Charting a route out of the debt maze

Notes John Podlewski, president and CEO of Burlington, Ont.-based Debt Freedom Canada Inc. : “Advisors who want to grow their business can’t ignore debt any longer.”

And, contrary to what many advisors may expect, debt is a major problem -— even for those with a comfortable income. “The more you make,” Podlewski says, “the more you spend.”

Although his firm specializes in the middle-class market, 25% of its client base comes from households making six figures. “In fact,” he adds, “I guarantee you’ll find many people with an upper-echelon income in our marketplace.”

With so many Canadians in debt — consumer debt has hit an historical high of $1.5 trillion (see story on page 21) — debt counselling within a larger financial plan is a growing business. When money is saved on debt, the resulting pool of freed-up resources can be directed toward building your client’s long-term wealth.

Given that the savings are often significant — the average Debt Freedom customer saves $500-$1,000 a month — the rewards can be substantial for both clients and advisors. “We’re helping people who now, for the first time, have money to invest,” says Podlewski, whose firm has doubled the number of its debt consultants to 600 in only two years. “I believe that the debt opportunity — for the right advisor — exceeds the opportunities that led up to the post-recession bull market, or the same kind of opportunities that advisors had in the ’90s.”

Stephanie Holmes-Winton of Halifax is one financial planner who has decided to specialize in cash management after discovering that selling investment products to clients was often only half the battle when it came to improving their finances.

She has created a website called The Money Finder (www.themoneyfinder.ca) that uses books, software and seminars for advi-sors who want to get the word out: careful cash management and debt control are as important to financial security as sound investments for almost all clients.

For those clients grappling with debt despite solid incomes, Holmes-Winton typically starts by imposing a strict cash regime for a few months; this shows clients where the issues are and helps them to break problem spending habits.

It’s particularly crucial, Holmes-Winton says, to illustrate the difference between fixed expenses and active cash flow — money used for everyday purchases ranging from groceries and clothing to gifts and entertainment. “What greatly improves everything,” she says, “is when the client can separate that day-to-day spending money [from fixed expenses], see there’s an emotional influence over it and that they have control over it.”

Holmes-Winton uses Cash Flow INSIGHT, software that allows her clients to record expenses and purchases as they occur; typically, after about two months of this often painful exercise, she meets with the client to assess spending patterns, decide which ones are harmful and figure out how they can be broken.

Indeed, getting clients to accept a cold dose of reality is a common element of most debt-reduction programs. Podlewski uses software that he refers to as a “financial MRI,” which focuses attention on client spending. Debt Freedom has developed two in-house applications to show patterns to clients. Equity Plus analyzes amortization and interest payments, including mortgages, showing clients a comparison of how long it would take to pay down debts on their own and how long it would take if they turn to refinancing. The other program, Debt Stacker, looks at unsecured debt and how outstanding lines of credit and loans affect their long-term plans.

The results can be eye-opening for clients, he says: “They finally see [their spending patterns] for the first time. No one looks at the amortizations of their lines of credit or credit cards. It’s amazing.”

After the often shocking experience of facing up to harmful spending patterns, Podlewski explains how the future could look different — if the client can change his or her ways.

“It’s a very simple explanation,” says Podlewski. “Here is their numeric accountability before and here is their numeric accountability after we’ve restructured everything. And when those dollars are freed up, then those clients are free to increase their net worth.”

In many ways, however, successful debt reduction has some features in common with weight control — it’s as much about long-term behaviour modification as it is about organization and discipline. And that means that diplomacy is in order. Although clients certainly appreciate honesty — especially those who have been in deep denial over their debt — an encouraging tone is just as crucial. Holmes-Winton, for example, recommends avoiding such questions as: “You don’t have any debt, right?” which can put the client on the defensive. “I tend to start conversations about a third party,” says Holmes-Winton. “That helps people understand they’re not the only ones.”@page_break@Also to be avoided is the term “budget,” as it often sounds like a four-letter word to someone who is already struggling with debt.

“People hate that word,” says Patricia White, executive director of Toronto-based Credit Counselling Canada, a national association of non-profit counselling agencies. “I like to use ‘spending plan’ because it’s positive. It’s as if you’re thinking about things and making decisions looking ahead.”

Glen Zacher, CEO of Edmonton-based McGuire Financial Group Inc. , also avoids the term “budget,” especially when counselling couples about financial disclosure. “It sounds like an accountability,” he says. “We suggest, ‘Why don’t you just give yourself an allowance?’ It takes out that family-feud aspect.”

Beyond basics like this, advi-sors who excel at coaching in credit control note that other, less visible factors come into play: what is the client’s “spending personality”; and how does it fit in with their circumstances and stage of life?

“I started looking at it as, ‘What can I do to get people to do something that’s compatible with their existing behaviour?'” says Holmes-Winton. In her new book, $pent, she concludes that there are seven “money mindsets.” At one end of the spectrum, she says, there’s the extremely controlling “bunker-and-brick-wall type. That’s your ‘Navy Drill Sergeant’; he’s probably brilliant but kind of scary. It actually doesn’t matter how good or bad with money he is. These people stress about wanting to be a good saver, but maybe doesn’t know how to do it.”

At the other end of the spending spectrum is the “Pollyanna”: “They think, ‘Money goes in and money goes out. I don’t pay attention to that, and I don’t understand it anyway; it’s all over my head’.”

Holmes-Winton believes these mindsets require different money-management lessons. The Pollyanna goes on a 60-day cash diet to “learn to take responsibility for some of their finances.” The Drill Sergeant takes home the Cash Flow INSIGHT software, which, Holmes-Winton says, will appeal to that person’s need for control and organization.

The dynamic between the members of a couple has its own particular issues. Credit Canada, an Ontario-based non-profit organization, ran a survey on couples and money management. “Financial infidelity was one of the biggest causes for divorce,” says Elena Jara, the company’s education co-ordinator and life skills coach. Infidelity in this context means hiding debt from partners, borrowing money from friends or raiding joint accounts.

Age is also a factor. “We find that we get a lot more seniors coming to us of late, with more debt and money-management issues,” says White. “They may have to work a little longer to get rid of debt. They may have to look at the equity of their home to see what’s there.”

For couples in their 20s and 30s, it’s often the need for instant gratification, from buying a house to new business suits. “That’s where the advisor has to ask, ‘You know yourself well. If you had a blank credit card, are you going to be tempted to use it?'” Jara says. “And if the answer is ‘Maybe’ or even a slight ‘Yes,’ then you need to say ‘No’.”

Once spending patterns have been assessed and behaviour addressed, the mechanics of debt reduction become easier to apply. In particular, new money-management skills should be firmly in place before measures such as refinancing debt are considered.

Then, look at further ways to reduce debt, without opening the Pandora’s box of more credit. For example, transferring debt onto a lower-interest rate credit card may not be the right solution for the Pollyanna client. “The person who does this has to have absolute control,” says Jara. “They have to be consistent and they have to be willing to make sacrifices to pay this off.”

Andrew Mayhew, who runs a financial advisory practice in Mississauga, Ont., warns of the powerful temptation to get back into the spending groove: “People go, ‘Oh, look, I’ve got so much more money to spend.’ They have to stick with a plan. You have to be your own liquor control board.”

Podlewski doesn’t even want clients to have the option of upping their borrowing, even at lower rates, and actively discourages them from taking out a line of credit. “We contractually have every one of our clients take a percentage of the dollar they do save [by reducing spending] and apply it directly to base principal. Because it is financial suicide to just consolidate and reload that gun again.” IE

The final part in this series will appear in IE’s mid-October issue.