How Financial Advisors and Their Clients Can Profit from “Non-Bank Banking”
The proliferation of non-bank banking in the residential mortgage industry contributed to the great recession that began in 2008. Ironically, the consequences of the great recession have created the next phase of non-bank banking.
What is a non-bank bank?
So what is a non-bank bank? As defined by Wikipedia, a non-bank bank (also referred to as a non-bank financial institution (NBFI), is a financial institution that does not have a full banking license or is not supervised by a state or federal or banking regulatory agency.
A finance company that lends money for the purchase of a used car is a non-bank bank. An independent mortgage company making residential mortgages is another example. And how about online peer-to-peer lenders? Yep, that’s a non-bank bank, too – but more on that later.
Back to the Future
America’s traditional banking industry, as represented by state and federally chartered banks whose deposits are state or federally insured, has changed significantly since the great recession. Two of the primary changes impacting traditional banks stem directly from the aftermath of the great recession: 1) increased capital requirements and 2) increased regulation. More capital (and changes to the way capital is calculated) and more restrictions on lending and investing activities should, in theory, equate to stronger banks, a stronger banking system, and more financial resilience during the next economic downturn.
Only time will tell if these measures will achieve the intended goals. But one thing is for sure: largely due to these influences, banks have curtailed the breadth of customers they will lend money to. Several surveys have shown that traditional banks’ share of the lending market has decreased since the great recession. This void is now being filled by the next generation of non-bank banks.
Meet the New Non-Bank Bankers
Business Development Companies (BDCs) that lend to and invest in small and middle market companies across the country are leading the way for non-bank banks. Online lenders such as OnDeck, Kabbage, and CAN Capital provide short term advances to very small businesses across the country who, for various reasons, cannot or chose not to get a loan from a traditional bank.
These lenders recently came together to form the Innovative Lending Platform Association (ILPA). The association plans to provide small businesses with standardized pricing comparison tools and explanations prior to securing a loan as early as September 2016.
Other online lenders – such as Enova – provide a wide range of loan products to individuals who can’t get a loan from a traditional bank or who don’t want to apply. Modeled on customer service leaders like Amazon and Apple, these online lenders consistently deliver a high level of customer service that traditional banks are challenged to match.
Then there are peer-to-peer (P2P) lending networks, in which an investor lends money directly to a borrower. Individual P2P lending was pioneered by online services like Prosper and LendingClub. LendingClub was the first P2P lender to register its offerings as securities with the SEC and to offer loan trading on a secondary market, and today the companies are both big players in the peer-to-peer space.
P2P lending now extends to real estate to aircraft loans to investing equity in start-up companies and everywhere in between. What was a cottage industry five years ago has become a fully functioning marketing offering opportunity -- and risk -- for advisors and investors alike.
Even traditional banks are getting in on the act. In 2015, Prosper announced a partnership with a consortium of more than 160 community banks allowing them to source their consumer loans through Prosper’s platform. If you can’t beat ‘em, join ‘em.
Challenges and Opportunities
The opportunity for investors – and for advisors who become savvy about this evolving space – include access to investment opportunities across a wide range of asset classes formerly limited to banks, hedge funds, and high net worth individuals. This is an opportunity for advisors to differentiate themselves from the competition.
However, there are risks as well. LendingClub announced the company is cutting its workforce by 12% and ousting its CEO after experiencing major stock woes resulting from increased investor scrutiny due to a rise in loan defaults, slumping revenues, and the recent discovery of accounting anomalies. Last month, Prosper announced it was slashing its workforce by 28% in response to slowing demand.
And the small business lenders are struggling as well. OnDeck reported a loss of $18M for the second quarter of 2016 and many of the other public online lenders have stock prices that are half or less as compared to a year ago. The culprits are concerns about the quality of their loans and the fear of, you guessed it, increased regulatory scrutiny.
The US financial services landscape is constantly evolving. In addition, the providers of capital and the consumers of capital are constantly changing. They are not only switching up the products they will supply or consume, but also the ways in which they provide or consume them. Non-bank banking encompasses both and offers a unique promise that can benefit advisors and their clients.
Are Your Clients Failing to Plan for the Costs of Long-Term Care?
Written by: Matthew Paine
It’s been a tough few years in my family. My mother has been battling cancer for what feels like forever, and while she’s been managing her health with diet and exercise for some time, a few months ago everything changed. Her cancer had become aggressive, and chemo, which she had dreaded, was suddenly the only real option. My mother is in her late 70s, so the already brutal side effects of chemo resulted in a prolonged hospital stay that is currently at four weeks and counting. The good news is that she’s mentally strong, and she’s battling like a lion.
