Seven Mistakes Made by Financial Advisors
The advertisement starts with a scared client asking a professionally attired person behind a desk “Are you a certified financial planner?” The answer “yes” is supposed to reassure the client.
It shouldn’t.
Financial advisors, even those who claim to be fiduciaries, routinely give bad advice to their clients. Advice which routinely increases their fees and/or the income of financial firms.
Financial Advisor Mistake #1: Contribute to the firm-sponsored retirement plan even when entering the workforce with a ton of debt and very little liquidity.
The decision to prioritize retirement savings over rapid student debt reduction will often lead to a bad credit rating and higher future borrowing costs, higher total lifetime interest payments on student debt, taxes and penalties stemming from early disbursements from retirement plans, and delays in home purchases leading to lower accumulation of house equity. For additional information go to the post prioritize debt reduction over savings for retirement.
Financial Advisor Mistake 2: Fail to search for highest possible interest rate on CD rollovers.
A recent Wall Street Journal article found that many banks are routinely rolling over old CDs to new CDs with interest rates way below market rates. Your local bank will keep the money in their bank and will not consider better options elsewhere in the market. A better approach, outlined in the essay Ways Fixed-Income Investors can Avoid Bad Outcomes, is to purchase fixed income investments from an on-line brokerage account or through Treasury Direct.
Note: The Treasury Direct web site is complex and takes some getting used to. Some financial writers have exaggerated problems with the Treasury Direct web site. The advantages from purchasing Treasury securities directly from the Treasury are huge. There are no minimum order limits. Series I bonds can only be obtained from the Treasury.
Financial Advisor Mistake #3: Invest in bond ETFs instead of directly investing in Treasury securities.
Both bonds and bond ETFs will fall in value when interest rates rise. However, bonds and short-term T-bills with a maturity date will be redeemed at par at maturity while the price of bond ETFs will remain low until interest rates fall. I was amazed that financial advisors kept pushing bond funds when interest rates fell after the pandemic. The data reported in Ways Fixed-Income Investors Can Avoid Bad Outcomes, reveals the 2022 financial results were not pretty. Also, before you purchase a bond fund click on the Morningstar report, like the one for VBIAX, and observe what happens to returns, in years where interest rates rise.
Financial Advisor Mistake #4: Failure to recommend regular purchases of Series I Savings bonds through Treasury Direct
Series I Savings Bonds are an essential part of every investor’s portfolio. The bonds cannot fall in value and will rise during periods of inflation when bonds and stocks often fall in value. Financial advisors often neglect to mention Series I bonds because the bonds can only be purchased directly from the Treasury and the financial advisor and private financial institutions do not receive fees from the purchase of Series I bonds. Go to Series I Savings Bond an Essential Investment, for more information.
Financial Advisor Mistake #5: Take a mortgage into retirement while placing most liquid wealth into a conventional retirement plan.
Retirees with a mortgage in retirement must spend substantially more than retirees without a mortgage. When all or most retirement wealth is inside a conventional retirement plan spending occurs from disbursements from the retirement plan which are fully taxed. The extra disbursements must occur regardless of whether the market is up or down. Two posts Comparison of Two Financial Scenarios in Retirement and the Impact of Mortgage Debt on Longevity Risk, demonstrate the risks facing a 401(k)-rich retiree with too much debt.
Financial Advisor Mistake #6: Failure to recommend delaying in claims of Social Security benefits
CNBC recently reported on research, which found financial advisors often fail to give good advice on when their clients should claim Social Security benefits. People who can delay claiming Social Security benefits should delay because returns from delaying claiming Social Security are riskless while returns on investments are subject to changes in the market. However, financial advisors and financial firms earn more if their client claims Social Security and reduces retirement plan disbursements. My own analysis found that a delay in claiming Social Security benefits is a prerequisite for highly profitable conversions of conventional retirement accounts to Roth accounts early in retirement.
Financial Advisor Mistake 7: Overuse of College 529 Savings Plans
College 529 plans can play a useful role in saving for college, but 529 fees are high. Investors should use college 529 for long-term investments in an equity fund purchased near the time of the birth of the beneficiary. However, savers using fixed-income funds and life-cycle funds inside a college 529 tend to lose money because of high fees and interest rate risk. The fixed-income portion of college savings should be held in Treasury securities including short-term bonds and Series I bonds held at Treasury Direct.