MONEY financial advice

What I Learned in India About Financial Advice

150408_ADV_India
Stephen Wilkes—Gallery Stock Mumbai

One thing that crosses international boundaries is how people misunderstand the cost of financial advice.

In the airport shuttle taking us to our hotel in Mumbai, I looked out the window and thought, “We’re not in South Dakota anymore.” At midnight, the streets of India’s largest city seemed as full of people, vendors, and traffic as Times Square at noon.

I had no real comparison, though, for the garbage strewn about, the beggars going from car to car when traffic stopped, the people sleeping on the sidewalks, the ramshackle condition of most buildings, and the roaming packs of stray dogs. The third poorest county in the US — just 60 miles from my home — is no match whatsoever for the real ghettos of Mumbai, where 55% of the city’s 16 million people live.

Given these great dissimilarities in economic status as well as political, religious, and cultural views, I expected to find striking differences between the Indian and U.S. financial adviser communities and their clients. Here I was surprised.

I traveled to Mumbai to meet with a group of Indian financial advisers. The country’s financial regulators are actively encouraging advisers to change from charging only commissions to charging fees. My role was to offer suggestions for making that transition.

After spending several days observing and listening to the struggles of the Indian advisers, I concluded that 95% of the obstacles they face in promulgating client-centered, fiduciary planning are the same as the ones planners face here in the US.

The most frequent complaint I heard was that consumers just won’t pay fees. They would rather pay a high commission they don’t see rather than a low fee they painfully do see. I find the same behavior in US consumers. It seems irrational, but it makes perfect sense when we understand the delusional money script of avoidance that says, “If I don’t see the fee, then I must not pay a fee.”

Just as in the US, Indian advisers struggle to help consumers understand the math behind hidden commissions and visible fees. While most advisers can quickly calculate the amounts, consumers still find it hard to accept the numbers. There is great resistance to writing a check, even when a planning fee is half as much as an unseen fee or commission. In my experience, most consumers have great difficulty emotionally understanding that writing a check for $10,000 for advisory fees on $1 million represents a $15,000 savings on a 2.5% wrap fee they don’t see and for which no check is written.

Another similarity is that those most willing to pay fees for service are the wealthier clients. At first blush one might surmise that of course the wealthy are more open to paying fees because they have more money. That isn’t the case. The fees paid are roughly proportionate. In fact, usually smaller accounts that go fee-only save proportionally more than do larger ones. The difference is that affluent or wealthy clients tend to be business owners or professionals who are familiar with employing fee-for-service consultants, like accountants and attorneys.

The transition to introducing fees is slow, requiring a lot of education on the part of advisers and willingness to listen on the part of consumers. Similar to where the US was in the 1980s, India has only a handful of pioneering fee-only planners. Most advisers wanting to switch from pushing financial products to doing comprehensive financial planning have rolled out a fee-based model first. They hope consumers will eventually embrace the advantages — lower costs and fewer conflicts of interest — inherent in a fee-only compensation model.

In my career, I have watched and participated in financial planning’s growth as a profession in the US. It’s a privilege to be able to see it develop in India as well.

———-

Rick Kahler, ChFC, is president of Kahler Financial Group, a fee-only financial planning firm. His work and research regarding the integration of financial planning and psychology has been featured or cited in scores of broadcast media, periodicals and books. He is a co-author of four books on financial planning and therapy. He is a faculty member at Golden Gate University and the former president of the Financial Therapy Association.

MONEY portfolio

5 Ways to Invest Smarter at Any Age

dollar bill lifting barbells
Comstock Images—Getty Images

The key is settling on the right stock/bond mix and sticking to your guns. Here's how.

Welcome to Day 4 of MONEY’s 10-day Financial Fitness program. So far, you’ve seen what shape you’re in, gotten yourself motivated, and checked your credit. Today, tackle your investment mix.

The key to lifetime fitness is a powerful core—strong and flexible abdominal and back muscles that help with everything else you do and protect against aches and injuries as you age. In your financial life, your core is your long-term savings, and strengthening it is simple: Settle on the right stock/bond mix, favor index funds to keep costs low, fine-tune your approach periodically, and steer clear of gimmicks such as “nontransparent ETFs” or “hedge funds for small investors”—Wall Street’s equivalent of workout fads like muscle-toning shoes.

Here’s the simple program:

1. Know Your Target

If you don’t already have a target allocation for your age and risk tolerance, steal one from the pie charts at T. Rowe Price’s Asset Allocation Planner. Or take one minute to fill out Vanguard’s mutual fund recommendation tool. You’ll get a list of Vanguard index funds, but you can use the categories to shop anywhere.

