The point: it doesn't matter what method you use to pay off debt, or if you use any method at all. What matters is that you stop creating new debt.

It's out there: the mathematically precise, strictly rational formula for paying off your three credit cards, small car loan, and fluid line of credit balance. It's not too hard to calculate the most efficient way to allocate every dollar and wring the most interest-busting bang out of each buck.

If that doesn't work for you - and let's be honest, it often doesn't - there's a psychologically motivating method that throws math out the window and concentrates on tickling your brainpan with the momentum of every dollar that's paid off - like the eponymous snowball rolling down a hill.

Proponents of these two camps are territorial and permanently at odds. (I'm just spitballing here, but I imagine it has to do with not being able to live inside somebody else's brain and see how it works, like so many other disputes.)

Frankly, I don't care how you pay off debt, so long as you simultaneously stop creating more.

Enter debt consolidation. Often a polarizing bone of contention between the two camps, debt consolidation - for those three of you in the back of the room unfamiliar with the concept - is when a lender gives you the money to pay back all of your other debt that's scattered across the country and pay them back instead. They win by getting a new loan on the books, and stealing market share from the competition. You win by bringing down your overall interest rate.

What's to argue with, right?This is what to argue with: there's a teeny-tiny window of opportunity in which debt consolidation is a powerful tool to bring your debt-free date closer and eat vast chunks out of the total amount of interest you'll pay. That window of opportunity is open for about half an hour, and when it closes, it's so hard to reopen that it might as well be painted shut.

If from the outset you don't commit to a payment that is equal to or more than the amount you were paying on your unconsolidated debt, and that will get your three credit cards, small car loan, and fluid line of credit paid off in less time than they were originally amortized for, then you're not paying down your debt, you're just moving it around.

If you don't take a long, hard look at how you got into debt in the first place, and - from minute one of your newly consolidated life - take measured, calculated steps to not do it again, those credit card balances are going to creep back up again. You'll find yourself in the same office, maybe even in front of the same banker, signing a new set of loan papers for a new consolidation loan three years down the road.

I began my career in banking in the heyday of debt consolidation lending. The amount of new unsecured dollars added to our lending portfolio was a huge component of our sales scorecard, and while the focus shifted to include a wider spectrum of product sales after 2008, banks are still hungry for your debt consolidation dollars.*

Folks, I've seen a lot of debt consolidation train wrecks, and about five of them where due to circumstances beyond the borrower's control. The other 7,256,219 were due to the window slamming shut, either because the borrower didn't know or didn't care about it.

I'd love to blame the bank for it (you know I would), but I can't. Yes, the banker you sit across from has incentive to talk you into stupid stuff that'll not only shut the window of opportunity, but nail it closed and board it up too. ("Increasing your cash flow" is a phrase that comes to mind.)

But down in the land of brass tacks, you just signed a loan to pay off other loans. If you weren't thinking about how you got to this point at this point, when else are you going to think about it?

If it was important enough to you to take action, why isn't it important enough to change your behaviour?

*They'd like those dollars to be in the form of a secured line of credit, though, and will sell you on the fact that you can consolidate again and again and again, without ever having to go back into the bank to do it.

The point: If you financial advisor is giving you a financial plan for "free", what's his incentive for doing it well?

These days, we all want to believe that we're savvy consumers. We scoff at TV commercials for products that are worth hundreds of dollars but can be yours - for a limited time, mind you - for the low, low price of $19.99 (plus an unspecified amount of shipping and handling), and they'll throw in two extra sets for FREE!

"Ah-hah!" We say to ourselves as we sit on the couch, "We are not chumps. We know that the little loud man is creating a perceived value for a product that has little intrinsic worth. We know that the real money is in shipping and handling. We will not fall for dat."

Believing ourselves to be Too Smart for that kind of marketing, we fancy ourselves willing and active participants in mutually beneficial transactions: we buy the cereal that comes with a free t-shirt because we were going to buy cereal anyway.

If companies have to "lose a fly to catch a trout", well - these days - they're dealing with some pretty cynical trout who think they're too smart to ever get caught.

Except we're just as susceptible to delicious flies as the trout who went before us...If companies couldn't make money by offering products and services with a perceived value for free or below cost in order to entice consumers to buy the profitably priced companion product or service, they would have stopped doing it. Using a loss leader as a marketing and sales strategy has been around for more than a hundred years, and isn't going to disappear anytime soon.

The cereal company doesn't care about the quality of the t-shirt that they give away when you buy a box of cereal. They care about the fact that the t-shirt costs less than pennies to make, has a perceived value, and will cause unthinking shoppers to buy cereal (or more cereal, or a different brand of cereal) that they didn't need, because they were getting the t-shirt for free.

