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Financial Planning > College Planning > Student Loan Debt

Should Advisors Accept Clients In Debt?

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Americans say they want to pay off debt and save for retirement, but many are not doing enough to ensure their future comfort, according to a survey of 1,000 Americans by the Million Dollar Round Table, Park Ridge, Ill.

Given this fact, financial advisors offered their opinions on working with a client who is in debt.

Thirty percent of respondents identified paying off debt as their top financial priority. Yet, only half of them would use extra income to reduce that debt, MDRT says.

Further, 76% say they feel comfortable with their knowledge of retirement saving, but 35% arent contributing to 401(k)s, IRAs or any other form of retirement investing.

Joseph Sciabica, a certified financial planner with The Guardian Life Insurance Company, New York, says that often when young people are in debt, it is precisely their adherence to contributing to their retirement accounts and other such investment vehicles that helps keep them in debt.

“What I find is that people who have debt dont recognize how to creatively get rid of it. They make decisions and they see the debt as just one aspect of their financial life and dont consider how other aspects can impact it,” he says.

For example, younger people often continue contributing to 401(k)s–accounts they wont likely use for 30 or 40 years–rather than using that money to spend down high-interest credit-card debt, Sciabica says.

“Young people get too caught up in retirement or saving for education when thats too far down the road; they contribute to their 401(k) when they have debt today,” Sciabica says. “Its a matter of first things first and recognizing what makes an impact on finances today,” he says.

Although people with debt arent his most coveted prospects, Sciabica does not turn them away. Instead, in the interview process, he shows them how savings, insurance and debt are interrelated, and develops a strategy that will help them pay off their debt and realize their objectives.

Much of the debt Americans have is in the form of credit card balances, MDRT says.

“Americans carry $1.7 trillion in consumer debt with more than $700 billion of that on plastic,” says John Putnam, a financial planner and member of MDRT.

“This says that we have accepted debt as a way of life. We give into our immediate spending desires too easily, and that certainly will come back to haunt us if we dont take control of our finances.”

This suggestion is precisely in line with what Michael Bonevento, a senior financial advisor in the Wall, N.J., office of American Express Financial Advisors, learned early in his career.

At first he was an idealist who wanted to help clients in debt pay it off and realize their financial goals. But he soon learned that what people say and what they do are not always the same thing.

This happened often enough that Bonevento can now tell in the interview process who is likely to remain in debt despite what they claim are their goals, and who is genuinely determined to pay off their debt and ultimately reach their goals.

One couple in particular had named saving for their childrens education and retiring early priorities. But, when told that in order to make those priorities materialize they would have to change their spending habits, they admitted they were not willing to take those recommendations.

“They made enough money to reach their goals but lacked the behavior and discipline,” he says. He no longer accepts clients who are not likely to spend by his recommendations.

Not surprisingly, the MDRT survey revealed that more than a third (38%) of those whose top priority is paying back debt believe they will always be in debt. Still, 72% of those who foresee continual debt predict improved financial situations in 10 years.

Reproduced from National Underwriter Edition, July 14, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.


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