2. Push Yourself When You’re Young

Investors 35 and under seem to be so concerned about a market meltdown that they have almost half their portfolios in cash, a 2014 UBS report found. Being too conservative early on—putting 50% in stocks vs. 80%—reduces the likely value of your portfolio at age 65 by 30%, according to Vanguard research. For starting savers, 90% is a commonly recommended stock stake.

3. Do a U-turn at Retirement

According to Wade Pfau of the American College and Michael Kitces of the Pinnacle Advisory Group, you have a better shot at a secure retirement if you hold lots of stocks when you’re young, lots of bonds at retirement, and then gradually shift back to stocks. Their studies found that starting retirement with 20% to 30% in stocks and raising that by two percentage points a year for 15 years helps your money last, especially if you run into a bear market early on.

4. Be Alert for Hidden Risks

Once you’ve been investing for several years and have multiple accounts, perfecting your investment mix gets trickier. Here’s a simple way to get the full picture of your portfolio.

Dig out statements for all your investment accounts—401(k), IRA, spouse’s 401(k), old 401(k), any brokerage accounts. At Morningstar.com, find “Instant X-Ray” under Portfolio Tools. Enter the ticker symbol of each fund you own, along with the dollar value. (Oops. Your 401(k) has separately managed funds that lack tickers? Use the index fund that’s most similar to your fund’s benchmark.)

Clicking “Show Instant X-Ray” will give you a full analysis, including a detailed stock/bond allocation, a geographic breakdown of your holdings, and your portfolio’s overall dividend yield and price/earnings ratio. Look deeper to see how concentrated you are in cyclical stocks, say, or tech companies—a sign you might not be as diversified as you think or taking risks you didn’t even know about.

5. Don’t Weigh Yourself Every Day

Closely monitoring your progress may help with an actual fitness plan. For financial fitness, it’s better to lay off looking at how you’re doing. A growing body of research finds that well-diversified investors who check their balances infrequently are more likely to end up with bigger portfolios, says Michaela Pagel, a finance professor at Columbia Business School. One reason: Pagel says savers who train themselves not to peek are more likely to invest in stocks. And research by Dalbar finds that investors’ tendency to panic sell in bear markets has cut their average annual returns to 5% over the past 20 years, while the S&P 500 earned 9.2%.

When you have the urge to sell, remind yourself that your time horizon is at least 20 years, says Eric Toya, a financial planner in Redondo Beach, Calif. “Outcome-oriented investors agonize over every up-and-down whim of the market and make poor timing decisions,” he says. “If your process is sound, you don’t need to panic.”

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MONEY retirement planning

How to Save More for Retirement Without Saving an Extra Cent

fingers holding penny
Roy Hsu—Getty Images

Think you can't set aside any more dough than you're already saving? Here's a simple way to grow your nest egg without putting a squeeze on your budget.

If I said you could significantly boost the size of your nest egg without setting aside even a single penny more than you already are and do so without taking on a scintilla of extra investing risk, you’d be skeptical, right? Well, you can. Here’s how.

It’s no secret that the best way to increase your chances of achieving a secure retirement is to boost the amount you save. Problem is, given all the other demands on your paycheck (mortgage, car payments, child expenses, the occasional night out, etc.) how do you find ways to free up more dough for saving?

Actually, there’s an easy way boost your retirement account balances without further squeezing your budget: Stash whatever money you do manage to save in the lowest-cost investments you can find. This simple tactic has the same effect as contributing more to your retirement accounts, making it the financial equivalent of upping your savings rate.

How big a jump in your effective savings rate are we talking about? That depends on how much you cut investment fees and how long you reap the benefits of those lower costs. But over time the increase in your effective savings rate can be quite meaningful, as this example shows.

Let’s say you’re 35, earn $50,000 a year, receive 2% annual raises, and contribute 10% of your salary to a 401(k) that earns a 7% a year before fees. If you shell out 1.5% annually in investment expenses, by the time you’re 65 your 401(k) balance will total just under $465,000.

Reduce your annual investment costs from 1.5% to just 1%—hardly a heroic effort—and you’re looking at a nest egg worth roughly $505,000. To end up with that amount while still paying 1.5% in annual fees, you would have to boost your annual 401(k) contribution to 10.8%. Which means that lowering expenses by a half percentage point in this case is essentially the same as saving nearly a full percentage point more each year, except you don’t have to reduce your spending to do it.

And what if you take an even sharper knife to investing costs?

Well, cutting expenses from 1.5% to 0.5% a year would give our hypothetical 35-year-old a 401(k) balance of just under $550,000 at age 65, or the equivalent of saving 11.8% a year instead of 10%. And if you’re able to really cut investment fees to the bone—say, to 0.25%—that nest egg’s value would balloon to just over $573,000. To reach that size while paying 1.5% annually in investing costs, our 35-year-old would have to contribute 12.3% of pay.

