My Banker, My Friend

When I first read an article warning that banks are changing standard mortgage wording to allow them to apply mortgage payments to other forms of debt, I was skeptical.  After all, a mortgage payment is a mortgage payment and a credit card payment is a credit card payment.  There is no ambiguity.

Then I received a letter from my credit card provider (see below) that says:

"In any of the above categories (a) to (d), those amounts with the lowest rate(s) of interest will be paid first before those amounts with the higher rate(s) of interest."

Now that's just mean.  Basic financial advice is that you pay down the debt with the highest rate of interest first.  It only makes sense.  And in troubled financial times, we all have to pay attention to basic financial advice.  Is it really in the bank's best long term interest to treat customers this way?  Here's what MNBA says:  http://www.mbna.ca/about_company_conductcommitment.html  I'll let you be the judge of whether this practice is "top quality customer service."

Codes of Conduct and Public Commitment

MBNA, a division of The Toronto-Dominion Bank and Canada's largest MasterCard issuer, is committed to providing top quality customer service. What sets us apart is our commitment to finding the right customers and keeping them.

Voluntary Codes of Conduct and Public Commitments are non-legislated commitments, voluntarily made by companies, that ensure a high level of service while helping them remain competitive. At MBNA we adhere to the following voluntary codes and public commitment designed to protect our customers.

Code of Conduct for the Credit and Debit Card Industry in Canada
Promotes fair business practices and ensures that merchants and consumers understand the costs and benefits associated with credit and debit cards.

Call to Action

I'm not going to rant about unfairness or counsel you to complain to the authorities, the ombudsman or the courts.  Yes, class action lawsuits and government intervention have happened over this kind of issue, but it's a long road.  My simple advice is to keep all of your eggs in different baskets.  The old advice was to have a relationship with your banker.  Keep all your services under one roof so they could get to know you and offer you the best deal.  Those days are gone.  Now you can have your mortgage with one company, your credit cards with two other companies and your retirement savings with yet another firm.  Divide and survive!

Sound, Practical Financial Advice From a Bank??

A round of applause to the bank president who wants the Federal Government to reduce the maximum mortgage limit from 30 years back to 25. (I guess he doesn't realize that he could order his own people to do just that.)

Without getting into a bunch of financial mumbo jumbo, I look at it this way: you get the big mortgage when you need the space for a growing family. With the cost of university education being as high as it is, you need the mortgage paid off by the time the kids go there. A 30 year mortgage leaves you caught in a financial squeeze.

Unfortunately, bank employees don't talk in those terms when you sit down to negotiate your finances. They tell you that you can afford a bigger house with a 30 year mortgage. While not technically a lie, it is hardly a responsible practice either.

So, Mr. Clark, put your bank where your mouth is and give your young customers solid, practical financial advice. You don't need Federal Government approval for that.

http://www.theglobeandmail.com/globe-investor/mortgage-rules-should-be-stricter-td-chief-says/article2271588/

Dear Donut

Dear Donut,

Our relationship goes back a long way. I feel like you’ve become a big part of me. You used to be such a treat, but now, I fear you’ve become a bad habit. Three-thirty in the afternoon rolls around and suddenly you’re there, demanding my attention. It wasn’t supposed to be this way.

I don’t know how to say this without hurting your feelings, but let’s face it. You lied to me. You were supposed to be a snack, a burst of energy, a friend to carry me through until dinner. But that’s not what happened. Sure, the anticipation of meeting you was exquisite. Your softness against my lips. Your sweet taste . . .

But I digress. The sad thing was that after all that foreplay, you didn’t hold up your end of the bargain. After you were gone, I felt tired, not energized. In fact, worse than if I hadn’t had you at all. I put up with it for a while, but it has gone too far. This relationship has to end.

I’m sorry if I’ve never mentioned this before. I know you mean well. I appreciate the kind thought, but no, I really don’t think there’s anything you can do. No, another layer of frosting isn’t going to make a difference. Really. Yes, a fruit filling might make you more romantic, but that just doesn’t deal with the issue. We just weren’t made for each other.

Well, I wasn’t going to mention this to you, but yes, there is someone else. She’s from a different country. No, not Danish! She goes down smooth and gives me lasting energy. No, this isn’t about liking salty more than sweet. Besides, she’s a lot less salty now, more earthy, I’d say. She’s a vegetable juice.

No need to get personal! Vegetables may not be sexy, but they’re smart, and I have come to appreciate how much I like that. You know, I thought you would be a difficult habit to give up, but it turned out that you were easy to replace with something smart.

Look, let’s not part as enemies. You’re sweet. You’re fun, particularly when you’re fresh. And we have known each other a long time. Can't we just be friends?


Bill

Are the Banks Responding?

Rob Carrick of the Globe and Mail reports that the banks may be taking more responsibility for people getting themselves in too deep:  http://www.theglobeandmail.com/globe-investor/personal-finance/rob-carrick/banks-can-do-more-to-restrain-runaway-household-debt/article1918234/ 

I'm all for consumer choice and I don't want a paternalistic approach.  At the same time, there needs to be a balance to the marketing messages of spend, spend, spend.

