To Buy or Not to Buy a New Car?

The genesis of this article was a brief conversation in which a colleague was justifying the purchase of a new car. Now, he already has a car, it’s not the car he’d buy today, and he’s still making payments on it. Recently, the air conditioner stopped working and he’s not yet troubleshot the problem. It could be the compressor, the clutch (something as simple as a fuse), a problem with the expansion valve or other evaporator problem. It could have a leak that allowed all the refrigerant to leak out. In any case, this problem is being used to justify taking on additional debt to get a more expensive, larger vehicle. He also wants an electric car, an issue that we’ll set aside for a later post.

The real issue, though, isn’t the pending repair bill. It’s the masking of a debt-financed consumption desire by the repair bill. This makes me think of an analysis I conducted years ago when faced with a similar decision.

Back then, I got a second job on the other side of town, almost an hour away by freeway driving time. I was driving a ten-year-old car at the time and it didn’t get the best mileage. The thought occurred to me that I might be able to get a new car and actually save money based on the increased fuel efficiency. But, before I jumped into a new car, and commensurately, a new car loan, I wanted to confirm the numbers. To my surprise and disappointment, the numbers just didn’t work out. Gas would have had to have gotten up above $5.00/gallon to make my decision work financially. So, with that off the table, I was reduced to considering a consumption rather than a financial decision.

As with any consumption decision, the issue is this: What do I want to give up to consume X [insert whatever you’re thinking of buying at the X]? Now, given my framework, I value consuming financial stability above everything except a place to live, necessary clothing, and food. Following stability is financial well-being and a long, relaxed, partial-retirement (what’s come to look like the “gig economy” except I can work when I want to and play when I don’t want to work). After that, my framework allows for entertainment, social considerations, and outright consumption like adult toys (all that sporting hobby equipment, not what you were thinking!).

Where did a new car come out then? It didn’t. I continued to drive the old car until it’s engine head warped (it was aluminum) and even then, I looked closely at dropping a new one onto the engine. One of our saving funds was new car purchases so we also shopped for a small subcompact and found a good deal for a Nissan Sentra, 5 speed, bottom-grade trim car. We were then off and running for another ten+ years. We sold that car overseas when we’d had it for 12 years.

Transportation purchases are one of the most common wealth-draining purchases people make. At this point, I’ve heard almost every rationalization known, and they are all just excuses. The real issue is to learn to manage wants versus needs. Conflating the two is what holds most people back from financial well-being. The tool to avoid this: Having a financial framework that allows you to produce a budget and stick with it. The framework will allow you to have a ready reference to how you prioritize what you do with your financial resources today and tomorrow.

There’s also a maxim at play here. “Don’t let a bad decision cause you to make more bad decisions.” Say, for example, you don’t like the car you bought. Perhaps you deem it to be unreliable. To come to terms with a reasonable decision, given your financial framework (or philosophy some call it), run the numbers, throw in some probabilities, assess the ranges, figure out what you have to give up (all the other possibilities for those dollars) and then make your decision. In this case, there’s likely little way that the most expensive air conditioning repair will justify driving another car off the lot.

The money you save by controlling consumption impulses will allow you to focus on building wealth. Financial freedom and non-working retirement years require income streams. Only productive capital can produce those streams. Every time we buy something that isn’t productive, we’ve taken a step back from financial freedom.

While this is not a financial lifestyle blog, the reality is that you do have to save money in order for us to help you build tax-advantaged wealth. Once you are accumulating savings, don’t forget to have a chat with us about where you are, financially, and where you want to be.

Merrill-Edge Drops Free Trades

Bad news on the investing front: one of the best deals going is coming to an end. Merrill-Edge is ending its 30 free per month transaction deal that was previously qualified by maintaining a deposit balance of $25,000 in Bank of America and Merrill-Lynch accounts. For many of our clients, the imposition of a $6.95 per trade fee will outweigh their returns on their small, learning accounts that we recommend.