By the way, lowering investment costs can also have a big payoff after you’ve stopped saving and have begun tapping your nest egg for retirement income. For example, a 65 year-old with a $1 million nest egg split equally between stocks and bonds who wants an 80% chance that his savings will sustain him for at least 30 years would have to limit himself to an initial draw (that would subsequently rise with inflation) of just under 3.5%, or a bit less than $35,000, assuming annual expenses of 1.5%.

Cut that levy from 1.5% to 0.5%, and he would be able to boost that inflation-adjusted withdrawal to almost 4%, or $40,000, while maintaining the same 80% probability of savings lasting 30 or more years.

Of course, the results you get may vary for any number of reasons. For example, if you’re doing most of your saving through a 401(k) and your plan lacks good low-cost investment options, your ability to turn lower expenses into a higher account balance will necessarily be limited. And even if you are able to home in on investments with rock-bottom costs, there’s no guarantee that every dollar of cost savings will translate to an extra dollar in your account.

That said, unless every cent of your savings is locked into an account that offers only high-expense investments, you should be able to get some money into cost-efficient options. At the very least you can steer savings in IRAs and taxable accounts into low-fee index funds and ETFs (some of which charge as little as 0.05%). And while cutting investing costs can’t guarantee a larger nest egg, Morningstar research shows that funds with the lowest expense ratios tend to outperform their higher-fee counterparts.

One final note. While targeting low-expense investment options is certainly an effective and painless way to boost the size of your nest egg, you shouldn’t let low costs do all the work. Indeed, if you focus on low-fee investments and increase your contributions to 401(k)s, IRAs and other retirement accounts, that’s when you’ll see your savings balances really take off.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

More From RealDealRetirement.com:

The 4 Biggest Retirement Blunders
Can You Afford To Retire Early?
Market Jitters? Do This 15-Minute Portfolio Check-up Now

Read next: If You Want to Retire in 10 Years, Do These 5 Things Now

MONEY Debit Card

What Happens If I Swipe My Debit Card as “Credit”?

person swiping credit card
David Woolley—Getty Images

The answer may surprise you.

It’s a question we’ve all heard when shopping: “Credit or debit?” It seems straightforward, just the cashier asking you what type of payment card you’re using, but there’s actually a lot more history to that question than you might think.

Debit and credit transactions are processed differently: Here’s how MasterCard explained it in an emailed statement to Credit.com: When you use a debit card and your PIN (personal identification number), the transaction is completed in real time, also known as an online transaction — you authorize the purchase with your PIN and the money is immediately transferred from your bank account to the merchant. With a credit card, or using a debit card as credit, it’s an offline transaction.

“The funds for offline transactions are deducted after the merchant settles the purchase with the credit card processor and typically take 2-3 days to be reflected in your account balance,” MasterCard says.

Issuers used to charge merchants different fees for accepting credit cards than for accepting debit card transactions with a PIN. Before the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed, Sen. Dick Durbin added a provision, now called the Durbin Amendment, that restricted interchange fees to 12¢ per transaction. By the time the bill was signed into law, the cap was set at 21¢, much lower than the previous average of 45¢ per transaction. (On Jan. 20, the Supreme Court declined to hear retailers’ challenge to that 21¢ cap.)

With the cap on interchange fees, banks saw their revenue source for things like debit card rewards and free banking dry up, which is why you’re unlikely to find those things these days.

“There’s several thousand community banks and credit unions, what the act refers to as unregulated, who can actually charge greater interchange on transactions,” said Nick Barnes senior vice president of retail banking at ACI Worldwide, a payments system company. The Durbin Amendment only impacted financial service providers with $10 billion or more in assets. “That’s why you go to these tiny banks you’ll still see free banking and debit rewards.”

Should You Choose Debit or Credit?

Credit cards and debit cards are very different products, each with their own advantages and drawbacks that should influence when and how you use them. As for hitting the “credit” button when you’re using a debit card: It doesn’t really matter.

Other than the changes banks may have made as a result changing interchange fees, choosing to use a debit card as credit doesn’t really impact you. You often have the choice to use your debit card with or without the PIN, and how you use it is a matter of personal preference. Running a debit card as an offline transaction still ends up doing the same thing — taking money from your checking account — and it doesn’t help you build credit, like using a credit card does.

More from Credit.com

This article originally appeared on Credit.com.

Read next: Why You Need to Get a Credit Card

Listen to the most important stories of the day.

MONEY Fundraising

Crowdfunding for a Good Cause Gets Cheaper

Ball picking up money
Getty Images Websites can help you turn small donations into a life-changing gift.

A growing number of sites will help you raise big money for a friend in need. But watch for high fees.

The week before Christmas, a fire gutted the Beverly, Massachusetts home shared by Kevin Wagner, his fiancée and their four young children. Most of their basic possessions were destroyed along with their Christmas presents.

