Fiduciary Irresponsibility

As I'm sure that most of you are aware, I worked for several years as a stockbroker. As a broker, one of the most important concepts we had to keep in mind was the idea of fiduciary responsibility. Boiling it all down, it basically came down to the idea that because of our position it was very likely that we knew more than the client about investing and financial matters (which was true) and as such, we had a responsibility to ensure that any actions taken by the client were consistent with their needs, requirements and goals. A breach of fiduciary responsibility was a serious offense (and it was treated as such by the regulators).

So I always am interested when I see some finance company promoting an idea that seems to run 180 degrees contrary to most everyone's needs. CNN/Money has a great article about the Home Equity Lines Of Credit (HELOC) which are one such creation in my opinion.

I noted a week or so back that people were really starting to take on way too much housing debt. Yes, it is really what has kept the economy going over the last few months, but that still doesn't mean that it was a wise decision for many of these people. Now, with the HELOCs, companies like Wells Fargo are making it even easier to tap the equity in your home for whatever purpose you might want: travel, home improvement, education, dinner, groceries, fries from McDonalds. For whatever reason you deem necessary, you can put your house at risk for foreclosure.

Most people probably never realize that. They see the little VISA logo on the card and think that everything is hunky-dory and that it works just like the VISA card they got from Citibank. It never occurs to them that the whole reason they got that massive credit line is because it is secured by the equity in their home. It never occurs to them that if they fail to keep up the payments, they could end up living in the cardboard box that their shiny new refrigerator came in.

Do you think that Wells Fargo or any of the other HELOC companies are emphasizing that point? No. They may mention it in passing; it may be in the fine print, but they're going to be spending much more time selling the prospect on the ease of use of this card when they need that hot dog and Slurpee.

As I see it, that's promoting a financial product that is likely not in the best interest of the client. In other words, a breach of fiduciary responsibility. Are there times when an HELOC might be appropriate? Sure, but buying designer clothes and lunch from Wendy's are not two of them.

The finance companies are beginning to make a big push to remind people of how easy it is to use these HELOCs. They are trying to make more from merchant fees and interest charges, which are good for the company, but they're doing it at the expense of the financial well-being of their clients.

The HELOCs will not be the downfall of Western Civilization; they won't even push our economy into recession. But they are not the ideal solution for everyone. They have real and significant risks to people.

And those risks need to be made clear, much more so than the ease of buying a Slurpee out of your home equity.