Rick Kahler's Financial Awakenings

As I wrote in a recent column, it’s best to try resolving a dispute through negotiation. This approach can save time, stress, and money. What happens, though, when negotiating doesn’t work? Sometimes it’s necessary to follow through with a lawsuit.

This isn’t something to do lightly. Before you haul your opponent off to court, it’s a good idea to think the matter through carefully and establish your bottom line. What might you gain? What might it cost? What is the potential return—in payment of damages or money owed you, vindication of your position, or whatever satisfaction you might be seeking? How much time, money, and emotional energy are you willing to invest in this matter?

You probably will need to consult an attorney before you can answer those questions. Obviously, the attorney can’t guarantee you’ll win your case or give you a precise cost. Still, a consultation should give you a realistic assessment of the validity of your position and an estimate of the cost to pursue legal action. The attorney may also be able to suggest intermediate steps short of suing someone. The magic words, “a letter from my lawyer” can be a powerful tool to help persuade someone to settle an agreement.

If a lawsuit does seem necessary, consider using Small Claims Court. Many people assume this option only covers disputes involving a few hundred dollars. In fact, a “small claim” can be considerably more than that. In South Dakota, the current maximum amount is $8,000.

Cases handled by Small Claims Court commonly include suits for collection of unpaid bills or returned checks, damages resulting from car accidents, landlord/tenant disputes over payment of rent or return of security deposits, and damage to personal property.

To find out more about the requirements in your county, look under “Small Claims” in the government section of your phone book. The court office, which may be a division of the Clerk of Courts office at your county courthouse, will provide forms and instructions. As the Plaintiff, you are responsible for writing a statement describing your loss and providing copies of any supporting documentation such as receipts, bills, leases, or repair estimates.

When you file your claim, you pay a small filing fee which varies according to the amount you are seeking. In South Dakota, the minimum fee is currently $17.03 and the maximum is $35.03. This amount is added to your claim, so the Defendant will be required to pay it if you prevail.

The Defendant is served notice of the claim by certified mail, or, if necessary, in person by a process server. There may be additional fees for this. If the Defendant doesn’t respond by the deadline, a judgment is entered in favor of the Plaintiff. If the Defendant does respond, a hearing date is set. At this time both parties present their cases in front of a magistrate judge. You can be represented by an attorney if you wish. Either party can call witnesses, who can be subpoenaed if necessary.

If a judgment is entered in your favor, that isn’t necessarily the end of the case. You will still need to take steps to collect any amount due. These may include asking the Sheriff’s office to execute the judgment, asking that the Defendant’s wages be garnished, or asking to have the Defendant’s driver’s license suspended.

Small Claims Court is “do it yourself” litigating. You need to do your own legwork, provide the supporting evidence, and follow through as necessary. If you are willing to do those things, Small Claims can be an effective and inexpensive way to resolve a dispute.

In the past I’ve written about the important difference between a registered investment advisor (RIA), who typically is advice driven, and a traditional stockbroker, who is typically product driven. A recent court decision may help clarify that difference.

Any professional truly engaged in financial planning is also registered with the SEC as an investment advisor and makes a living disbursing unbiased advice. A stockbroker is registered instead with the National Association of Securities Dealers and is a sales person who makes a living primarily selling products.

To a financial planner, you are the client. The financial planner has a fiduciary responsibility to put your interests above his and disclose conflicts of interest in the same way your attorney or accountant does.

To a stockbroker, you are a customer, because the broker’s fiduciary duty is to the company he or she works for. The broker does not have to fully disclose conflicts of interest and must put his company’s interest ahead of yours.

The problem is that brokers have a built-in conflict of interest. They make most of their money from commissions on products they sell, so their recommendations to customers are inherently biased toward investments that will be the most profitable for them. Theoretically at least, customers are protected against malfeasance because brokers are required by the SEC and NASD to comply with a complex set of rules to treat customers fairly and disclose the commissions they receive.

Financial planners and investment advisors who are RIAs with the SEC are held to a much higher standard.

Ironically, the SEC has not required brokerage firms to register as investment advisors under the Investment Advisers Act of 1940. This applied as long as their investment advice was “solely incidental” to their brokerage activities and as long as they were not receiving “special compensation” such as fees for that advice.

Over the years, however, large brokerage firms have increasingly spun their advertising and communications to leave the illusion that they were doing unbiased financial planning. They decided to try to have the best of both worlds by charging fees for advice as well as selling in-house products. Even though this was done in many cases by separate divisions within the companies, the inherent conflict of interest remained. For the public, the line between brokers and RIA/financial planners has become more and more blurred.