While insurance will cover much of the rebuilding, friends stepped in right away with cash to fill the gap until the claim is settled. As is becoming more common these days, they started crowdfunding campaigns on popular sites—one on DreamFund.com, which holds money in an FDIC-insured savings account, and another on GoFundMe.com, which is linked to a personal bank account. Both sites collect a 5% fee from the donations and pass along a credit card processing fee of about 3%.

For the $25,000 Wagner’s friends raised on DreamFund, that amounts to $2,000, and another $800 went to GoFundMe and its credit card processors for the $10,000 raised on that platform.

A few people were put off after learning about the fees, Wagner says, and simply handed him checks, which added another $10,000 to the effort.

Nevertheless, raising money for personal causes through crowdfunding sites is a skyrocketing business—GoFundMe says such fundraising campaigns increased by 291% between 2013 and 2014, after rising by more than 500% the year before. But the fees make it clear the platforms themselves are, indeed, businesses rather than purely charitable efforts.

More than 2,000 crowdfunding sites have sprung up to try to catch the wave of this rapidly growing industry, says Howard Orloff, vice president of Zacks CF Research and founder of Crowdfunding-Website-Reviews.com. Of those, many are start-ups with little staying power and many are aimed at businesses seeking capital rather than personal causes. Some, like Kickstarter, one of the best known sites, don’t allow personal fundraising.

Regardless of type, the sites make money by taking a percentage of pledges, which results in either a donation being reduced when it reaches the recipient or a surcharge added to the donor so the recipient gets the net amount pledged.

But when it comes to raising money for charity, that may be changing.

On Dec. 15, popular crowdfunding site Indiegogo, which typically charges 4% to 9% (plus fees for PayPal or credit card processing), decided to drop the fee for personal fundraisers. Users of its new IndiegogoLife service only have to sacrifice the 3% taken by the credit card processors.

Indiegogo co-founder Danae Ringelmann says the company didn’t want those who were in need of charity to be subject to the same charges as those trying to launch a business.

“Every dollar counts—we’ve heard that again and again and again,” she says.

Dropping that platform fee is a “game-changer” in the world of crowdfunding, Orloff says. “Smaller sites [like YouCaring.com and Tilt.com] have offered no-fee crowdfunding for a while but none with website traffic, and public trust, anywhere near Indiegogo.”

By contrast, collecting the old-fashioned way—by accepting cash in person or checks to be deposited in a bank—usually involves no extra costs, although some banking fees may apply depending on the kind of account you choose.

But real-world collecting like that has limitations of reach, and not much possibility of the campaign going viral.

With crowdfunding, if the cause is popular enough to land on the home page of one of the more popular sites “it can go pretty wild,” Orloff says. “It can change somebody’s life.”

Indeed, the campaign to raise money for Wagner and his family went far beyond the $5,000 he imagined—the $50,000 raised so far may actually be more than they need.

“We didn’t expect this at all,” Wagner says. “If there is extra , we want to help others. We hope to pay it forward.”

MONEY Debt

You’re Going to Spend $280,000 on Interest in Your Lifetime

Sorry.

The typical American consumer will fork over an average of $279,002 in interest payments during the course of his or her lifetime. So says a new report from Credit.com, which analyzed the lifetime cost of debt in all 50 states and the District of Columbia, based on average mortgage balances, credit card debt, and credit scores.

The size of the nut varies dramatically from state to state. Residents of Washington, D.C.—where average new mortgages are $462,000 and the average credit score of 656 falls squarely in the “fair” range—can expect to pay $451,890 in interest, the highest in the nation.

Concerned D.C. residents might want to consider hitching a ride to Iowa, where the average new mortgage is the nation’s lowest, at $120,467. Add in an average credit card debt of $2,935—also the lowest in the country—and a credit score of 689, and residents of the Hawkeye State have a lifetime cost of debt of “only” $129,394.

Along with 30-year fixed-rate mortgages, Credit.com also considered an average auto loan balance of $22,750 (assuming nine cars over a lifetime) and 40 years of revolving credit card debt when calculating its findings.

Here’s a breakdown of the top 10 states with the highest cost of debt:

  1. Washington, D.C. ($451,890)
  2. California ($368,745)
  3. Hawaii ($312,747)
  4. New Jersey ($309,500)
  5. New York ($300,031)
  6. Maryland ($294,720)
  7. Virginia ($280,516)
  8. Washington ($267,964)
  9. Massachusetts ($261,220)
  10. Colorado ($255,232)

And the lowest:

  1. Iowa ($129,394)
  2. Nebraska ($137,174)
  3. Wisconsin ($144,127)
  4. Maine ($154,340)
  5. North Dakota ($157,011)
  6. South Dakota ($157,136)
  7. Montana ($160,849)
  8. Pennsylvania ($163,513)
  9. West Virginia ($166,232)
  10. Vermont ($167,042)

See the full state-by-state list.

