Being out of the market when it rallies can be just as damaging as being in it when it crashes. In some respects, being out of the market is worse, because the fearful investor often doesn’t buy back in until the market has recovered much of its losses. Such a sell low, buy high reaction is very harmful to one’s portfolio.

So make sure your portfolio isn’t overly aggressive, so that you can ride out the volatility. There are many more bumps in the road ahead.

Saturday, August 7, 2010

Inflation, Deflation, Double Dip?

If you’ve read the papers, watched the TV or listened to the radio lately in hopes of getting a clue as to where the economy is going, we expect you are confused. We hear concerns about inflation, deflation and a double-dip recession. Unemployment is steady at 9.5% with some 131,000 jobs lost last month alone. At the same time, the President says the economy is recovering slowly but surely.

A recent report we heard, predicted that housing prices won’t bottom out until the middle of 2011. Foreclosures are expected to be as high or higher this year than last. The new financial regulations bill just passed by Congress will clearly increase business costs for many but in ways that have yet to be determined. The bill was quite general in nature and some 240 rules need to be defined before the regulations can be fully implemented.

While it seems likely that taxes will increase, it’s not one hundred percent clear for whom the Bush tax cuts will be extended. The new healthcare legislation also raises a significant amount of uncertainty for businesses, since it creates a significant number of new government organizations that must define their role and span of control.

We’ve written before that all the uncertainty in the economy could certainly be the reason that small businesses are not hiring. Many are struggling to make ends meet. Expanding businesses requires confidence that the economy is on the mend.

It would be nice if we could turn to the economists for a definitive projection about what the future holds. Unfortunately, many of them disagree. Laurence Peter, the author associated most famously with The Peter Principle, said of economists: “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.”

Edgar Fiedler, former Chief Economist at The Conference Board once said: “Ask five economists and you’ll get five different answers (six if one went to Harvard).”

We can’t remember when there’s been this much uncertainty about the economy. It doesn’t seem that anyone can convince anyone else what’s going to happen. So what are we to do? What lesson can we learn from all of this?

The lesson to be learned is that if you ever thought you could time the market or pick the next hot asset class, you clearly have your work cut out for you (We don’t believe in trying to time the market.). Avoid looking for the silver bullet. Make sure you are broadly diversified. Pay down your debt. Build up your emergency fund. Increase your savings. Do all the things you should do in a normal market and don’t panic. If you do those things you should do all right no matter which way the economy turns.

Friday, August 6, 2010

Estate Planning Uncertainties Continue

As of January 1st of this year, there is no estate tax. For those with substantial estates, it’s a once-in-a-lifetime opportunity to avoid estate taxes. Of course, it’s probably not an opportunity that many would want to take advantage of. There’s no estate tax because Congress, with all it’s fighting over healthcare legislation, couldn’t find the time to pass new legislation. Since there is talk of reinstating the estate tax retroactive to January 1st of this year, those trying to settle the estates of their loved ones may be in limbo, if the estate is relatively large.

In 2009, the estate tax law provided for a $3.5 million exemption for each person. Thus, a wealthy couple with properly funded revocable living trusts could shelter $7 million from the estate tax. This was especially important for small business owners and farmers who had the majority of their assets tied up in the family farm or business. Without the exemption, many families could have been faced with selling the family farm or business within six months following the owner’s death, in order to pay the estate taxes.

The previous estate tax law had a sunset provision that called for the estate tax to be eliminated in 2010 and then, in 2011, to revert back to it’s previous level of a one million dollar exemption and a top tax rate of 55%.

According to an article by Mark Schoeff Jr. in the publication InvestmentNews (July 28, 2010), the uncertainty about the estate tax is likely to last at least until the end of September and perhaps until December.

Mr. Schoeff notes in his article that “A proposal by Sens. Blanche Lincoln, D-Ark., and Jon Kyl, R-Ariz., to set the estate tax rate at 35% permanently – and allow a $5 million dollar exemption – probably won’t see action in the Senate before the chamber’s members head home August 6th.”

While many articles and advisors point to an exemption of $3.5 million to $5 million per person, the top rate for the replacement tax seems to still be in question. In the meantime, the longer Congress delays in resolving this issue, the more families are affected and unable to settle the estates of their loved ones. In our opinion, Congress needs to step up to the plate and solve this issue.

Monday, August 2, 2010

The Downside of Regulation

Many hope the recent financial regulation bill passed by Congress will help prevent another economic crisis and eliminate a myriad of financial abuses that impact borrowers, credit card holders and more. While we believe some regulation is necessary, we have reservations about the recent legislation’s cost, complexity and effectiveness. We’ve written before about some of these issues (See our blog post titled “New Regulations off the Mark”, Sunday, July 18th, 2010).

New regulations typically cost financial institutions significant sums to implement systems and procedures to comply with the regulations and in many cases result in a loss of revenue as a result of the new regulations. That means consumers will pay less as a result of the regulations, right? Wrong. It often leads to new fees and penalties that consumers must learn about, sometimes the hard way.

An example of the impact regulations can have on consumers is outlined in the Saturday, July 31st edition of the Wall Street Journal in an article titled “The New Credit Card Tricks” by Jessica Silver-Greenberg. The author’s article discusses the impact of the Credit Card Accountability Responsibility and Disclosure Act of 2009, known as the Card Act.

Ms. Silver-Greenberg points out that credit card fees have risen dramatically, in many cases in advance of the passage of the legislation. In particular, the article states: “According to a July 22 report from Pew Charitable Trusts, a nonpartisan research group, the industry’s median annual fee on bank credit cards jumped 18% to $59 between July 2009 and March 2010. At credit unions, annual fees soared 67% to $25. During the same period, the median cash-advance and balance-transfer fees jumped by 33%”.

In addition, the article reports that foreign transaction fees have increased 50% and penalty interest rates have risen 3.4%. In addition to higher fees, the credit card issuers have implemented new fees and changed billing policies. For example, the Card Act requires consumers have 21 days to pay their bills. In spite of the fact that the legislation encourages that banks not process payments on Sundays, many say they are open for business on Sundays. If your payment arrives on Monday, because there is no mail delivery on Sunday, your payment is considered late and a penalty will be charged.

A number of other subtle changes are outlined in the article. The bottom line is that you must be diligent in reviewing your credit card bills and correspondence to be sure you understand the latest changes. The banks will find creative ways to avoid loss of revenue, which may lead to another round of regulations, more complexity and further creative fees by the banks. Clearly, government regulation is not as easy or effective as one might think.