Just a week after President Obama’s first Inaugural I started my financial planning practice. Since then, new tools and consumer-friendly policies have offered Americans meaningful opportunities to improve their personal finance decision-making.
I’ve seen firsthand how these Obama Administration policies have helped clients with four critical financial challenges:
- investing for retirement,
- repaying student loans,
- buying their first home, and
- purchasing health insurance.
The information tools and policies also helped me do a better job. The policies put consumers (and their financial planners) on equal footing with sellers by providing relevant, timely information to make personal finance decisions. Sellers now have to compete on price and basic product features and not on image and needlessly complicated product descriptions.
These policies are a win, win, win, win for consumers!
1. Better Retirement Investment Advice
By and large consumers are on their own to manage retirement savings. The Obama Administration recognized the need to help regular investors get a better deal on their retirement savings. Most consumers lack the aptitude or desire to manage retirement savings. They therefore rely on investment advisors for help.
While many advisors act in customers’ best interest, not everyone is legally obligated to do so. Some investment professionals receive compensation to steer investors to products that better compensate the advisor. These products are generally not in the investor’s best interest.
Advisors do not always have to disclose these conflicts. Advisors face few consequences under federal law for harms resulting from the lousy advice they give to retirement investors.
The Department of Labor adopted a rule requiring financial advisors to act in their client’s best interests when they give retirement advice. They must be a fiduciary. They must put their clients’ best interest before their own profits. The rule becomes effective April 2017.
These conflicts of interest cost America’s families an estimated $17 billion a year through lower retirement investment results. That’s a big number and a potentially huge wealth transfer to consumers. I didn’t understand its significance until I looked at the advice I provided to several clients recently.
Four new clients asked how the fiduciary standard would have affected them had it been in place when they started working with their former advisors. These clients were with Brown Advisory, Morgan Stanley, Raymond James, and Wells Fargo.
I created hypothetical portfolios for each client using low-cost index funds and matched their former advisor’s asset allocation. Overall, the hypothetical portfolios had a greater total return of between 10% and 36% over the three- to five-year periods studied after considering advisor fees.
Let me say that again. Their returns would have been 10% to 36% higher using a low-cost index fund strategy and not advisor-recommended products! A future blog will further explain this analysis and how you can check up on your own investments.
A fiduciary standard is a win for investors.
2. Flexible Student Loan Repayment Plans and Forgiveness
The Administration reduced the burden of student loan repayment. Excessive student loan debt delays financial freedom, home ownership, and a secure retirement. From a macro view, high debt burdens retard overall economic growth.
The Administration adopted flexible repayment plans and loan forgiveness programs based on the borrower’s income.
Reducing the amount of debt in the first instance is a better strategy. But until then, these policies have been a step in the right direction.
The one program that I’ve seen work nicely is the Public Service Loan Forgiveness Program. A borrower’s student loans are forgiven after 10 years of on-time payments while working in public service.
Many clients have started the clock ticking for the 10-year period. Their loans should be forgiven within the next two to three years. They will then be able to move forward with their financial lives.
3. Enhanced Mortgage Loan Disclosures
For many Americans, buying a home is their single biggest purchase. Getting the right mortgage loan with payments that are not budget breaking is the key to not becoming overextended.
The Obama Administration mandated that mortgage lenders give borrowers two meaningful cost disclosures: the Loan Estimate and the Closing Disclosure.
Borrowers receive them when they are best able to understand the terms. The Loan Estimate is due within 24 hours after applying for a loan. The Closing Disclosure is due three days before the closing. Both forms help borrowers understand the loan’s terms, and importantly, how the loan payment can change.
The forms have begun to empower borrowers by providing them prompt and relevant cost information. Borrowers can use the standardized Loan Estimate to shop for the lowest cost loan by comparing products on an apples-to-apples basis.
The rule also requires that borrowers get three business days to check the Closing Disclosure. On several occasions, I’ve helped clients compare the Loan Estimate to the Closing Disclosure and have seen discrepancies in the lender’s favor. The discrepancies involved the points paid and the loan origination fee. The required delivery of these forms helped my clients fix these issues without being caught off-guard at the settlement table.
The new mortgage disclosure forms allow borrowers to understand their obligations and to compare costs in a timely manner.
4. Health Insurance Product Improvements and Information Disclosures
The Administration made buying health insurance easier and less confusing by creating the exchanges, improving basic product features, and standardizing information disclosures.
In the past, individuals buying their own health insurance had to hunt high and low for insurers. Products varied. It was difficult to compare them because of all the confusing terms and features.
The exchanges eliminated the search issue by centralizing the marketplace and bringing down insurers’ marketing costs. Insurers would now have to compete on the basis of price and other relevant features.
The Administration also set an out-of-pocket maximum for which the buyer would be responsible. This cap really improved the products by ensuring that insured consumers would not face financial ruin should a health crisis occur.
Most consumers don’t know about this improvement because they don’t use their policy to its maximum. From a planning perspective, however, this maximum helps folks plan for their future knowing their cash outlay for health care is capped annually.
Finally, the new standardized summary of health benefits form helped educate all consumers – regardless of where and how they obtained their health insurance. The summary of benefits form uses a novel format that provides information about the insurer’s product but also explains the significance of the information. The form was a serious attempt to educate consumers at the moment they are most engaged, when they are purchasing the product, about how the product works.
In all, the health insurance products are easier to get, better safeguard consumers against financial ruin, and allow for shopping by using an easy-to-use standardized form provided at the time of purchase.
For millions of Americans these four things will make a material difference to their personal finances: 1) retirement advice free from conflicts of interest, 2) student loan repayment and forgiveness flexibility, 3) enhanced and timely mortgage loan disclosures, and 4) better health insurance products to protect against catastrophic illness that causes financial ruin. I believe President Obama has improved personal finance decision-making so that Americans can reach their financial goals.