Danielle DiMartino Booth tell us what is really going on at the federal reserve board and why this might not end so well. We discuss her new book, Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America.
The Big Banks Have Figured a New Way to Stick It to the Consumer
A money grabbing trend has started in the financial services/banking industry and ironically it is a result of a government mandated rule.
The Department of Labor issued the new fiduciary rule to go into effect sometime in the future. The fiduciary rule was passed so that advisors put the interests of their clients first ahead of their own. This primarily points to the commission based advisor.
For example, let’s say that the advisor has product A and product B. Product A pays a higher commission. Product B is better for the client. However, the advisor recommends product A. That is a conflict of interest and the advisor putting his or her interests ahead of the client.
Most of the major brokerage houses are owned by the big banks. For example, Bank of America owns Merrill Lynch. So, what are the big brokerage houses doing? They are taking commission based accounts and converting them to fee based accounts. In fee based accounts, the notion is that there is no conflict of interest because we are dealing with fees versus commissions. The same fee gets paid regardless of the advisor’s advice.
This article points out the increase in revenue for the banks because of advisors switching from a commission model to a fee based model. The article states that Bank of America Merrill Lynch saw an increase of $29.2 billion in fee-based accounts in the first quarter. JP Morgan saw $8 billion of new deposits. These deposits will create new fees for the banks.
There is one problem with this change from commissions to fees and it is ironically enough it is a conflict of interest.
What is the advantage for someone who was in a buy and hold commission account changing to a buy and hold fee account? There is in most cases no advantage for the client. A fee based model implies that the advisor is going to actively manage the account. Are commission based advisors suddenly going to become seasoned money managers? I think not.
They solved the old conflict of interest by creating another conflict of interest. Regulators frowned on commissions so to stay in the business the big banks encouraged their advisors to switch to fees. However, they aren’t going to do anything to earn those fees. Who gets the advantage here? The advisor gets the advantage and so does the crooked banks/brokerage houses that are encouraging it. Once again, the big banks who own these brokerage firms are sticking it to the consumer.
If your advisor wants to switch you to fees, dig a little deeper to see the advantage. For a fee advisor, there should be an active management strategy in place. So, look past the glossy marketing brochures because you are probably seeing a commission account dressed in fee clothing. Most commission based advisors are going to buy and hold and maybe reallocate at the end of the year. That is not worth a big management fee. It shouldn’t take long for investors to realize that they are being taken advantage of. In fact, wait until the next big downturn.
Who gets the advantage? In most of these offers to switch to fees, there won’t be one for you. However, there will be a new revenue model for the advisor.
The Student Loan Debt Bubble is the next Debt Crisis
Consider these facts about student loan debt:
- Over the past 10 years the amount of student loan debt in the U.S. has grown by 170 percent, to a whopping $1.4 trillion
- 44 million people have student debt. Eight million of those borrowers are in default
- The average debt load individual graduates carry is up 70 percent over the past decade, to about $34,000
How exactly did we get there? Let’s just call it greed.
According to this article, a great deal of the tuition hike came as a result of hiring and increased payrolls for additional employees charged with bringing in big donors and building their school’s brand and of course building new buildings and facilities. It is about attracting students not to a school based on academics but based on the benefits that it offers. You spend money to make money. Of course, they fund all of this spending through borrowing money, dependence on donors that they can name buildings after, and increasing tuition. The math is the math and the math is based on greed. Realistically the cost of educating a student doesn’t have this high of an inflation rate.
Parents want to send their kids to college. The problem is that they are just not prepared to do so especially at these costs. As a result, they look to the government to fund the endeavor just hoping that they can figure out a way to pay the money back. Unfortunately, it is the government that is enabling this student loan bubble. According to this article, 90% of the loans made are backed by the government. Imagine that…. the government is at the heart of the problem.
The saddest part of this student loan bubble are the default victims. Unlike any other type of debt, there is no walking away from student loan debt. There is even relief for IRS debt. It is like being in a debtor’s prison. Sure, there are programs that help…when they work. Yet, they are so unknown by the masses and complicated that students are unaware of them or understand how they work.
Of course, this ends up catching up with the economy through consumer spending. There is a whole generation who is bogged down in student loan debt that is preventing them from buying houses and doing other consumer spending.
Colleges with their fancy sports programs, big buildings, and activity centers won’t always be so grand. At some point this debt binge has to come crashing down. Debt bubbles always pop. When it does, it won’t be pretty.
Cosigning a student loan provides flexible options and underwriting to account for different borrower needs. Look for Cosigner release and in-school payments
Prudent Money Reader! I wanted to introduce John Hupalo to you. He is our newest Prudent Money Contributor. John is a nationally recognized expert in the field of college admissions. He covers everything from the college admissions process to how to pay for college. His book Plan and Finance Your Family’s College Dreams should be a must read for every parent. Today, I wanted to share one of his pieces.
