Good Selling Vs. Selling Goods-The CU Challenge In Financial Planning

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Is your financial planning program consistent with "The Cause?"

In recent years, many credit unions have adopted financial planning programs. The usual agenda has one or more licensed securities representatives (brokers) meeting with members on the credit union premises and then selling to the member investment products they represent.

Investment products, such as mutual funds, stocks, and bonds, differ from credit unions' more traditional and secure offerings of savings and time deposit accounts. There are several reasons why an increasing number of credit unions have opted for this arrangement. Among the advantages for the credit union is that they can be viewed as a more complete one-stop shop for financial products and services.

Most credit unions receive some form of compensation from the broker, and the broker cross-sells the credit union's products. The sales representatives from the brokerage company, in turn, make commissions off of this very large referral network that the credit union has provided. Everyone goes home happy. Sounds like a win-win situation for both credit union and broker, right? Think again.

Although it is true that the credit union stands to profit from this arrangement, the underlying question of "what do we, the credit union, owe our membership?" is often overlooked. In my view, any investment products sold to the membership must be in that member's best interest. The challenge lies in the fact brokers have a tendency to push to the unsuspecting public whatever product pays them the highest commission, as opposed to what the member needs. Thus, an alarmingly large number of trusting yet unsuspecting credit union members are purchasing-or rather being sold-the "high markup" items. Those items normally bear the name of an insurance company and entail life insurance or annuities. High commissions and expenses mean lower investment returns.

Although brokers may shrug off this assertion, every piece of empirical evidence concludes that high investment returns are directly correlated with lower expense ratios. If a credit union's primary objective is to benefit its membership, then how can said credit union justify its brokers selling investment products with the highest markup/commission? I contend that they cannot.

Striking A Balance

The following relays my experience as a financial planner within our sacred system, and how I have approached the "earn a living while doing what's right for the member" issue. My first venture into the credit union system occurred about 10 years ago when I was approached by the CEO of New Trier FCU in Kenilworth, Ill. Our initial discussions centered on CASH VALUE LIFE INSURANCE. In case you are unfamiliar with life insurance, cash value is the expensive variety that also goes by the name of whole life, universal life, variable life, etc. Nearly every American has a neighbor, a family member, or an old fraternity brother who has approached them about it. Cash value life insurance is in contrast with low-cost TERM INSURANCE, which only provides a death benefit.

I told the CEO that, in my opinion, cash value life insurance was completely oversold, that the vast majority of people who purchase it should not, and that the real motive for selling it was the high commission paid to agents. The CEO was surprised by my candor and he felt compelled to discourage his membership from buying this expensive insurance. Unknown to me, he had been interviewing several brokers and planners over the past several years with the hope of offering financial planning within his credit union-and he felt I was the right guy with the right ethics. The "right" ethic, in this CEO's eyes, is to NEVER compromise the integrity of the credit union.

New Trier FCU's vision was to create a safe harbor inside the walls of the credit union where members could get objective honest financial advice. I would only offer term life insurance, and only to those who needed to protect their incomes for their families. This was the beginning of "Financial Planning the Credit Union Way," which was designed to protect the member. Above all, the integrity of the program was paramount. Banks had recently started installing investment programs at that time, and we would never allow our program to degenerate into the fraud that ensued the moment they began offering insurance and investments (recall that early investigations by AARP and the Securities and Exchange Commission found that more than half of senior citizens who purchased mutual funds from banks did so under the belief that they were FDIC insured).

The advantage over the bankers that this little 4,200-member credit union holds currently and in the future is the affinity with its membership. The members who truly understand their credit union's mission know that they can go into the credit union and receive information that is in THEIR best interest. They have come to understand through years of trust and relationship building that we tell the truth-even if it means not closing the deal. We are people-driven, not production-driven. If you go back to the three preceding sentences, substitute the word "bank" for credit union, and insert the opposite of everything I just said, then you will be privy to how financial planning works in banks.