My dad is another story. Suffering from early-onset dementia, his ability to understand what’s happening and why my mother isn’t at home shifts from day to day. Because he’s unable to drive or care for himself (at least predictably), my siblings and I have been juggling taking care of him ourselves. It’s not an easy task, especially with jobs, children, and lives of our own to manage as well.
Like many families, none of us—my mother, my father, my siblings or myself—saw our current dilemma coming our way. Clearly we should have. My mother hasn’t been in top health for years. My dad’s condition is sure to get worse. And even if both of them were in perfect health, their age alone should have driven us to communicate better, earlier, and smarter. Despite being in the financial services industry myself, I haven’t been involved in my parents’ finances. I know they saved well for retirement, but I don’t know where they stand financially today. I don’t know what or how much insurance coverage they have. I have no idea how they plan to pay for their long-term care—or if there even is a plan.
The situation is forcing our family to get personal—and fast. Despite being careful about nearly every other aspect of our family’s financial lives, this one slipped through the cracks. We failed to plan.
Just like cancer and dementia, this failure to plan is an epidemic. And it’s only getting worse. To help your clients battle this epidemic, it’s vital that planning for long-term care become an intrinsic part of your retirement planning process. Here’s why:
Retirement planning alone isn’t sufficient.
We’ve all seen it. A client has a great retirement plan in place, and suddenly life throws an unexpected curveball. The later in life your clients get, the more likely that curveball will be the need for long-term care. According to the National Center on Caregiving, the number of people needing long-term care will hit a shocking 27 million by 2050. And according to the AARP, one in four people age 45 and over are not prepared financially if they suddenly required long-term care for an indefinite period of time. That statistic alone tells us that our efforts at planning are failing.
Long-term care costs are escalating rapidly.
According to a 2016 survey from Genworth Financial, a private nursing home room costs just over $92,000—about $7,698 a month—which is 19% more than it cost for the same care in 2011. According to the AARP Public Policy Institute, lost income and benefits over a caregiver's lifetime is estimated to range from a total of $283,716 for men to $324,044 for women, or an average of $303,880—and less than 10% of that care is expected to be covered by private insurance.
Medicaid isn’t the answer.
Many people assume that public programs are the answer to long-term care, but in the case of Medicaid, a program designed to assist the poor, it is a last resort. First, while nearly everyone over age 65 has Medicare coverage, that program doesn’t cover long-term stays. That means that many people who need that coverage are forced to spend down their assets until they qualify for Medicaid. How poor must a patient be to receive benefits? In order to be eligible for Medicaid benefits, a nursing home resident may have no more than $2,000 in "countable" assets, and the patient’s spouse—called the "community spouse"—is limited to one half of the couple's joint assets up to $119,220 (in 2016) in "countable" assets. The result: even a couple who has spent a lifetime saving for a comfortable retirement can be forced to draw down nearly all of their assets before qualifying for Medicaid.
Once on Medicaid, long-term care patients lose the one thing many seniors care about most: choice. As a recipient of public assistance, patients rarely have a say in where they receive care. Whether that means being placed far from family, in a less-than-desirable facility, or even in a facility that lacks certain types of care (such as a dementia unit or other specialized care), the patient is at the whim of the state.
The good news is that even for those who feel there’s no light at the end of the tunnel, there are options that can help seniors who are struggling to pay for their post-retirement care to not only cover those rising expenses, but to do so in a way that gives them the freedom of choice. A Veteran myself, I know that VA Benefits are highly underutilized—including long-term care benefits. You can learn more about these benefits here. As well, the National Association of Insurance Commissioners (NAIC)’s July report Private Market Options for Financing Long-Term Care Services offers a variety of options for helping finance long-term care needs. Included in that list is the use of life insurance policies to help to fund long-term care expenses—an approach that is supported by GWG Life’s LifeCare Xchange Program.
In my own situation, I know there’s a high likelihood that my dad will eventually require skilled nursing care. I hope that as my siblings and I begin to dig into the details of my parents’ estate, we’ll find that they have indeed planned for long-term care. If that’s not the case, I’m comforted to know there are options available to help ensure Dad is not only in a facility that can meet his specialized needs, but that his new home is where our family chooses for him to be. Life may throw its curveballs, but at least Dad’s care will count as a home run.
Matthew Paine is Senior Vice President at GWG Holdings. Mr. Paine started his financial services career with AXA Advisors, developing marketing strategies for the North Central Region and building his personal practice. Since 2008, he has lead sales teams in raising capital in various assets classes ranging from the Life Insurance Secondary Market, Multi-Family Real Estate, Conservation Easements, and MBS Hedge Funds/Fund of Funds. Mr. Paine has a BA in Marketing/Management from the University of St. Thomas in St. Paul, MN and holds FINRA Series 7, 24 and Series 63 licenses through Emerson Equity, LLC. Member FINRA/SIPC.
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