50/50 Chance your Car could create a Life-Threatening Problem
Hyundai and Kai announced a recall today. They are recalling 1.4 million cars to fix a serious problem. You could be driving down the road and the engine might fail. Consider these statistics:
53.2 million cars were recalled in 2016
51 million cars were recalled in 2015
63.85 million cars were recalled in 2014
323.95 million people in the US.
Assuming that the 323.95 were all driving cars, you would have a 50/50 chance that your car was recalled. We all know that number has a large population of people under the age of 16 that don’t drive. Thus, your percentage chance is much higher than 50/50. Obviously, I am playing loosely with the math. However, you get the point. The numbers are the numbers.
Why is this so serious? The majority of recalls involve automotive failure that can cause accidents which can lead to death. The automobile industry is failing to deliver safe cars without defects.
Tony Joe who is on every Friday with me on the Special Car Corner edition of Prudent Money says it is about rushing product to market and using cheap outsourced parts all to make us much money as possible. The quality isn’t what it used to be. Another reason might be that up until December 2015 there was no accountability by workers in the union based automotive field. I interviewed Stephen Kohn who is one of the top whistle blower attorneys in the US on the show last year. He said that automotive industry is one of the last industries to be protected by whistle blower laws.
The whistle blower laws allow for people to turn others in anonymously. Before those laws went into effect, it took a brave soul to blow the whistle on someone else. Reputations would be ruined, jobs would be lost, and families threatened. Thus, people knew things that should be reported but never did.
It might take a few years for those laws to affect the outcomes of recalls. Meanwhile the numbers are what the numbers are. So, do yourself a favor. Go to www.recall.gov and enter in your vehicle identification number and make sure you don’t have a recall. Your life might depend on it.
The IRS Debt Collection Scam
The IRS is going back to the private debt collector model. They are turning to debt collectors to speed up the collection process. There are a couple of things that you need to know. First, the private debt collectors industry is the most complained about industry in the country. More complaints are filed to the Federal Trade Commission year in and year out.
The difference between debt collectors using tactics with consumer debt versus tax debt is that most of the threats that are used for consumer debt are just that – threats. They can’t garnish wages. They can’t put a lien on your house. That can’t seize bank accounts. However, with IRS debt they can do all of those things. So, imagine getting threatened knowing the IRS can back it up. Taking you to jail for a tax debt. For the average debt and the processes afforded the taxpayer, jail is unlikely. Bottom line look to private debt collectors to use harassment and threats to collect IRS debt. As I said, the worst part about is the fact that the IRS is afforded those powers.
Second, the scammers will have a field day. Impostors posing as debt collectors will wreak havoc on consumers pretending to collect IRS debt. There is an easy way to know if the phone call is legit. You would have already received numerous letters from the IRS warning that this was going to happen. You should never be surprised. If you owe it, they will be in contact by mail. It is always by mail and never by phone. The problem with this scam is that when a person hears IRS debt and you owe and you’re in trouble, the thinking part of their brain turns off.
Just remember this is if you are in tax debt. The IRS has an unwarranted reputation for treating people badly. They want to work with you. I have heard stories of a kinder IRS in recent years. There are processes and laws passed to protect taxpayers in every situation. The problem is that taxpayers just don’t know about them. Dan Pilla is the authority on these processes. He has written many books on how to utilize the law to help with the IRS. For more information go to www.taxhelponline.com.
The Millennial generation has been stereotyped as having some pretty unflattering traits. Words such as entitled, disloyal, lazy, etc. come to mind. I get all types of studies and surveys sent to me for stories for the radio show and the ones on the millennial generation show that this generation is anything but like they are being stereotyped.
Here is a news flash for you – my research shows that the millennial generation is probably the most financially responsible generation around.
39 % of millennials have decided to save or invest this year’s tax refund — the most of any age group. Gen Xers came in at 23% and baby boomers came in at 33%. Only 6% of millennials plan to splurge and spend that tax refund.
I belong to generation X. Yes, we would rank as the most irresponsible generation when it comes to money. So, the 23% is no big surprise. I just know when I was in my 20’s that tax refund would be spent before I even received it. After we are the credit card generation. Why wait when you have plastic.
Moneyunder30.com released these stats from their research:
62% of Americans on average are saving anything for retirement. 86% of Millennial ‘s are saving.
Amount of money saved on average for retirement in America is $35,000. The average amount of money saved by Millennials is $7,453.
The average family savings account in America has a balance of $3,800. The average savings account balance for the Millennials is almost twice that at $6,713.
So why the shift?
There could be many reasons one could point to. My theory is that the Millennials had a front row seat during the financial crisis and watched what their parents went through and came to one conclusion. I don’t want to be like my parents. I think that this is also why the Millennial generation is so risk averse when it comes to investing. They are force fed advice to take as much risk as possible because of their age. They aren’t taking that advice.
This is encouraging news. We must stop the cycle of financial irresponsibility. The even better news is that Generation Z which is the next generation up appears to be even more financially responsible.