One of the most interesting developments I have seen at Even is the sea change happening in the financial advisory sector. Financial advisors have historically focused on helping their clients manage their wealth, many of them refusing to take on clients who have less than $1M in assets. But with the introduction of robo-advisors like Betterment and Wealthfront, financial advisors have been forced to rethink how they help their clients. It’s no longer enough to help clients balance their portfolio when that task can be mostly accomplished by an algorithm. Financial advisors are realizing that they need to help their clients more holistically, and that includes looking at both sides of the balance sheet - not just with assets, but also with debt.
53 million US households have a combined $1 trillion in credit card debt, and that debt hurts their credit score and is not a wise economic choice if it can be avoided, due to the relatively high interest rates of credit cards. Further, 45M borrowers have over $1.5 trillion in combined student loan debt. These clients often feel that their next best dollar should be going to paying off that debt, which holds them back from developing an investment portfolio until much later in life.
Financial advisors are finding that offering solutions to help their clients deal with their debt, enabling them to put a plan into place, is often a great door opener to a long-term trusted relationship. At the same time, once that plan for debt repayment is in place, clients feel more comfortable putting money to work in the market.
Financial advisors are generally more familiar with traditional lending products like securities backed loans and mortgages, and might seem wary of the newer products that have proliferated as part of the fintech era born out of 2008. One of the key instruments to help people get out of credit card debt has been the advent of the personal loan. Financial advisors can easily identify when a client or prospect has a mound of revolving credit card debt, and then can support them by enabling them to refinance and/or consolidate that debt onto an installment loan called a personal loan. This loan doesn’t require the client to pledge any of their assets, rather it is an unsecured loan underwritten mostly based on credit history and income, with limits up to $100,000 and often single digit APR’s.
Many financial advisors recommend that their clients have at least six months of cash expenses on hand in case of an emergency, like losing a job or a medical issue. The obvious question a client might ask is then: “where they should keep that money?” Historically advisors haven’t had a great answer for this, but many advisors are now starting to plug into marketplaces where they can help their clients compare different high-yield savings and cash management accounts.
The evolution of the financial advisor space is something to watch in the coming years. As advisors are forced to differentiate from their algorithmic counterparts, the best weapon is the strength of the relationship and the advice they can bring. When I worked at SoFi, (now an Even partner), I was always amazed to see how happy their customers were when they refinanced their student loans or credit card debt, and how much of that positive halo accrued to the SoFi brand. Financial advisors of the future would be well served to learn from that and start using debt solutions as a way to help their clients take the first important step in their financial journey.
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