Did you know that when you work with a financial advisor that also sells financial products that your plan - the analysis of your current situation, the recommended action steps to change it for the better, and the forecasts that show the best and worst case scenarios if you do (or don't) take action - is a loss leader? This is why it can be hard to find the right financial advisor.

The fact that the fund companies are the ones compensating your advisor for the time he took to build a plan for you should tell you a lot about the value of that plan. Actually - having seen some of the "plans" that come from these advisors when I talk to clients who've been burned - the quality of the plan itself should tell you a lot about the value of the plan.

Banks and mutual fund salesmen love to trumpet the planning side of what they do. They talk about it like it's a public service; that the financial health of every consumer in Canada is so important to them that they'll give freely of their time and resources to create personalized, tailor-made plans for everyone they meet.

In reality, of course, they make their money when you buy the mutual funds from them, and - surprise! - the result of their analysis is that your financial health would be, well, healthier if you transferred your life savings into whatever mutual funds they're selling that day.

And, more often than not, you bite.

You bite because you feel a moral debt to this person who just spent an hour filling out financial health check questionnaires and risk profiles with you. You bite because the plan that their computer spit out has charts, and forecasts that you're told are pretty conservative, and it's only a week or so after you leave the office, having made the recommended changes to your portfolio and signed the transfer documents, that you realize all you have in your hands is a one-size-fits-all, standardized by age and family situation checklist of products to buy, not a roadmap to healthy finances tailored to you.

If they spend little enough time on the plan that they can afford to give it away, how much are they earning on the products you're being encouraged to buy at full price?

I guarantee you that the financial plan you're getting for free from the personal banker and the investment advisor isn't really a financial plan tailored to you at all, and it's free because the full priced products - through up front and annual trailing commissions - are huge profit engines for the people and companies who sell them.

A classic loss leader.

The point: have a plan for the money you earn within your business, and be ruthless about it. Otherwise, you'll only succeed through sheer luck.

A short meditation, today. Losing power for forty-one hours during the busiest week I've had in my practice has set me back a little, but I had to share this with all of the new and hopeful entrepreneurs out there.

First, some context: I have been intimately involved with the start-up planning and financing of at least six small businesses - eight if you count my practice and my husband's renovation company. I know what it's like to build a business, feed a family, pay a mortgage, and save for tomorrow (and next year, and the years after that) on irregular and sometimes insufficient income. I am completely sympathetic to the feelings of anxiety, self-doubt, and stress that entrepreneurs feel, because I am one. But this has got to be said:

Please, please stop saying "the business will pay for it." And stop saying "but it's a write-off" while you're at it.

People, the money your business makes is a real, finite resource. The operating account for Joe's Plumbing isn't an endlessly renewing cup of Red River Cereal like that one you made on that camping trip last year but didn't add enough water to, so every bite you took was rapidly replaced and you despaired of ever finishing the blasted stuff. 

I've seen it too many times: in the first flush of success, when the cash is flowing, the operating account is full, and it looks like wild success is right around the corner, it's so easy to pay yourself a celebration bonus or invest in new equipment instead of setting aside money for next year's income tax bill or your HST installment.

Justifying an unnecessary purchase because it will allow you to pay slightly less money in income tax is like buying something you didn't really need because it was on sale.

When your business buys something, it can't buy something else. If your hand is always in the till, and you don't ever manage to get (and keep) your business money separate from your personal money, you're guaranteeing yourself years of one cash flow crisis after another, years of stress and frequent burnout, and - eventually - you'll give up or be forced by desperation to abandon your business and try to get someone to hire you again.

Be as careful with your business income (and - I hope it's obvious but I'll say it anyway - your business borrowing) as you are with your own income. Set yourself a start-up budget and be ruthless about what you do and don't need. Set cash flow goals for your future purchases, as in: that new piece of equipment is "affordable" once the business starts making X amount every month for six months.

You probably have a great idea, and you're very likely really good at what you do. Don't let disorganization and poor impulse control ruin a perfectly good business.   

Let's not be coy: I'm a financial planner. My reason for writing here is so that potential clients will read it and decide that they want to pay me for advice about their money.

My business model is what those familiar with the industry call "advice only". Most regular people don't really know what this means, which is why we advice only financial planners talk a lot about why we sell our advice and nothing else, and have "Advice Only Financial Planner" written prominently on our business cards, LinkedIn profiles, and everywhere else we can manage to put it. We usually stop short at tattooing it on our kids.

