Deborah Fox: New Credit Crisis Is Brewing

Uncertainty. Get used to it. It just might be the new normal. If that is indeed the reality, financial advisors should be hypervigilant. Deborah Fox, founder of Essential Planning Services and Fox Financial Planning Network, and who coaches some 500 FAs, is one advisor who is on high alert.

She is particularly concerned about the rising number of subprime auto loan delinquencies at a time when the U.S. economy is pretty healthy. The 30-year advisor worries that a credit meltdown in that market could set off a domino effect that will lead to a broader financial crisis.

Fox isn’t the only one who’s concerned. In the fall of 2016, climbing subprime auto loan defaults sounded alarms at the Federal Bank of New York, The U.S. Treasury Department’s Office of the Comptroller of the Currency and the Consumer Protection Bureau.

Advisor Fox was on guard ahead of the global financial crisis. When Bear Stearns collapsed in March 2008, sensing calamity ahead, she moved 70% of her clients’ portfolios to cash. Every client remains with her today.

For more than two decades she has coached and trained wirehouse breakaway brokers, established RIAs and independent BD reps to become more profitable and scale their practices for growth. The forward-thinking FA was an early adopter of cloud technology and is now focused on employing artificial intelligence to boost efficiency and productivity.

ThinkAdvisor recently spoke with San Diego-based Fox about what she’s watching as the new year begins to unfold. Here are highlights from our interview:

THINKADVISOR: What’s top-of-mind?

DEBORAH FOX:  We’re on high alert. There’s another credit crisis brewing that’s very disturbing. It isn’t nearly as large as the mortgage crisis, but subprime auto loans that are securitized — just like subprime mortgages were — are very problematic right now because a good number of them have already defaulted. In November, Hertz stock dropped 50% in one day. They’re right in the thick of this.

What the greater significance?

We’ve been in a secular bull market since 2005. This party can’t go on forever. At some point it’s all going to come crashing down. Some corporations have borrowed so much that there’s no way they can ever pay it back. It’s the same thing with subprime auto loans. People that don’t even have a credit score are getting these loans.

In 2008, you moved your clients’ assets mainly into cash. What prompted that?

I went by my gut [feeling]. When Bear Stearns failed in the spring of 2008, I knew we were in big trouble. I felt I needed to protect my clients. So I sold 70% of their portfolios to cash and kept 30% invested. It ended up being the biggest call of my career. For two days I was in the office from early morning till late at night calling every client to get permission. Not a single client said no.

But what about the credit situation today?

I feel like I’m in a very similar position now because of what’s occurred over the last seven years. And I wouldn’t hesitate to do it again [go to cash] if I felt it was necessary. I’m keeping my finger on the pulse of what’s going on and trying to assess the situation. One of the most important roles a financial advisor serves is to be paying attention and watching for risks that will throw clients’ plans off-kilter.

Could subprime auto-loan defaults develop into something as bad as the 2008-2009 financial crisis?

It’s possible, though they can’t create as large a crisis as subprime mortgages because it’s a much smaller market. However, everything is so much more tied together globally now. And central banks all over the world are propping up their markets and currencies. The things that I’m keeping my eye on can be the first dominoes to fall, which would create a chain reaction and a much larger crisis just because of panic. It takes only a little wave to start it, and then it becomes amplified. That’s what I’m worried about.

How does President-elect Donald Trump factor into your thinking?

He’s created a lot of uncertainty because we’ve never had a president without political experience, and he tends to be very quick to “shoot.” We’re going through times now that we’ve never been in; so there needs to be a lot of thoughtfulness on policies, especially monetary policy, and who we have relationships with. I’m hoping his business sense will be helpful and that he’ll come through for us, but some of the appointments he’s made – I don’t know. I want to give him a chance, but it’s a little unnerving. What do you think Mr. Trump’s agenda is regarding the Department of Labor fiduciary standard rule?

He’s threatened to throw it out. I’d be surprised if that happened, but I guess it depends on who he has in his pocket. It’s prudent to assume that the DOL rule won’t go away.