Smart Money just published a good piece on how to determine if financial advisors, mortgage lenders, insurance agents and college aid advisors have your best interest in mind—or if they’re in it for themselves. It’s got some good basic tips for consumers. Below are the financial and mortgage advisor excerpts, and here’s the full report.
Financial planners: Fee-only advisers don’t sell products, and therefore don’t have commission incentives (they charge a flat or hourly fee or a percentage of assets under management, or both). But other financial planners depend on commissions that come from selling products, others charge fees or get a percentage of assets–many use a combination of the three. One big pitch to watch out for: variable or equity-indexed annuities where high commissions often eat into returns. The same tax-deferred retirement saving benefits occur with an IRA or 401(k) often for a tiny fraction of the fee, says Roper. Planners make up to four times more in commission (about 5% to 8%) on average by selling a variable annuity than investing a client’s money in mutual funds, says Sheryl Garrett, a fee-only certified financial planner. Invest $3,000 a year in an index fund with a 6.75% net return and you’ll have $40,000 more after 25 years than if you put the same money in an annuity at 5% net yield.
What to do: Make sure you understand how fees and performance on funds you are pitched stack up to other funds with similar exposure. (Many people don’t: About 32% of women and 23% of men rely solely on a financial adviser’s recommendations for mutual funds, according to the CFA.) You can also ask if the fund is owned by the company selling it or if the broker gets paid extra for selling it, says P.J. Gardner, founding partner at AGW Capital, an investment consulting firm, but there’s little guarantee that they’ll tell you.
Mortgage brokers: As of now, mortgage brokers can earn extra cash from the lender they sell the loan to for adding terms like a prepayment penalty. In April, new Federal Reserve rules for mortgage brokers will put a stop to that, but buyers will still need to look for questionable tactics, says Robert Lattas, a real estate attorney in Chicago, including pushing a customer into a bigger mortgage. The result: a buyer with, say, a $70,000 down payment might be persuaded to put less money down than the typical 20% recommended, in order to get the $380,000 house — on which a broker will earn a bigger commission. The broker’s share, which ranges from 0.5% to 2% of the mortgage, gets bigger as a loan grows.
What to do: It’s a good sign if a mortgage originator asks about monthly income and expenses and whether large expenses, like private school tuition for children, will kick in while repaying a mortgage, says Gibran Nicholas, chairman of the CMPS Institute, which trains and certifies mortgage lenders and brokers. If they don’t ask — or don’t care — consider these expenses yourself before signing up for a mortgage that gets you an extra bedroom now—and financial strains down the road.