Accounting Crisis Response

Major David Ebel, of the Escondido Salvation Army, is one of the moderators of the Emergency and Disaster Responders Support web site.  I spoke to him about training as a volunteer to help people in crisis.

"You may think of fires and earthquakes when you talk about disaster relief, but if you were in Escondido, I could use your accounting skills right now," he said.  Ebel went on to describe the financial challenges some of the people he serves face.  "If you could help people figure out how to live on $22,000 per year, you would be making a big contribution to their quality of life."

Ebel continued, "Some of the people I work with have never seen a raw potato.  They don't realize that they can buy five pounds of potatoes for the cost of two boxes of processed potato flakes.  They have never made mashed potatoes from scratch in their life."

In the financial area, I see a similar lack of exposure to the basics.  In my grandfather's day, if a young couple came to the bank for a mortgage they couldn't afford, the loan officer would quietly explain the situation to them and refuse to advance the money.  Fast forward to today, where the bank employee will help you minimize your payment by reducing the down payment and extending the amortization period from 20 years to 35 years.  The problem is, they don't tell you the consequences of those decisions.

Let's say you have a $100,000 20 year mortgage at 5%.  Over the course of the mortgage, you will pay $57,710 in interest, at $657 per month.  If you extend that mortgage to 35 years, then you will pay $110,600 in interest (more than the original mortgage!), at $501 per month.  That extra $150 per month makes a huge difference spread over 20 years.  Here's the part they don't tell you:  if you get the 20 year mortgage when you're 20, then it's almost paid off at the time when your children may need college tuition or are considering getting married, etc.  If you go for the 35 year option, then you haven't paid off the house until you're 55 years old!  Who needs that kind of stone around their neck?!

The point of all this is simply that when budgeting for mortgage payments, the right question to ask is "What's the MAXIMUM I can pay?"  As odd as it sounds, reducing mortgage payments makes mortgages LESS affordable, not more.

The sub-prime mess is still with us.  People have been badly wounded and those wounds are no less real for being financial.  Grab your spreadsheets and get out there!  If anyone reading this blog knows of ways to help counsel people or places to volunteer, please note them in the comments.

Making Financial Reports Fundraising Friendly

Charity Accountants:  Have you ever watched potential donors read the financial statements of a charity?  Even sophisticated readers can be puzzled by things like fund accounting ("What do all these different columns mean?"), how endowments are treated ("What are all these transfers?"), or finding the answers to basic questions ("How much of the money raised goes to administration?")

It's a difficult task to stay up to date with the changing accounting rules for charities, disclosing financial results in a way that ties the revenues and expenses directly into the charity's mission and getting everything done in time for the audit.

But it's worth the struggle.  As I look back at all my accounting training, I can't remember devoting a single hour to making financial information easier to read, yet in these days of funding cuts in the charitable sector and increasing direct donor involvement, making the financial story understandable has never been more important. Imagine that each donation has a flag attached to it and the donor of that money needs to know exactly how the donation helps the charity achieve the donor's mission, as well as where the money actually went.

So, as you struggle to get the year end completed and start to think about how the audited statements should look, take a look at what Queen's University is doing about Voluntary Sector Financial Reporting Excellence.  Maybe you should consider entering it this year!

Why Aren't They Screaming?

Why aren't the pension plans screaming blue murder?  Why aren't they foaming at the mouth and demanding justice?  Why are there no dire predictions about the millions of retired people who rely on fixed rate investments in an era where interest rates are being kept artificially low to stimulate the economy?

And they are hurting.  Really.  Here is a recent communication from a pension plan to its members (altered only to remove anything to identify the actual plan):

The Pension Board has been carefully monitoring the funded status of the pension plan. As previously announced, the Pension Board’s decision not to increase the pension benefits, although difficult, was necessary to maintain the plan’s “fully funded” status.

The combination of a challenging investment environment, historically low interest rates, and the maturing demographics for the plan means the Pension Board will be examining options and strategies to best ensure the sustainability of the pension plan for the longer term.  The Pension Board has also commissioned an ad-hoc committee to coordinate investment strategies to support the plan’s pension commitments. This committee’s efforts will ensure optimal support for the plan’s long-term sustainability. This systematic approach—in-depth researching of all available options—underscores how seriously the situation is being taken.  The Pension Board is keenly aware of the importance of keeping the benefit meaningful for retirees and of maintaining the affordability of the pension plan.

Keeping plan members informed of all decisions that impact the pension plan is a priority of the Pension Board, and any changes will be fully communicated to members as soon as details are available.

In pension circles, there is talk about how to ease the rules so that employers can take longer to fund the deficits in their plans.  Pension liabilities are increasingly seen as a heavy burden on large employers.  I am seeing an increased emphasis on defined contribution plans as opposed to the traditional defined benefit plans, as employers seek ways of sharing the risk with their staff.

Pension plans are traditionally long term, conservative investors, with as much as 40% of their investments in bonds and other fixed rate interest bearing investments.  The current low interest rates are unfairly punishing their performance, particularly when their pension liabilities, which stretch decades into the future, are being discounted at a different rate than they are earning.

Someone should be screaming!