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Suze Orman Money Matters

Suze Orman, Money Matters

The Five Signs of Bad Financial Advice

by Suze Orman

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Posted on Friday, November 3, 2006, 12:00AM

In a recent survey conducted by Fair Isaac, the company behind the FICO credit score, 79 percent of respondents said that financial professionals were their most trusted source for personal finance and credit information. (Family members came in second at 70 percent.)

That doesn't really surprise me, but it sure concerns me. The fact is that there are plenty of professionals out there who sell clients financial products that put a lot of money in the adviser's pocket regardless of whether they're truly the best choice for the client.

I'm not making a blanket statement that all financial professionals are bad; that's how I got my start as one back in the 1980s, after all. But you really need to do your homework to make sure anyone giving you financial advice is giving you good advice.

Here are five signs that a financial advisor may not have your best interests at heart:

1. You own a mutual fund with the letter "B" in its name.

B-share funds are bad news. While it's true that you pay no sales commission (or load) when you first invest in the fund, you could be hit with a load when you try to leave the fund.

These funds are known as deferred-sales charge funds: If you cash out in the first year you'll pay a commission of, say, 5 percent of the money you pull out; if you leave in the second year , the fee is 4 percent, and so on. After five years or so you typically won't pay a fee when you sell.

But the longer you stay invested in the fund the longer you'll be paying a very steep expense ratio. That's the annual charge all mutual fund investors pay on their investment. The problem with B share funds is that the expense ratio can be 1.5 percent a year or more, because a big portion of that charge goes to pay the advisor who sold you the fund.

When you compare that to index funds or ETFs, which have expense ratios that can be just two-tenths of a percentage point or less (0.20 percent), it's a huge difference. Your advisor is doing well, but the high expense ratio you're paying makes it harder for you to do well.

2. You pay the advisor through commissions rather than a flat rate.

A financial advisor -- which can just be a gussied-up name for broker -- who makes all of his or her money on commissions for the investments you buy and sell obviously has an interest in getting you to do a lot of buying and selling. And it's not unreasonable to see that the advisor has a financial incentive to get you to pay high commissions.

How is that good for you? You and your money deserve a better deal than an advisor who works solely on commission can offer. A better arrangement is to work with an advisor you pay a flat annual fee to rather than per-trade commissions.

A typical advisor fee might be 1 percent to 1.5 percent or so. But again, you need to be careful that your advisor is taking good care of your money. If you're paying an advisor 1 percent or so a year for his fee, and the advisor is then turning around and putting you in mutual funds with annual expense ratios of around 1.5 percent, your total investing costs are way too high.

A financial advisor who charges a flat annual management fee should be focused on individual stocks or very low-cost funds such as index funds or ETFs.

Recommendations from people you trust are obviously a great way to track down a fee-only advisor. You can also search for fee-only advisors at the National Association of Personal Financial Advisors.

3. Your life insurance is a cash-value policy.

If your advisor also happens to be a life insurance agent and has steered you into a cash-value policy, sirens should be blaring in your head. In the vast majority of cases, all you need is a simple-term insurance policy, which is going to cost you about 80 percent less than a cash-value policy such as universal life, whole life, or variable life.

Why would someone recommend an expensive cash-value policy? Well, one strong possibility is that the agent's commission is a percentage of your premium, and the higher cash-value premium translates into a larger commission for the agent.

4. You own a variable annuity inside of an IRA.

Anyone who tells you to buy a variable annuity (VA) for your IRA is clearly not looking out for your best interests. The spin on VAs is that you get tax-deferred growth in mutual funds -- that is, no taxes while the money is invested in the VA. But in truth, everything in your IRA is already tax-deferred anyway!

It's absurd to buy a VA inside your IRA. Why might the advisor recommend this move? Once again, there's a nice commission to be made.

5. You're saving for your kid's college education rather than for your retirement.

One reason many people turn to financial advisors is for help in figuring out how to save money for their children's college educations. While it's logical to want to provide for your kids, a good financial advisor won't blindly set up college funds for you.

Instead, a good financial advisor will assess whether you should be saving for college at all. If you aren't already maxing out on all your own retirement savings options, or you have a big chunk of high-interest credit card debt, you have no business putting your kids' college costs ahead of getting your own finances in good shape.

A financial advisor who has your best interests at heart -- and your kids' for that matter -- will explain that if you retire without sufficient income to live on, or in serious debt, you're going to be a financial burden to your children.

DIY Financial Planning

Finally, allow me to give you some free financial advice: Take the time to become educated about your finances so you can make your own informed choices rather than relying on someone else.