The Financial Planning Association eventually sued the SEC over its exempting brokerage firms from the fiduciary requirements that applied to registered investment advisors. Recently, a three-judge panel for the U.S. Court of Appeals ruled in favor of the FPA.

The result of this ruling is that large brokerage firms can no longer claim they are doing financial planning unless they register with the SEC as investment advisors. This will require them to change the relationship with their customers, elevating them to the status of clients whose interests must come first.

Some of the firms may do this, but most will not. It is also possible that they may move away from offering advising services and go back to the commission model with its built-in conflict of interest.

The brokerage industry is also likely to lobby Congress for legislation to reverse the effects of the court’s ruling. The SEC exemption has been important for these companies, and they aren’t likely to allow it to disappear without a fight.

What impact does this court decision have on the average small investor? For now, at least, it requires a plainer definition of whether one is a customer or a client. It is a momentary clearing of the smoke and mirrors. Whether that clearing lasts remains to be seen.

TD Ameritrade is making changes to their website. Starting next week, you will notice a number of improvements. Here is a sampling of the most notable changes:

• Self-service tools that will allow you to update your address and phone number, request checks and submit instructions to wire funds, and view the status of your requests.
• Consolidated account views for easy access to balances, positions and history.
• Electronic statements, confirmations and tax documents so you can receive all of these documents via e-mail rather than via U.S. mail, which helps reduce the amount of paper you receive in the mail.
• A comprehensive, easy-to-navigate account center, giving you single-screen access to individual account details, balance summary, positions and history.

I recently read that the National Association of Realtors forecast a 0.7% decline in house prices this year. I was surprised to learn that home prices have never declined on a nationwide basis since the 1930’s—something I didn’t know despite spending 30 years in the real estate industry. I certainly knew of times, such as the mid to late 1980’s, when prices declined in Rapid City. For a period of several years, I never gave a house seller a check at closing. Instead, they wrote me one.

Of course, there will be areas where prices rise, but certainly there will be many more localities where prices decline. According to The Wall Street Journal and The Arizona Daily Star, prices are down around 4.5% in various Virginia and Arizona cities.

One mutual fund manager, The Leuthold Group, is so pessimistic about housing that they recently invested 7% of their Concentrated Core Portfolio in shorting housing stocks. They expect to cover their shorts at 30% to 50% below current price levels. Leuthold has been negative on residential real estate for a number of years, calling it a “train wreck” waiting to happen.

They blame this on government bureaucrats and politicians taking to the extreme the notion that “most every American family should be able to own a home.” This has resulted in buyers who have poor credit histories or lack down payments obtaining “subprime” loans by paying higher interest rates than borrowers with better credit scores. By Leuthold’s account, over 20% of the loans originated in 2006 were subprime.

To see how someone in the trenches viewed the subprime issue, I called my brother, David Kahler, who is the largest residential real estate agent in western South Dakota. He told me that prior to the subprime crash, a borrower with a credit score of 580 could get a 100% loan on a home. Since the crash, lenders have raised to 600 the minimum credit score to qualify for a 100% loan. Just as a comparison, our property management firm requires a person to have a credit score of at least 600 to rent an apartment or a home. An increase in credit scores from 580 to 600 doesn’t exactly squeeze a lot of people out of the home buying market. This makes one wonder how dire the subprime crash really was and if it wasn’t just the “crisis du jour” created by the financial press.

I also asked Dave what was happening in the Rapid City real estate market. He told me, unscientifically, that homes which sold for around $105,000 at this time last year were now selling for $115,000, up around 9%. That doesn’t sound like much of a slowdown. Dave noted that prices in Rapid City typically increase in the spring, and this year is no exception.

He said upper end houses have been slower, but inventory is unchanged. Currently, there are 1031 residential homes on the market, compared to around 998 a year ago. He also told me the market is “flooded” with unsold new construction, which would suggest there are fewer existing homes listed for sale. Accordingly, new residential construction is down substantially.

According to Amy Bockman at the Black Hills Board of Realtors, the average priced home in Rapid City increased in value by 9.1% from 2005 to 2006 ($150,400 in 2005 to $164,800 in 2006). So far this year the average price of a home is unchanged.

Perhaps the bottom line on this issue is to remember that real estate is always local. Whether you’re buying or selling, it’s wise to focus on local real estate conditions rather than national headlines or predictions.

Ebenezer Scrooge will be the topic when Rick speaks to the annual convention of the North Dakota and South Dakota Banker’s Association in Sioux Falls, SD, on June 12th. Rick is a part of the spouse/guest program and will center his talk on Ebenezer Scrooge, an unlikely source from which to glean wisdom about financial planning.

