Former investment banker and wealth manager Thomas Anderson has a message for financial advisors: Debt, not assets, will make the difference in your clients’ financial well-being.
“The biggest determining factor in whether or not you’re going to succeed long term is the decisions you make with respect to debt,” says Anderson, author of the new book “The Value of Debt in Building Wealth” and CEO of Supernova Companies, which hosts a lending solutions platform for advisors.
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The book is geared toward college-educated people 25 to 55 years old who are earning more than $50,000 annually with a net worth less than 20 times their annual income. It includes recommendations that individuals, households and advisors can use.
Anderson argues that advisors and their clients should not view debt as a burden but as a way to buy more assets and save on taxes, which in the long run will lead to bigger retirement savings because of the power of compounding along with more liquidity and flexibility.
Millennials in particular represent a shift in attitude that includes very unretirement-like plans.
The key is choosing not to rush to pay off debt, specifically low-interest debt, which he calls “enriching debt.”
“If you’re paying 3 percent on a loan that enables you to leave investments that are earning 6 percent intact, you’re actually earning 3 percent,” writes Anderson.
There are, of course, other kinds of debt that aren’t so beneficial: oppressive debt, such as high-rate credit card debt, and working debt, such as mortgages and Small Business Administration loans, which make things possible like owning a home or a business that otherwise might not be, according to Anderson.
“Advisors need to think about debt,” says Anderson. “It has to be part of a financial plan … If you’re just going to advise on assets and not advise on debt, it’s a mathematical fact that you’re not using all the tools and resources to give your clients the best advice.”
This author argues that advisors should teach clients how to use debt to their advantage. (Photo: iStock)
Anderson uses the examples of three types of households to prove his point: the “Nadas” who direct all of their savings to pay down debt; the “Steadys” who pay down their debt on schedule and also save; and the “Radicals” who pay down only interest on their debt, not principal, and save even more than the Steadys. At the end of 30 years, the Radicals end up with more savings because of the power of compounding.