As anyone who has taken the CFP Board exam knows, comprehensive financial planning includes an analysis of the client's personal net worth statement. By definition, this means that a financial planner is supposed to gather data, analyze, make recommendations and, if appropriate, implement recommendations pertaining to liabilities as well as assets. If engaged for ongoing financial planning, the practitioner should also continue to monitor the liability side of the balance sheet as well as the asset side.

Unfortunately, many professionals who call themselves financial advisors or wealth managers today all but ignore the liability side of the personal balance sheet and instead concentrate almost exclusively on a client's assets. Twenty years ago this was understandable (though still not justifiable), because generally speaking our parents' generation was frugal. To many of them, debt, with the possible exception of debt linked to real estate, was something to be avoided.

In addition, the number of debt products available to retail clients was limited. There was a time when anything other than a 30-year mortgage was considered "exotic." Clearly, that is no longer the case today. Until the recent meltdown, many Americans used their houses as piggy banks, making use of mortgages with no down payments, of interest-only mortgages, of home equity loans, etc. The liberal underwriting policies of lenders only added fuel to the fire. The result was a mortgage meltdown that reminded us once again that too much debt or the wrong kind of debt could prove toxic.

Think it is only the lower end of the financial spectrum that has been hard hit by the mortgage crisis? Think again. Celebrities such as Johnny Carson's longtime sidekick Ed McMahon and former boxing champ Evander Holyfield have also been engulfed in the mortgage mess. And these are not isolated incidents. For example, within the famous Beverly Hills 90210 zip code, 31 foreclosure actions were filed in the first four months of 2008, up sharply from 13 in the same period of 2007.

Against this backdrop, a number of firms have developed products that are designed to help advisors better gather data, analyze the data, make recommendations, implement recommendations and monitor the liability side of the personal balance sheet. Of these, the most interesting one I've come across so far is the online application by Financial Crossing called Liability Manager.

Financial Crossing Inc., headquartered in Palo Alto, Calif., bills itself as "the market leader in the emerging field of liability management." In the broadest sense, the company's goal is to provide tools through all sales channels, including call centers, online portals and the branches of banks and other financial institutions, but perhaps the most comprehensive tools the firm has developed are designed for financial advisors. These tools are designed to help advisors manage all of a client's liabilities, including mortgages, home equity loans, car loans, credit card debt and any other debts the client may have or is contemplating in the future.

Liability Manager looks and feels similar to traditional financial planning programs, and functions in a similar way, so advisors should not have trouble adopting it. After an advisor and client have discussed the scope of their engagement, the advisors can have clients fill out a data-gathering form, or they can complete the form with the clients. As they gather data, they also discuss the client's goals. Next, with the help of the software, the advisor analyzes the client's situation. The software uses a proprietary optimization model that factors in the client's risk tolerance, his time horizon, the current economic conditions and his financial strength and creditworthiness. Once this is done, the application will recommend one or more alternatives. The advisor will then recommend a course of action to the client, and perhaps offer alternatives if appropriate. If authorized, the advisor can then help apply for the appropriate loans and implement the plan. Once it has been implemented, the advisor can regularly monitor it.

Sound familiar? That's because the process closely adheres to the six-step financial planning process. Now that you understand the progression in general terms, let's look at a real example.

An advisor logs on to the Liability Manager and enters the e-mail address of a new client, Mr. Joe Public. The application then sends out an e-mail to Mr. Public, inviting him to click a link and fill out the electronic Liability Management questionnaire. When the client clicks on the link, he sees a secure Web page with his advisor's name/branding. The page has four tabs, one for client contact info, one for basic financial information (income, credit score, tax bracket), a page for current liabilities and one for goals (which include the client's priorities and risk tolerance, his willingness to use certain products, his willingness to accept prepayment penalty provisions, etc.). If the client has access to all the necessary information, and if he understands all of the questions, the form can be completed in a matter of minutes. Otherwise, the form can be completed during a live meeting with the advisor or with the advisor's help over the phone

Once the client fills out the questionnaire, the information is automatically populated in Liability Manager.

The advisor sees that the client has $175,000 in regular income plus $10,000 in additional income, all of which can be documented. The client also has $50,000 in liquid assets and an excellent credit rating. His wife has an additional $15,000 in regular income and $20,000 in cash.
The couple currently has two major liabilities. The first is a 7.5%, 30-year fixed mortgage they took out in January of 2006 on their house, which has a current value of $800,000. The balance on the loan is $463,380, and they are paying $3,321 per month. They also recently took out a $15,000 auto loan at 9.0% with a monthly payment of $370.