MONEY Saving

How the Great Unbundling of Pay TV Could Backfire on Consumers

Cable remote
Brad Wilson—Getty Images

Cable TV customers love the idea of paying just for the services they want—and skipping those they couldn't care less about. To see how such an a la carte model could turn to misery, however, look no further than the airline business.

For years, couch potatoes have dreamed of an a la carte pay TV model. Instead of the standard package—a bloated bundle with hundreds of channels that you’re paying for whether you ever tune in or not—the a la carte option would allow customers to pick and choose and pay for only those deemed worthy. Every household is different, but the average pay TV customer watches only 17 channels, a small fraction of the 189 channels that are factored into the average package’s monthly bill.

To which the natural reaction of many customers tired of constantly rising cable bills is: Wouldn’t it be a cinch to save a bundle simply by eliminating the bundle?

In fact, while the oversized bundle remains the standard, the door to unraveling the cable package has been opened, thanks to the arrival of a broad variety of viewing options—notably including standalone streaming options that require no cable package from HBO, the Dish Network, and of course Netflix. Admittedly, Dish’s just-introduced Sling TV streaming service is also a bundle, but it comes with only 11 popular, very watchable channels (including all-important ESPN), and at just $20 a month, it’s a potentially big money saver.

To many, it’s a just and foregone conclusion that the big cable bundle will continue to lose its dominance in the marketplace, and that cord cutters and upstart competitors will push us all toward an increasingly a la carte system. There are likely to be more small and affordable packages along the lines of Sling TV, and we’ll probably see more options to pay to stream content from favorite individual channels, which HBO and CBS have already made possible.

And yet, as much as consumers loathe the big pay TV providers, analysts have long warned that we should be careful what we wish for in terms of an a la carte viewing future that doesn’t necessarily involve Cablevision, Comcast, Verizon, or Time Warner Cable.

Back in 2010, New Yorker business columnist James Surowiecki wrote that if the bundle disappeared, the cost per customer for each channel would soar, “perhaps on a customer-by-customer basis.” The likely result would be that loads of channels would go out of business, and that the average customer would pay roughly the same amount monthly he was paying for the big bundle, only with far fewer channels.

The landscape has changed since then, what with the consensus assumption that TV in the future will be delivered via the Internet rather than cable. Yet the argument that unbundled TV will not necessarily yield cheaper prices remains. Among cable defenders, this acclaimed manifesto from 2013 summed up the big upside to the bundle, including more content and cheaper prices when they’re broken down on a per-person, per-channel basis:

Cable TV is socialism that works; subscribers pay equally for everything, and watch only what they want, to the benefit of everyone.

More recently, Wired offered some deep-held concerns for consumers regarding a future dominated by Internet TV options:

It will be deeply fragmented. That could threaten the very companies that pioneered this space to begin with—and make it more difficult and more expensive to get everything you want to watch.

In light of Dish’s rollout of Sling TV this week, Neil Irwin of the New York Times summed up previous research on the topic of how an a la carte TV scene would play out, writing, “contrary to many peoples’ intuition, the unbundling of cable service could actually lead to slightly higher prices for fewer channels.”

Irwin pushes the issue further, diving into the idea that not only could unbundling provide worse value, but there’s a good chance it’d make the average customer even more miserable regarding pay TV than he is right now. And the cautionary tale he cites as an example of how this could come about is the one that travelers have been living through for the past two decades or so. After all, the airline industry has steadily unbundled the flight product, which was once a package including food, checked bags, and the privilege of actually sitting on the plane next to your travel companion. With today’s more a la carte model, the price of airfare may include nothing more than bare-bones transportation.

What’s more, the airlines that have embraced the a la carte, fee-laden way of doing business most just so happen to be the most hated carriers of all. And across the board in the industry, flight prices have gone up, not down, while the unbundling has been underway.

Is pay TV heading in this same direction? Irwin acknowledges that unbundling undeniably benefits certain kinds of consumers—travelers who don’t fly with bags or care about legroom, and TV viewers who watch only a few channels and no sports. Yet he writes that the effects of unbundling on the average TV customer will be similar to what we’ve seen with the airlines:

For many more people, the result will probably be little or no reduction in total fees, combined with the hassle of making constant decisions about what channels you really want and which you don’t.

The airlines have been working hard over the years to perfect systems for extracting maximum revenues out of passengers. A recent New Yorker story described the broad airline strategy of inflicting “calculated misery” on customers and all but force them to pay fees to avoid the pain: “Basic service, without fees, must be sufficiently degraded in order to make people want to pay to escape it.”

Bloomberg View columnist Megan McArdle responded to the idea of “calculated misery” with a slightly different take on the matter. “The problem isn’t greedy airlines” trying to milk customers by making them miserable, she writes. “It’s us.”

