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April 22, 2004 at 08:00 PM
LSAs: Recipe For Disintermediation
Some years ago I served for a period of time on our local “Better Business Bureau” board of directors. At one time during my years of service, the main complaints we were receiving were being directed at health spas and physical fitness centers. Most of the complaints centered on the way they were handling membership fees. Typically, a member would sign up for a year at a stipulated fee per month. The member actually was signing a promissory note, which the spa promptly sold to a bank. If the member, after a few weeks of exercising, decided to drop out of the plan, the individual then discovered he or she still owed the balance of the note, and the banks insisted upon payment. Shock turned to anger, which resulted in a complaint to the BBB.
Because of the bad report we issued on all of these organizations, their business suffered and a group of them asked for a hearing to plead their side of the case. The request was granted and they pointed out that engaging in physical exercise was difficult for most people and unless there was a strong incentive to continue the program, most would drop out after a short time and their health would suffer as a consequence. The incentive to continue in this instance, they argued, was the loss of the money they had pledged to pay. They also produced statistics to show that pay-as-you-go plans did not work because of the high drop-out rate.
The board could see the logic of imposing some kind of discipline on a plan for physical fitness, but still, we did not like what was perceived as a deceptive way of financing the discipline. A compromise was reached, which required the spas to be more open in their dealing with their members and provide full disclosure as to the penalties involved. It worked and the complaints soon stopped.
Financial fitness, like physical fitness, also requires discipline. When I came into our business, I worked initially with middle-income families who were not unlike the families of today. They had dreams and ambitions but had done little to bring them about. It was a fact that at that time, most of their savings accounts had less than 100 dollars in them and the rate of savings was sporadic at best. Typically, I would ask a 45-year-old how much he or she had saved out of the last months pay. The answer was usually “nothing,” and then I would point out that they had only 240 such paychecks left before age 65 and 240 times nothing is still nothing. That was usually the springboard for creating an insurance plan that provided “double duty dollars”family protection, coupled with a long-term savings plan. Early termination caused the loss of insurance protection and a financial penalty thereby injecting a sense of discipline into the plan. It has worked well for millions of people who might otherwise have clung to their rollercoaster savings accounts.
