Why Your Planner Wants You in Debt

In Money magazine's May issue, they have an article from "The Mole" -- a certified financial planner who gives the truth behind many actions taken by the financial planning community (not everyone, but by enough to make it worth pointing out.) In this piece, he talks about why a planner may NOT want you to pay extra on your mortgage (in this case a second mortgage) even if it was at a fairly high rate of 8% or so. He goes through the various calculations on tax benefits of keeping the mortgage, how much you'd make by paying it off versus investing and so on, but here's the bottom line:

If early payment [mortgage] makes so much sense, why don't my colleagues tell you to do it? Because in most cases, the more money you let your planner manage, the more he earns. There is absolutely no money to be made from your thriftiness.

What? A financial planner working in his own best interest and not that of the client? Shocking! Surprising! Caught me totally off guard! ;-)

As a reminder that it's you who are responsible for your money and that not every "financial planner" can be trusted, check out Thoughts on Financial Advisors.

Comments

[James]

FMF,

This is an important post. I want to thank you for raising this point again. Many people don't realize that paid financial planners are not compensated based on their ability to generate wealth for their clients, rather they are paid based on their ability to generate fees for their companies.

Utimately hard work, research and being economical in your use of resources will take you further than hiring a personal financial planner.

Best,

James

[oneway]

i am trying to figure out where to start. thanks for the tip :)

[bigbuddha]

Once again, ignorance rules. A planner should only be judged on the STRATEGY he/she provides. If your planner is charging you via COMMISSION then walk away, they should only be charging FEE FOR SERVICE anything else is just a money grab. THIS is a fact, I am an adviser, this is how it should be

At the end of the day, any profession will have it's bad apples, but don't generalise, look into the facts and talk to alot of people with more experience than yourself. Making broad sweeping statements without knowing the industry is crazy talk.

[FMF]

1. What do you mean by "once again?"

2. Are you saying that the "common people" can't have an opinion on financial planners simply because you're an "expert" in the industry? Sounds like just the attitude I'm warning people against.

3. In case you missed it, the guy I quote above IS in the industry and IS a planner, so by your definition, he knows the industry.

[Duane Gran]

This is actually one of several good litmus tests to apply when speaking with a planner. Generally an ethical planner will advise you to put funds into tax sheltered vehicles (401k, etc) and to pay down consumer debt before purchasing investments.

[pf101]

Thanks for another great post. The shady dealings of financial planners is why I got into my business. You bringing these types of things to light is useful as it will hopefully drive people to educate themselves more before making financial decisions.

Not all planners are bad by a long shot but the VAST majority of the ones I've met (and cleaned up after) did more harm than good. I'm a firm believer of the teach a man to fish philosophy which is why I love blogs like yours.

Thanks!

[Steve Kwon]

As one who just got his first job, just paid a financial planner for his advice and is now thinking about going forward with his plan (and trying to be convinced of him managing the money) I am so disturbed. Thanks for the advice... although upsetting... a needed thorn in my side.