We all can use advice from time to time. Sometimes that advice is about personal finances, Investing, or borrowing. When choosing this person, stay away from financial advisors who have a conflict of interest. The advisor who makes money on your investment decisions is like the pharmaceutical rep who is telling you all about his new medication and why it is better than what you already use. The advice might be fine, but due to the obvious bias/conflict of interest, you never know when information is tipped in their favor. When you read a study about a new wonder drug and notice the manufacturer financed it, you tend to take the information with a grain of salt. Use the same skepticism with your financial advisors. Follow the money. Many a doctor has dropped his financial advisor after discovering the advisor was making more money off the portfolio than the doctor was.
Let’s take a look at who is offering this advice, and let’s consider what happens if you were seeking advice about paying off your home mortgage early.
The banker: If the bank holds your mortgage, they will continue to make a profit as long as you keep the mortgage and continue to pay interest. If the bank sells their mortgages, they make money by writing new loans (points, loan origination fee, and setup fees), so they would profit if you refinance and harvest some equity. If a competing bank holds the mortgage, then any money sent to the other bank to pay off that mortgage will not be available for you to deposit in a savings account or certificate of deposit in their bank, which your banker could loan out to make even more money. He is biased and has no reason to encourage you to pay off your house. He makes no profit if you pay off your house.
Stockbroker: A commissioned broker only makes money when you buy and sell stock. The more he can convince you to churn your account, the more money he makes. If you use your available cash to pay off a mortgage, that money will not be available to buy more stock and pay his fees. He is biased and has no reason to encourage you to pay off your house.
Insurance salesperson: Many of the insurance products they peddle are great for the insurance company and the salesperson’s commission but are bad for you, the buyer. This is true for any kind of life insurance that is also an investment. Commissions come directly out of your pocket and are not available for the investment. Like the other listed advisors, if you use your available cash to pay off the mortgage, it will not be available to buy the overpriced, high-commission policy he wants to sell. (Only buy term life insurance and never use insurance as an investment.) He is biased and has no reason to encourage you to pay off your house.
Advisor paid on total portfolio: Some advisors are paid a percentage of your total portfolio value. The larger the balance in your investment account, the larger the advisor’s paycheck. If you use your money to pay off your house, it is not in your portfolio to raise his income. He is biased and has no reason to encourage you to pay off your house.
Accountant: Many accountants are really tax preparers in disguise. You do need to have a top-notch accountant/CPA, not simply a tax preparer. Tax preparers may not be after what is best for you overall, but rather what creates the most deductions. The more tax deductions they can put on your tax return, the more it looks like they are earning their fee. “See what I did for you.” Unfortunately, the things that create the most deductions are not always the best options.
Deductions are good, but only if you had to spend the money anyway. Remember, the reason you can claim a deduction is because you’ve lost money. To lose one dollar in interest and gain 24 cents in tax refund is not a good deal by itself. To get the 24-cent refund for something you already had to pay anyway is a better deal. You don’t have to pay mortgage interest. If you didn’t have anything to deduct, you might not need someone to prepare your taxes. An accountant is less biased than the others, but has no motivation to encourage anyone to pay off their house.
Unbiased advisor: An unbiased advisor will not be selling anything or making any profit based on the decisions you make or the size of your portfolio. This person has your best interests in mind. If you do well, you tell your friends, and she gets more clients. She has no biases to keep her from recommending you pay off your mortgage, if it’s in your best interest. This is the financial planner who is paid a fee for her time, not a commission or percentage of anything she might be selling. This is the advisor you need to find.
Except for the unbiased advisor, the preceding examples are often salespeople masquerading as financial planners. They often have minimal training in financial advising and maximal training in selling their products. They have their own best interests in mind and if they can help you along the way, that’s a bonus. Some are legitimately trying to help you, but only inasmuch as it helps them also.
When I first set up my IRA during my internship, I went to an investment firm. The advisor helped me set up my IRA. The mutual fund he recommended had the highest front-end load allowable by law. In other words, it was the investment option making him the most money. He was only steering me to the investments that were lucrative for him.
Ask your friends who they use, why they like the person and if they can recommend them for you. Finding a good advisers is key to your financial future. You will need several different types of advisors through the years. The one who helps you set up your 401(k) plan might be different than the one you use to negotiate a contract. For those of you who need it, I offer a financial makeover program to help you get all the pieces of your financial life squared away. If what you are seeking at this time in your life is to get your personal finances in good working order so you can reach all your financial goals, this would be a good program for you and you can contact me if you want to check into it. When considering an advisor, always follow the money and see how he or she gets paid. If it looks unbiased and they come with good references, you are likely to be happy with the results.
Have you had any especially good or bad experiences you would like to share with us? If so leave a comment, we would love to hear your story.