At the center of Rick’s message will be a chance for participants to examine their relationship with money and discover their deep seated money scripts. Click here for more information.

Rick was pleased to appear for the first time as an author in Financial Planning magazine. “Beyond The Numbers” appeared in the May issue of the popular trade magazine. In the article, Rick discusses the trend among the most forward-thinking planners of incorporating the more emotional and psychological aspects of money into the traditional financial planning practice.

Rick is considered by his peers as one of the pioneers in the field of Financial Therapy and Money Psychology. You can read his article here.

I asked London to tell me something about her third book. “This book is the final book in the white filly series. It is where Karen gets up one morning to find that someone had stolen Sonya. Karen gathers up her friends and goes out on a mission to get her back. Then the kids get kidnapped. I hope that you will enjoy it.”

As I am posting this, Miss London is busily reading the first four chapters of her fifth book to me. It’s interesting to watch her sit down at the computer almost every night and entertain herself writing. Folks have said I am a prolific writer; I don’t think I have anything on Miss London!

You can download her book here: The White Filly Two

Rick and his co-author, Ted Klontz, will be featured speakers at the Financial Planning Association’s annual convention to be held in Seattle, WA, on September 11, 2007. The convention typically draws 4,000 financial planners from across the nation.

They will be speaking on “The Financial Wisdom of Ebenezer Scrooge: Transforming Your Client’s Relationship with Money.” Ebenezer Scrooge would seem an unlikely source from which financial planners could glean wisdom on how to facilitate change in their clients. However, Dickens’ classic tale of how Scrooge left behind his broken relationship with money and transformed into a joyful, compassionate and generous man is a powerful model planners can benefit from today.

For more information, click here.

Over the years, I’ve been a party to several business-related lawsuits. Regardless of which side I was on or the eventual outcome, the process was stressful, time-consuming, and costly. It’s an experience I’ve never liked. In addition, the adversarial nature of a court proceeding can leave a legacy of anger and resentment.

This is why I have become a big fan of arbitration and negotiation. Two recent incidents have confirmed the value of talking first and suing later.

One of my friends recently bought a house to rent to his daughter. The day after she and her three kids moved in, the sewer backed up. It turned out that the septic system hadn’t been installed properly. The sellers obviously knew there were problems, because they had compensated with a jury-rigged system of hoses and a sump pump. They had failed to disclose any of this to the buyer.

The solution, reinstalling the septic system, would cost several thousand dollars. Clearly, the sellers bore some responsibility for this. Unfortunately, they had moved out of state. They didn’t respond to the buyer’s phone messages.

Initially, the real estate agent wasn’t much help, either. She had represented both parties under a limited agency agreement, and she interpreted her position to mean she shouldn’t get involved at all in a dispute between the buyer and the sellers.

The buyer was beginning to think a lawsuit was his only recourse. Before going ahead, however, he decided to give negotiation one more try. He talked with the real estate agent’s employer, who convinced the agent it was in her best interest to help her clients come to an agreement. She started making phone calls.

The outcome? The issue was resolved within two weeks. The sellers sent the buyer a check for about two-thirds of the cost of the new septic system. The buyer felt his complaint had been heard and that he had been treated fairly. The sellers may not have been especially happy, but they avoided a costly lawsuit. The real estate agent also avoided being named as a party in a lawsuit. In addition, she maintained and even enhanced her professional reputation. By the time everything was finished, the buyer told her he wouldn’t hesitate to use her services again.

My second example involves a used van my wife and I recently bought. It was a great vehicle except for an annoying whistling noise. I was very clear that I would not buy the car unless the whistle was fixed. The salesman said it was a simple problem to solve and they would fix it. They did, supposedly. We bought the car, on the salesman’s assurance that we could bring it back if the problem wasn’t taken care of.

Within a week, the noise was back. Over a period of two weeks, the van was in and out of the shop several times, whistling merrily along each time. Finally, we said we wanted our money back. The dealer refused. The salesman, it turned out, had made us a promise he wasn’t authorized to make. We negotiated—heatedly, at times. Eventually, the dealer gave us our refund even though, legally, he didn’t have to.

The outcome? We aren’t stuck with a whistling van. The salesman learned to make promises more carefully. The dealer made clear he would prefer not to do business with us again. Still, we were left with respect for his integrity in keeping the commitment his salesman had made. And none of us had the stress and expense of a lawsuit.

There are times when a lawsuit is necessary. It’s almost always worth your while, though, to try negotiating first.