Given that change, what other options exist? This chart lays out many of the options and our experience with Fidelity, Schwab, and Vanguard supports recommending to our clients that they contact one of those firms. For our purposes, we will be moving our corporate accounts to Vanguard as their in-house ETFs and funds meet our needs and fit with our philosophy. The fact that we can continue to trade for free in their products clinches the deal. That said, if we want something outside their offerings, their $7.00 per trade fee is a bit more and we’ll likely open additional accounts at either Fidelity or Schwab given their $4.95 per trade fee.  We like how Vanguard just seems honest and open with no $0.95 nonsense in their pricing.

We don’t have any experience with some of the other firms that offer free trades or trades assessed at very low per share rates. For small trades, of course, the small volume of shares will frequently produce transaction fees less than the flat rate $4.95 of Fidelity or Schwab. However, since we don’t advocate day trading as a strategy, given the low frequency of trades and the reputations of the two firms, we are comfortable with our recommendation.

The Fiduciary Rule is Dead

The Fiduciary Rule is Dead?

Summary: The Fiduciary Rule, intended to eliminate predatory practices that have been costing retirement investors billions in lost returns, will not take effect on April 10 as previously scheduled.  Its implementation is delayed for 180 days and analysts assess that the Department of Labor will not implement it then, either.  A related executive order directs the Treasury Department to review regulations that inhibit Americans making, ” . . . independent financial decisions and informed choices.”

Fiduciary Rule Delayed 180 Days

The Administration directed the Department of Labor to cease work on implementing the Fiduciary Rule.  The rule would have taken effect April 10, 2017, but its future is now doubtful, given a 180 day delay to assess its impacts.  In a nutshell, licensed and registered financial advisers (financial product salespersons or FPS) engaging with either institutional or individual retirement plans would have been required to recommend investments that were in your best interests rather than applying the “roughly suitable” rule currently providing safe harbor in the industry.  This is a setback for retirement investors and increases the importance of being an informed investor before discussing any particular investments with your FPS.  The rule was not to have applied to investments in general, just to retirement plan investments. As a side note, McFarland-CPA does not recommend specific acquisitions of named products to its clients, instead providing an analytical framework from which to interact with those who do. We think education and information is the key to a satisfactory relationship with any salesperson.

FPS’s Interests Not Aligned With Yours

Up till now, FPSs could be compensated in many different ways and only a fee-only FPS could be assumed to really be in your court. Cases of “churning,” when a broker simply buys and sells in your retirement account in order to generate transaction fees, are not hard to find.  The sales of front-loaded funds and insurance-like investment products were other sources of FPSs’ revenue that did not necessarily align the FPSs’ interests, as the advisor, with yours, as their client. In another example, we have seen many clients who did not actually qualify as sophisticated investors (a term with pretty good common law definition) being taken advantage of by boiler room operations selling doubtful investments in shady limited liability corporations. The LLCs then go bankrupt with our clients losing everything. It is uncertain whether the final result will curtail these types of predatory practices but they clearly fall within the topic generally.

Fiduciary Duty Was Key Reason for Change

The previous administration had sought to force FPSs to be their retirement clients’ advocates rather than arms length adversaries as is now the case in some cases. Without fundamental changes to the industry, after the rule’s implementation, these sales professionals would have been open to slam-dunk lawsuits unless they could prove they actually were acting as fiduciaries. At least that was the scuttlebutt in the industry’s backchannels. The fiduciary duty is a bar that many would not have been able to meet and still remain in the industry.  Converting to a fee-only professional basis, as is common with attorneys, CPAs, and other professionals, would not have been possible for many given the saturation already existing in the market. There is a notable hesitance for consumers to leave indirectly-compensated brokers for fee-only professionals.  We’re ok with that, so long as it’s clear that the consumer understands the person on the other end of the phone has an agenda that isn’t necessarily aligned with your welfare. If your physician might be providing you with advice that wasn’t in your interest, how long would you retain her or him?

Assessment:  Maintained Vigilance and Consumer Education Will be Key

With the delay and possible cancellation of this rule, those most vulnerable to predatory practices will need the increased vigilant support of their confidants.  We will continue to emphasize this part of our information-only practice and look forward to a healthy discussion in the forums.  Advocates for the Obama administration rule contended that investor losses absent the rule reached $17 billion annually.

Investor Losses and the Fiduciary Rule

Obama Administration Policy Fact Sheet

DOL Fiduciary Rule as Proposed May Not Stop Investor Losses as Claimed