Speaking of regular people, they are the people I work with. Average, ordinary Canadians who work because they have to, wonder if they're saving enough, are working on paying down debt, and have the potential to wrestle their finances into submission, but are just starting out, don't have the time to dedicate to it, don't know quite how to approach the problem.

I obviously believe that pursuing this model will let me earn enough money to pay my mortgage, buy groceries, and keep my kids in clothes, or I wouldn't do it. 

Here's where things get tricky: if I didn't have the best interests of my clients in mind, how would they know? It's not enough to just say the words; anyone can do that.

How do you know that your advisor is putting your best interests first?

Studying for and passing the exams to become a Certified Financial Planner® is recognized across North America as a standard of knowledge and voluntary ethical behaviour in the industry, but does it guarantee that the advisor is going to put your financial interests above his own? It doesn't.

Can you tell by his actions? That depends on how much you know. Think about Barry Choi's story (with Big Cajun Man at Canadian Personal Finance, and with Preet Bannerjee on the Mostly Canadian, Most of the Time podcast) He had no idea that the funds his advisor bought for him had high expenses and would cost money to sell of he wanted to hold them for less than seven years, because that "advisor" didn't disclose those details.

That's an example of egregious wrongdoing that regulations already exist to protect against, and because of those rules, Barry was able to get his money back and invest it himself (in index funds).

But what if his advisor had met the minimum disclosure requirements? What if he had specifically disclosed to Barry that the cost to invest in the funds he was advising would be 2% of the invested money, and that there would be be fees charged to him if he withdrew or transferred his money before the seven year mark?

Would that have ensured that he was acting in Barry's best interest?

No, it wouldn't, and here's why:

• When he opened his account, Barry wasn't confident enough in his own knowledge to ask why that fund in particular was being advocated, or to evaluate the validity of the advisor's argument.

• Barry was in a client relationship with someone who was going to manage his money for him. He was reluctant to demand more information than was offered to avoid sounding adversarial.

• Barry assumed that the advisor was legally required to act in his best interest. He wasn't. He was legally required to offer investments that were suitable to Barry's time horizon, investment knowledge, and risk tolerance, which is a totally different thing.

• Barry didn't know - and wasn't required to be informed - that his advisor would be paid an ongoing commission, paid for out of the disclosed management fees, for the entire time Barry stayed invested in that fund.

I happen to be very familiar with the compensation structure of the particular organization that Barry's advisor was representing. That company pays a direct commission to its salespeople that varies in value depending on the type of investment it is. The highest commissions are paid on actively managed, equity based mutual funds that charge fees if you withdraw your money before the end of a pre-determined period of time, usually seven years. The lowest commissions are paid on money market funds. They don't sell index funds.

At the big banks, advisors are paid a salary, which allows them to say that they're not directly compensated for mutual fund sales. The fact is that those advisors have precise sales targets upon which that salary - and the possibility and degree of further pay increases - depends on meeting those targets. What sales are most highly rewarded? Actively managed, equity-based portfolios. The sale with the lowest rewards? Money market and index funds.

This isn't an argument against actively managed mutual funds (although I think there's an almost water-tight one to be made against the ones with the highest costs). This is an argument against compensating advisors based on the type of expenses they can incur for their clients, and - just to throw the net as wide as possible - it's an argument against compensating advisors for the sale of anything except their advice.

Let's lay it all on the table: my business stands to benefit if embedded commissions in mutual funds are banned, as is being proposed by the Canadian Securities Administration, the Ontario Securities Commission, and supported by organizations like FAIR Canada.There are good people whose careers are built on the embedded commissions model. They are facing an enormous problem making a living if the ban goes through, if they can't successfully transition their book of clients to an advice only or fee based model*.

If the only thing these advisors will be able to sell is their advice, they'll have to demonstrate that they can do more than just pick out and sell mutual funds. They'll have to offer enough value that regular people will pay for it upfront, instead of buried and forgotten inside a mutual fund account. Most importantly, they'll have to offer actual financial planning, instead of just investment advice.It won't feel free anymore, which is why Greg Pollock, head of Advocis and defender of the commission and disclosure laws as they stand today, argues that the 80% of investors who currently invest through commissioned advisors (and due-paying members) will balk at the bill and stop seeking advice altogether.

Canadians are smarter than that. If they knew what their choices actually were, they could choose visible over invisible fees. But they don't know that they have a choice. They're going to advisors who offer financial planning as a loss leader for their income-producing sales, believing that the advice is free and their best interests are being looked out for.

What if we just required advisors to disclose the embedded fees?

Increased disclosure sounds like it would solve the problem. Require advisors to explain precisely how they are compensated, by whom, and for what, and consumers will be able to make informed choices based on their own requirements, right?

