The Problem with Consumer Debt
Why your clients’ debt is probably not optimized - and how you can help
Intro
Americans hold over $14 trillion in household debt. This pool of capital – despite its size and importance in the lives of most Americans – remains one of the most poorly optimized in consumers’ lives. While consumer familiarity with equity markets has grown considerably in recent years, many consumers are still making sub-optimal decisions about their debt.
As an advisor, managing client debt can be critical to improving your clients’ overall financial health – and can help build deeper and longer-lasting client relationships.
The situation
Simply put, many Americans are paying too much on their debt today, either because they didn’t pick the right loan or didn’t refinance when it made sense.
While an overwhelming majority of Americans cite finances as their largest source of stress in life, tens of millions of American consumers are paying thousands of extra dollars each month in “excess interest” – interest payments higher than the best available rates. While many of the below studies were conducted in lower-rate environments, significant “excess interest” - and potential savings - likely persist:
Mortgages: A 2020 report found over 19 million mortgages to be “high quality” (the highest level of eligibility) for refinancing – with average potential savings of $309/month
Auto loans: A report from 2017 found $37 billion of potential savings from refinancing outstanding auto loans
Student loans: A 2021 study of student loans found that the average student who refinances their debt saves $14,000 over the life of their loan
Even in a rising rate environment, opportunities to save money through refinancing debt can and do exist – in ‘quiet’ years, mortgage refinancing originations in the U.S. are still measured in hundreds of billions of dollars.
The reason
If all of this is true, then why are so many Americans still paying too much for their debt?
The short answer: the world of debt is still far too complicated. It would take even a highly knowledgeable consumer hundreds of hours to scan all available loan options, and many more to determine which loan was best for them.
As a result, most consumers only check rates from a couple of lenders – if they check at all – and often don’t end up with the best rate available. That, coupled with the challenge of knowing how and when to refinance existing loans, means that most Americans are paying more than they should be.
The role of an advisor
Debt is a critical component of your clients’ portfolios. Advisors who don’t actively advise on debt risk leaving significant money on the table for clients - both in terms of direct savings and the compounding impact of reinvesting those savings. Many advisors know this – but are understandably overwhelmed by the effort and know-how that would be required to properly manage this portion of the portfolio.
Of course, not all advisors need to be thinking about debt. Some advisors, particularly those with older clients who don’t hold much (if any) debt, are better served focusing on other aspects of a clients’ financial portfolio. For most advisors, though, managing debt is a valuable path to a deeper client relationship. There are a few ways that you, as an advisor, can be a valuable resource for your clients when it comes to managing their debt:
Peace of mind: When it comes to finances, debt is atouchy subject. It’s important to remember that even a small amount of debt can weigh disproportionately on clients’ minds. One of the most important roles of an advisor in managing a client’s debt is being able to assure them that their debt is in good hands
Saving money: As cited above, many Americans carry debt at an unnecessarily high rate. By staying on top of prevailing rates and checking for refinancing opportunities, advisors have the opportunity to save significant money for clients
Saving time: Today, most clients manage their own debt. For many, this is a time-consuming and frustrating process – especially for those who are less informed about how to manage it. Taking your clients’ debt off their hands is an easy way to save them time, frustration, and stress
Conclusion
With 80% of Americans holding some type of debt, liabilities are a critical piece of the financial portfolio for most consumers – and for many Americans, overpriced debt is a major impediment to financial well-being. For financial advisors looking to unlock more savings, attract new clients, or deepen existing relationships, taking a closer look at a client’s liabilities could be an asset.