When travelers use search engines to find and book the cheapest tickets possible, McArdle explained, we’re sending a message to airlines that low flight prices are the most important and perhaps only criterion in our purchasing decisions. “To win business, airlines have to deliver the absolute lowest fare,” McArdle writes. “And the way to do that is … to cram us into tiny seats and upcharge for everything.”

It’s understandable that people want cheap airfares, just like we want cheap pay TV bills. It’s just that the way providers get to these end points may ultimately make us less—not more—happy. In the end, the standard could become an assortment of confusing fees and bills that, when tallied up, isn’t cheap at all.

MONEY

Why 2014 Was a Turbulent Year for Travelers

141229_EM_TRAVELYEAR
iStock

Remember the Knee Defender incident? That ugly episode sums up the way many travelers felt in 2014.

The year 2014 comes to a close soon after a monumental decision by the U.S. government to loosen restrictions for Americans hoping to visit Cuba in the future. The year also ended on a positive note for travelers eager to see one highly annoying hotel fee finally disappear (see below), and with some hope that airfares could at long last decrease in the months ahead. All of these bits of news are extremely welcome in light of how, overall, life became more expensive and less comfortable for travelers over the past year.

Airfare Soared
The average cost of a flight within the U.S. has risen year after year, far outpacing inflation and reaching $500 (perhaps a little more) in 2015. While that would be frustrating enough on its own, pricier airfare has been a trend during the same period when higher fees on all manner of formerly included amenities have become the norm, and, more recently, when fuel costs has plummeted.

Unsurprisingly, 2014 was a great year for airline stocks, and industry profits are expected to surge even higher in 2015. In its 2015 forecast, IATA, the International Air Transport Association, predicted global net profits will hit $25 billion next year, up from $20 billion in 2014. But there is some hope that at long last flight prices could decrease in the near future. As the IATA report summed up:

Stronger industry performance is good news for all. It’s a highly competitive industry, and consumers—travelers as well as shippers—will see lower costs in 2015 as the impact of lower oil prices kick in.

Recently, Japan Airlines became the first carrier to do the right thing and cut its fuel surcharges to reflect the decreasing cost of oil. Travelers should hope that other carriers are pressured into following in that airline’s footsteps.

Budget Airlines Broke Hearts
Travelers know not to expect much in the way of free amenities and services from today’s true low-fare carriers, including Frontier Airlines, Allegient Air, and Spirit Airlines. The latter has led the charge toward a business model in which up-front prices are low but cover only the extreme bare minimum, and even basics like bottled water, a carry-on bag, and a seat assignment cost extra. It’s not just the small carriers heading down this path. Recently, Delta Airlines expanded “Basic Economy,” a category of airline ticket that’s arguably worse than any low-fare carrier product in that seat reservations and itinerary changes are not allowed, even for an extra fee.

Yet it’s impossible to break customers’ hearts if they were never really in love with you in the first place. That’s why the changes introduced by JetBlue and Southwest Airlines—regularly rated highest in customer satisfaction of late—hurt the most. Southwest, now the nation’s largest domestic carrier, has consciously been spreading the message that it’s not simply a low-cost upstart anymore. Over the past year, the vaunted “Southwest Effect,” in which an airport’s fares drop across the board when Southwest Airlines enters the market, no longer holds up because the carrier’s prices just don’t stand out as cheap like they used to. Likewise, many customers felt betrayed by JetBlue—once the industry darling known for eminently reasonable fares and great amenities—when the airline announced it was cramming more seats on planes and adding fees for checked baggage.

Fees Multiplied—But One is Disappearing
As hinted at above, airline travelers encountered more (and pricier) fees in 2014. A la carte fees above and beyond the base cost of flights were projected at $28.5 billion in 2014, up from $23.7 billion a year ago. Another study showed that travelers saw a 17% increase in airline fees in 2014.

It’s not just the airlines making fee structures more troublesome for travelers. Several major hotel companies, including Marriott and Hilton, are tweaking their cancellation policies: Guests who need to cancel will be charged one night’s stay if they fail to cancel a reservation by midnight the day before expected check-in. In the past, many hotels allowed guests to cancel as late as 6 p.m. on the day of arrival without incurring a penalty.

Meanwhile, another hated hotel policy–charging for wi-fi—is increasingly on its way out. Hyatt, Marriott, and Starwood all recently announced guests would have access to free on-site wi-fi (the latter two only for members of its free loyalty club), while the boutique Provenance Hotels chain will also eliminate wi-fi fees in 2015.

To which virtually all travelers say: It’s about darn time. Free wi-fi became more or less standard at U.S. airports a couple of years ago, and there are so many other places to get fast free wi-fi that it seems nonsensical and annoying for hotels to gouge guests.