Consider the fact that they are consulting an advisor in the first place. It means that they either don't trust their own ability to investigate and make good financial choices, or they don't have the time to do the necessary work.

If they lack confidence in their own abilities, where will they get the confidence to evaluate the motives of a commission earning advisor who has just told them to invest in ABC fund? If all we do is make embedded fees part of the required disclosures, how likely is it that they'll weed through the 200 pages of annual report, prospectus, know your client statement, and account opening documents to find it?

What client, unsure of his own abilities, and confident enough in his advisor's expertise to agree to sit down with him in the first place, will take the time to read through - let alone question - all of the relevant information while their advisor sits across the desk watching him, and the next client is waiting impatiently in the next room?

Leave it up to the advisor to disclose verbally, and you get the equivalent of small print disclosures read by high speed robots in a pharmaceutical commercial. Or you get Barry's case, which - remember -  wasn't red-flagged by an industry ombudsman sitting in a back office somewhere, but was only resolved because Barry noticed something was wrong and made enough noise to get it fixed (and had kept all of his emails and paperwork to prove his case). How often do similar situations go unaddressed because investors lack the confidence or knowledge to get them resolved?

Banning embedded fees is only half the problem

If the Canadian Securities Administration does ban embedded fees, that still won't ensure that advisors will put the best interests of clients before their own financial gain, which is why it is also proposing a statutory fiduciary standard - finance speak for "it's against the law to give advice that isn't demonstrably in the client's best interest".

Regulation doesn't fix everything. It won't make every advisor magically competent and ethical. But in this case, regulation is necessary because the people it is designed to protect aren't even aware that they need to be protected, and the people they need to be protected from can talk really, really fast.

---

*Fee-based is a different model from advice or fee only: fee based advisors charge a fee to manage your investments for you, based on the percentage of the assets you hold with them, and may charge other fees for planning services. There's more to talk about that, but not in this post.   

The point: there are two things you can do if there's going to be a housing market crash, and worrying isn't one of them.

You're here, so I'm going to take a long shot and guess that you read about money online, unless you're here for the outstanding graphics, in which case: I'm sorry.

I'm going to ignore the personal finance bloggers in the room for a minute and just talk to you folks hovering awkwardly in the back. You know who you are: you worry about your money, but you don't really know what to do about it. You read an opinion here and a post there about the strength of the Canadian banking system, or the lessons of the Great Recession, or how the Dow Jones Industrial Average just hit 15,000, and you wonder how it applies to you.

You're pretty sure that everyone else in the room knows exactly how it applies to them and what to do about it, and you're fairly certain that they're laughing at you for not knowing. 

Rest assured: we don't, and we aren't.So when you read a post like Nelson Smith's "F--- You, I'm Short Your House, full of intelligent opinion, clear and reasonable calculations, rationally written arguments, and the occasional f-bomb to relieve the stress, you can be forgiven for adding "the Canadian housing market is going to crash, welcome to 2008" to the long list of things you're worried about.

This is what I want to say to you, the regular people in the room:

It's entirely possible that 2008: The Sequel will occur in Canada. What Nelson writes about Home Equity Lines of Credit is true: banks have been pushing them for years, and consumers have been eating them up, using them as emergency funds, purchasing vehicles, paying for their kids' post secondary education, and to consolidate credit card debt. If you can make the interest only payment, you can have it.

Further, Nelson is spot on about how we - as Canadians - patting ourselves on the back for the "prudence" of our lending system can congratulate ourselves only for being Less Bad. Think about this: the business of the bank is volume. Whether a personal banker is paid a salary instead of a commission is irrelevant when performance evaluations (and subsequent payscales) are based entirely on net new money to the bank. The incentives to get big HELOCs approved and - most importantly - drawn down, especially during the spring lending season, are enormous.It's also entirely possible that there will be no housing market crash. The economy could change in ways we can't even imagine, let alone forecast right now. It's happened before, and I daresay it will happen again.

Here's what you need to do, in a handy numbered list:

1. Get your spending in order. Figure out how much you're spending, and on what. Examine it in light of your goals, and cut back (dramatically if you have to) anywhere that doesn't get you closer to the life you want.

2. Funnel as much money as you can to paying off your debt: highest interest first, unsecured next, secured against your home next, and your mortgage after that.

There's a lot of other advice I could give, contingent on any of the thousands of different spending vs. debt vs. investment scenarios you could be in right now, and what your particular goals are, but I'm going to stop there, because these two pieces of advice are universal.

Follow them, and you'll be better prepared for whatever lateral damage a housing crash can have on your personal economy. If no correction occurs, and if Canada's banks sail serenely on their way collecting money in their wake, you'll be laughing along with them.