The couple's goal is to refinance in order to free up $50,000 in cash while best managing their overall liabilities. They have a moderate tolerance for risks such as mortgage rate resets and rising interest rates. They intend to sell the house within five years and move to another state.

Once the case is set up, the advisor hits the "generate plans" button. This launches multiple actions. First, the software "pre-analyzes" the client, and then it generates the scenario. After this, it screens products for pricing and eligibility so that only the mortgages the couple qualifies for will be presented. Next, the program evaluates the scenarios, selects the best plans and presents the alternatives to the advisor.

Given the information provided for this couple, which takes into account market conditions and eligibility, the program's top three recommendations all involve variable-rate mortgages. This is not surprising given the short planning horizon. One scenario entails keeping the car loan and taking out a new $513,830 3/1 adjustable-rate mortgage at 6.375%. The second scenario pays off the car loan and rolls the balance into a $528,830 mortgage under the same terms as the first option. The third option rolls everything into a $528,380 5/6 ARM at 7.125%.

For each scenario, the program provides an extensive analysis. There are loan descriptions, suitability notes, a cash-out summary and a risk analysis. Charts with accompanying text illustrate everything from anticipated future mortgage index rates (including projected best- and worst-case scenarios) to expected payment comparisons and the potential cash-flow impact. A side-by-side comparison of the three loans can be generated. This includes illustrated total loan amounts, monthly payments, the change in payment for the first month and the average over the term of the loan. It also illustrates the expected payment, as well as the best- and worst-case scenarios at various time intervals. Of course, many of the "expected" outcomes are hypothetical and are based on the assumptions built into the scenario generator, but all of this is spelled out clearly and extensively in the accompanying explanations/disclosures.

Not all inquiries result in a new loan recommendation. In some cases, the software will determine that the clients' current liability structure is at its optimal state for the current conditions. That's not to say that things won't change in the future, however, and Liability Manager can make sure you stay on top of the situation with automatic alerts. Once you have established a case, the application can periodically check to see if a predetermined level of savings is possible. If so, it will alert you.

Advisors can help originate and service mortgages through a relationship that Financial Crossings has with Citizens Community Bank. Commissioned advisors can earn up to 37 basis points on transactions, while fee-only advisors will likely forgo that 37 basis point price for themselves and give the client the savings. The software offers advisors the ability to electronically transmit proposals to clients or to print them and mail them. Each option includes the ability to generate a customized cover letter. Loan applications submitted through the system can be tracked online.

Other capabilities are built into the program as well. For example, you can do product searches for first mortgages, for refinancing or for equity loans without the full optimization and planning process. There is a fairly extensive help section that offers a mortgage glossary, software support, post-application loan support and more. There are also robust reporting capabilities.

Since I have not reviewed any competing products, I admittedly don't have a frame of reference for comparison, but Liability Manager impresses me as a product that can add value to many client relationships. As the current mortgage crisis has amply demonstrated, Americans need as much help managing their debts as they do their assets, and Financial Crossing's product can definitely help. In fact, even those who choose not to initiate mortgages on behalf of their clients can still add value and save a lot of time by analyzing their clients' liabilities with this product rather than trying to do it themselves manually.

If you aren't sold on Liability Manager yet, here's another factor to consider: If a client goes to another financial institution such as a bank for a loan, he will be required to reveal a great deal about his personal finances. Once a bank knows about the assets that are there, it could use the information to try and take on management of the client's assets as well. So by tending to the client's liabilities, the advisor gets the added benefit of limiting one potential source of competition on the asset management side too.

Although Liability Manager is good, there are some additional features Financial Crossing could add to make it even better. One is integration with leading financial planning software packages so that information can be shared. Another would be the ability (with the clients' permission, of course) to link the application to credit reporting agencies. With that capability, the program would be better able to zero in on loans that the client is eligible for. If could also be tied into the alert system: If a client walked into a car dealership, which then tried to pre-qualify him for an auto loan, his advisor would be notified immediately. The advisor would then be able to call the client and advise him that there are other ways to finance such a car purchase.

Priced at just $59 per month or $600 per year for independent advisors, the software appears to offer a path to better liability advice, improved service and efficiency, and it could perhaps also provide an additional revenue source. I suspect there are many advisors that will find Liability Manager an attractive new tool for their financial advisory practice.