Unofficial Fees Rose Too
In September, Marriott stirred up controversy when it launched a seemingly generous campaign encouraging guests to tip hotel housekeepers. Why the controversy? Some felt that Marriott should simply pay housekeepers more rather than passing on the responsibility to hotel guests.

Tenser Travel Overall
Remember the Knee Defender incident and all the discussion that the passive-aggressive flight survival product inspired? Obviously, the episode struck a chord among a nation of cramped, tense, beleaguered travelers, who feel forced to vigilantly protect every last inch of “private” space they’ve paid for on flights—sometimes even including the precious carry-on luggage space they’re paying for in one way or another.

A recent survey asked travelers to rank the worst kinds of airline passengers, and seat kickers and inattentive parents grabbed the top two spots. And while rude and insensitive travelers surely factor into the tense atmosphere on flights today, the cramped quarters, tough restrictions, and abundant fees pushed by the airlines should get much of the blame for widespread stress and agitation in the air.

MONEY Airlines

New ‘Basic’ Airline Ticket Is Worse Than Any Low-Fare Carrier Option

Economy class
Bart Sadowski—Getty Images

Delta recently introduced a new five-tier airfare scheme, including a revamped low-price "Basic Economy" ticket that's the riskiest, most restrictive, and least comfortable option in the sky.

Earlier this week, Delta announced that it is “redefining the products it offers customers to further distinguish the choices available to them,” with the 2015 rollout of a five different categories of service (and pricing) that passengers must choose from when buying flights.

Essentially, the more you pay, the better service and amenities you can expect. This is more or less the way things have always been with airline pricing. Yet the introduction of five flight categories—including “First Class” and an even higher class dubbed “Delta One,” as well as something called “Delta Comfort+” and “Main Cabin,” which used to be known as “Economy” or just coach—is unnecessarily confusing, and it certainly raises the bar in terms of instituting an onboard caste system. More importantly, Delta is flying into new territory at the low end of pricing, with the cheapest category providing the least flexible and least comfortable product of any American carrier.

“We’re providing Delta customers with a thoughtful, well-defined spectrum of options as they make decisions about travel,” Glen Hauenstein, the airline’s executive vice president and chief revenue officer, said in a press release. “Whether a customer prioritizes the perks of Delta One or the value of Basic Economy, every seat comes with impeccable service and unmatched reliability.”

Still, some travelers will be very surprised to find out what a Basic Economy seat comes without. Delta first began testing its low-price Basic Economy fare back in 2012 on a couple of flights. What stood out then about this low-fare option—and what remains unusual even in today’s profit-first, customers-last atmosphere—is how rigid and cruel it is. Neither advanced seat selection nor itinerary changes are allowed, not even for an extra fee. So this low-cost option is out of the question for couples or families who want to be assured they’ll sit together when flying. Also, because anyone not flying on a Basic Economy ticket has the right to arrange a seating assignment in advance, in all likelihood the passengers traveling on the cheapest tickets will be stuck in the worst seats on the plane. What’s more, because changes and cancellations are not possible under any circumstances, if an emergency arises and you must miss a scheduled flight, you’ll eat the entire cost of the ticket.

Today, Delta’s Basic Economy category is available from four Delta hubs (Atlanta, Detroit, Minneapolis, Salt Lake City) and 33 gateways, and it’s about to get more restrictive. Delta explained that as of February 1, several services that are currently available to Basic Economy ticketholders will be eliminated. These services include complimentary or paid upgrades, same-day standby, and priority boarding for a purchase.

It’s well understood that Delta introduced and expanded its Basic Economy category as a way to compete with Spirit Airlines, the much-maligned carrier that’s known for low fares followed by high fees for anything above the cost of a seat. Yet even the cheapest seats sold by Spirit Airlines, as well as low-fare, high-fee imitators such as Frontier Airlines, allow customers to pay extra for seating assignments and the right to change flight dates and itineraries. Frontier and Spirit also offer passengers the option of paying extra for upgrades, in the form of seats that may be larger or just come with more legroom.

The fare structures of Delta, Spirit, and all other airlines are meant to simultaneously attract customers and boost revenues. It’s just that some airlines go about seeking these goals in different ways. Spirit and Frontier are working the a la carte model, in which customers are wooed with a low upfront price, and then hopefully they’re upsold on a bunch of services later in the game. Delta’s new five-tiered model instead wants to get most of the upselling accomplished during the ticket purchase phase. The hope is that customers are so scared off by the absence of getting an advance seat, upgrade, or the option to change a flight that they’ll readily pay more upfront.