The evolution of "Financial Planning the Credit Union Way," since I conducted my first appointment in January 1997, has been astonishing. I have expanded my base to nine credit unions and over 150,000 members. We offer low-cost term insurance, unbiased advice on income and estate tax planning, budgeting and debt management services, asset allocation and retirement counseling. We have made a significant dent in the teacher retirement market, replacing high cost/high surrender fee variable annuities with low-cost mutual funds, and saving teachers tens of thousands of dollars every year.

Maybe you've convinced yourself that making the sale and doing what is right for the member can always peacefully coexist-think again!

The following are two examples of why making the sale and doing the right thing for the member doesn't always work. Mr. X, age 62 and single with no dependents, made an appointment to see me regarding his retirement. I asked him to bring in the following documents: a list of all his accounts, his debts, his current and projected monthly income and outflows, and a recent tax return. The session soon became "how do we create a plan to put away as much money as possible for someone who, up until now, has completely neglected his retirement?" In essence, there were very few financial resources except for $20,000 he managed to tuck away into his 401(k)-a paltry sum for someone who is staring retirement in the face. He had talked to other advisors. All of them suggested buying something that they, the advisor, sold-life insurance, variable annuities, Roth IRAs. I told him that the only acceptable solution was for him to put away as much as he possibly could into his company-sponsored 401(k) plan (incidentally, I have no connection with his 401(k) plan and no financial incentive to advise him to direct deposits there). The reason I made this recommendation is as follows: as a single tax filer with no substantial deductions and $50,000 of taxable income, any dollars invested into his 401(k) would save him 25% in federal income taxes. So, under current tax law, if he defers $10,000, he realizes $2,500 in tax savings that would have otherwise gone to the IRS. Now then, the clincher for Mr. X is that when he withdraws this money from his 401(k), given that his sole source of retirement income is social security, he can expect to make prudent withdrawals with zero to little tax consequences. The reason is that he will almost certainly be in a lower tax bracket when he retires. Thus, his 401(k) deferrals may provide as much as a 25% subsidy to him, a benefit that could not have been accomplished had he listened to the other salespeople he consulted. The credit union lost the sale, but won the trust of the member - and we did the only ethical thing that we could. I can sleep at night, and ideally, he will go back and tell his coworkers.

Try This Example

A female member (Mrs. Y) booked an appointment with me because she felt strangled by $50,000 of credit card debt. She made a nice income as a teacher, and the insurance representative that marketed 403(b) plans in her school had sold her both pretax annuities and post tax mutual funds. In fact, she was still investing with this broker up until the day she met me at the credit union office. I thoroughly looked at her finances and said "This is what you MUST do. Immediately stop your investment program and use those dollars to pay off your credit card balances. Begin with the highest rate cards first and work your way down. Meanwhile, call your credit union and get the wheels in motion to refinance your home. Use your home's equity to pay off all your cards. By all means, get rid of those cards until you have demonstrated that you can handle the responsibility of owning them. After you have done all of this, then you may talk to me about investing, but not before." Six months later a rehabilitated, credit card debt-free member appeared in my office to resume her payroll deferrals. Did I mention that she appeared more emotionally and psychologically at ease as well? Do you suppose her original broker ever bothered to ask her if she had outstanding credit card debts with 20% interest rates before he made his sale?

It is incumbent on credit unions to monitor what their members are being sold by their in-house financial advisors. After all, how would you feel if you were Mr. X and you later discovered that you left 25% on the table, or Mrs. Y who would be paying 20% interest forever if the broker had his way? Does your investment advisor at your credit union take the time to ask the right questions and put the member's interest above his or her own commission? Are your people buying life insurance products that they will later regret the next time The Wall Street Journal or Consumer Reports runs an article criticizing such practices? Who will your members feel is responsible for the bad advice and how many of their coworker-members will they disparage the name of the credit union to? Have you carefully examined how many life insurance and annuity policies are being peddled or are you just assuming your investment advisor has done nothing which may compromise your credit union's trust?

Credit union CEOs and board members need to take a strong look at what their membership is being told and sold. After all, if we don't have the member's trust, then what do we have?

Paul Raneiri is a certified financial planner and adjunct professor at Northwestern University, Chicago, who works with credit unions and their members on financial planning "the credit union way." For info:

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