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Who will Benefit from Cash for Clunkers?

The “Cash for Clunkers” program is designed to take older less efficient cars off the streets and replace them with newer more environmentally friendly ones while stimulating new car sales. So who will benefit?

Due to the fact that the clunker vehicles will be scrapped, the maximum trade-in value becomes the amount of the credit the purchaser will receive toward the new vehicle. This effectively limits the program to individuals who own cars worth significantly less than $4,500. (If I own a $4,000 vehicle and was not planning to replace it, it is unlikely I will do so for an additional $500 of trade in value).

In addition, it seems likely that many of the individuals who could benefit the most (those with the least fuel efficient and lowest value vehicles) are also people least likely to afford a new vehicle, even with the extra discount.

There is also the likelihood that a significant portion of people who qualify and are now motivated to purchase a vehicle under the program, will purchase smaller, more efficient and less expensive foreign vehicles. With the current condition of the US auto makers, it is disappointing to see the government spend $1 billion on a program which will be fairly insignificant and is likely to disproportionately benefit the foreign car industry.

Consumers of investment advice in England have long faced the same dilemma as investors in the United States: How do know if the advice I am receiving is objective?

On Friday, the UK Financial Services Authority (FSA) took a step to reduce the confusion surrounding this question by proposing that commission-based investment advice be eliminated. The agency states that this change will “improve the outcomes for savers and investors by enhancing the quality of advice they receive”.

The proposed regulations, which will not go into effect until 2012, are designed to ensure that:

* Independent advice is truly independent
* People can clearly identify and understand the service they are being offered
* Commission bias is removed from the system
* Investors know up-front how much advice is going to cost and how they will pay for it

Here in the United States the lobbying power and advertising budgets of the large brokerage firms and insurance companies have worked to blur the distinction between objective advice offered by Registered Investment Advisors and investment product sales.

However, this may be changing, on June 17, 2009 President Obama released his proposal for reforming the financial industry in the United States. His proposal includes increasing the standard of care for brokerage firms from the current “suitability standard” to the more rigorous “fiduciary standard” which is already utilized by Registered Investment Advisors and Certified Financial Planners.

While compensation structure is just one factor to consider in choosing an investment advisor, it is important for the client to understand who the advisor is working for. If an insurance company, mutual fund provider or brokerage firm is paying the advisor, chances are the advice is influenced by the firm making the payment.

Wealth Dimensions Group, Ltd. has been providing objective fee-based financial advice for over 20 years. We believe that transparency and objectivity are vital to building successful long-term financial strategies for our clients.