One way or another, there’s some upselling going on, and it’ll be difficult, uncomfortable, and often just plain impossible for travelers to actually complete a flight without paying above the base fare. A Delta spokesperson told Businessweek that the Basic Economy category could expand to more cities next year. And judging by the way that Spirit Airlines and its fee-crazed equivalent in Europe, Ryanair, have proven to be not only highly profitable operations but also industry trendsetters, more and more airlines are likely to follow in its a la carte, fees-for-everything footsteps. So, one way or another, when buying a ticket, when checking in, or during the flight itself, travelers should expect to pay more.

MONEY Airlines

A New Era Has Begun for JetBlue, and Travelers Will Hate It

Customers check in at JetBlue's counter at John F. Kennedy Airport in the Queens borough of New York City.
Andrew Burton—Getty Images

At JetBlue, legroom is disappearing and checked baggage will soon cost extra. In other words, the airline you fell in love with is following the playbook of airlines that everyone hates.

When word spread back in September that JetBlue CEO Dave Barger was stepping down from his post in early 2015, two interesting things happened: 1) The company stock soared, rising 5% immediately after the news; and 2) travelers who loved JetBlue for its customers-first policies began to panic.

As Fortune put it, equity analysts tended to view Barger “as being ‘overly concerned’ with passengers and their comfort, which they feel, has come at the expense of shareholders.” With Barger and his pesky, stubbornly customer-friendly policies out of the way, JetBlue—under the leadership of new CEO, former British Airways executive Robin Hayes—could hop on the pathway to higher and higher profits by implementing more fees and cost-cutting measures on par with other airlines.

Consequently, the change at the top was welcomed by investors and dreaded by flyers and travel advocates who loved JetBlue specifically because it didn’t engage in the very nickel-and-diming policies analysts were pushing for. Even before it was announced that Barger was out, Marketwatch foresaw the likelihood that JetBlue would soon begin “putting customers second,” while first and foremost pleasing investors by jacking up fees and cutting back on amenities. Frequent flyer expert Tim Winship described Barger’s departure as “the beginning of the end for JetBlue as we know it,” while noting the risks inherent in the airline’s likely policy shift:

Such changes would be wrenching for JetBlue loyalists, for whom the roomier seating and relative absence of nuisance fees have been key reasons to book JetBlue over the competition. Even the number-crunchers acknowledge that a remodeled JetBlue would jeopardize the considerable brand equity the airline has built up over the years.

Nonetheless, this week JetBlue announced that it is reducing average legroom and introducing a new fare structure that means passengers buying the lowest-price tickets will have to pay extra if they want to check luggage. The changes, which will be instituted starting in 2015, will leave Southwest Airlines as the only domestic carrier to grant free checked bags (two of them, in fact) for all passengers.

Shrinking legroom will come as a result of 15 more seats being added to JetBlue’s Airbus A320 planes. Even after squeezing in the new rows of seats, JetBlue’s average legroom will be 33.1 inches, which is still slightly more than what the typical passenger on Southwest or Virgin America can expect. The real heartbreaker to travelers is likely to be the new “Fare Families” structure, which consists of three bundled options that travelers must choose from when booking a flight. At the low end of the pricing spectrum, tickets do not include a checked bag. Passengers who pay higher fares are entitled to checked bags (one at the middle level, two at the high end), and also get bonus loyalty points.

Exact details on pricing and what specific amenities are and aren’t included in the various fares haven’t been released yet. JetBlue became immensely popular among travelers for perks including free snacks and free entertainment on seatback screens. Presumably, even at the low end JetBlue passengers will get more than the “Bare Fares” of Spirit Airlines, which include with almost nothing other than basic transportation—even water and seat reservations cost extra. But JetBlue’s moves certainly seem inspired by the example set by Spirit, which is widely known as one of the simultaneously most hated and most profitable airlines.

JetBlue’s changes are clearly aimed at pleasing investors—shares of the company stock jumped more than 4% on Wednesday, nearing a seven-year high—but Hayes, currently the airline’s president, still claimed that the company was focused on delivering “the best travel experience for our customers.” In a statement accompanying JetBlue’s press release, Hayes is also quoted saying that JetBlue remains different from the pack. “As we focus on executing this plan,” Hayes said, “JetBlue’s core mission to Inspire Humanity and its differentiated model of serving underserved customers remain unchanged.”

Travelers seem to feel quite differently about the matter. The very active traveler community at the Flyertalk forum has been bashing the changes because they remove what made JetBlue special and worth seeking out, and turn the carrier into just another (hated, annoying, nickel-and-diming) carrier. “Lovely. The ‘We’ll attract more customers by being exactly like every other airline’ move,” commented one Flyertalk member. “Charging for bags and a crappy FF [frequent flier] program? What a combo!” commented another. “Seriously though, they’ve completely lost their appeal.”

Another highlighted how Southwest will soon be the only major domestic carrier including free checked bags with flights: “Now, especially if I have a bag, Southwest will be the way to go…and I hate Southwest.”

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