At the end of the day, no one will ever care about your money more than you. You're your own best financial advisor.

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16 Comments

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  • Shantee - Wednesday, April 25, 2007, 12:25PM ET  Report Abuse

    • Overall: 5/5

    This is very good advise. To clarify, the purpose for buying a term life insurance policy instead of a whole life policy is to free up additional money for investments. A family will benefit more when a person can leave an inheritance of wealth as oppose to a whole life insurance policy that only pays off bills that could have been paid off prior to that persons death had they not put so much money into a whole life insurance policy. The idea is that a smart investor will have term life insurance and invest their own money instead of paying 80% more money for a whole life policy. The insurance company invests the premium paid on the policy at a substantial rate of return while the consumer is only left with the cash value of the policy. This advise is good for smart savvy investors.

  • Yahoo! Finance User - Wednesday, April 11, 2007, 11:26AM ET  Report Abuse

    • Overall: 1/5

    Making blanket statements to uninformed consumers should be a crime punishable by law. For her to imply that she knows every person's financial situation and goals by giving cookie-cutter advice for all, is a terrible mistake. She could very well lead someone down the wrong path and by the time they have realized they have listened to the wrong "expert" they cannot bring back the lost time value of their money. She apparently gives no regard to the lifespan and the longevity of Americans as it relates to life insurance. Most term life policies expire and cannot be renewed after age 65-75. What does this do for families who are sadled with large medical/housing bills after their loved ones have passed. Logically if the mean life expectancy is older than the policy runs, how is it really going to help if you survive the unexpected? I am appalled that people would believe what they read because she claims to be an "expert" with an opinion. If you want to live a retirement you have always dreamed of, you had better look out for your own best interest, not the interest of someone making a fortune by selling opinion. She has decent advice for people without solid financial futures, but for those of us who want to strategically build a financial planning path and know what our retirement years will provide, she is far from realistic.

  • Yahoo! Finance User - Saturday, March 31, 2007, 4:28PM ET  Report Abuse

    • Overall: 5/5

    This is real good advise. I with, though, I could find out some clear-cut information on HOW MUTUAL FUNDS and STOCKS LOCK IN THEIR EARNINGS.

  • Yahoo! Finance User - Wednesday, March 7, 2007, 1:33PM ET  Report Abuse

    • Overall: 2/5

    This is another perfect example of Suze says... she makes several valid points mixed in with some absurd statements and absolutes. The truth is, and Suze knows deep down, that there are no absolutes. She's trying to empower the "average investor" with some how to knowledge and give them confidence to make financial decisions. I applaud her for that because she's successful. Where she misses big time is her absolutes on life insurance, VAs (variable annuities for the layperson) and loaded mutual funds (A, B, C shares). There are plenty of times when these products are perfectly suited for the people buying them, but certainly there are times when they are not. Advisors are out there to serve their clients to the best of their abilities and she shouldn't try to create mistrust of them by the average person who doesn't know how to make a financial decision outside of what Suze tells them to do. The bottom line is that take what Suze says with a grain of salt. She can't be making the right decisions for everyone because there are no "one size fits all" investments, answers, or life insurance products. Do be cautious, and do ask questions when you don't understand something, but don't be afraid to trust financial professionals. Keep educating yourself to be more familiar with your finances and stay on the road to success!

  • Chris - Wednesday, March 7, 2007, 9:18AM ET  Report Abuse

    • Overall: 1/5

    I actually read Suze Orman's articles for a laugh. I remember reading one of her comics about "How to Fix Bad Credit," and she was saying things like, "Pay your bills on time." Do you think? LMAO! In this gem, she recs that parents worry about themselves first instead of making sure that their kids can afford a solid education. That's a beauty. Also, if you crunch the numbers, whole life insurance policies almost never work - but for some people who want guaranteed returns and a set amount in the end that they can count on, this may be an appropriate option. The first two points? Her "B" share analysis is TOTALLY off base. She acts as if an advisor takes no fees otherwise, when in fact, those same fees are all taken upfront. Translation: Investors have less of their capital working from go. And if an advisor is averaging 15% annualized returns for me, I will gladly pay commissions. What good does it do to have a fee based advisor, putting all your money in no load funds, if you only achieve 5% returns? You solve for total return. Pretty basic stuff. In short, another useless article from our pal Suze!

  • ibay - Thursday, March 1, 2007, 2:21PM ET  Report Abuse

    • Overall: 1/5

    Very uneducated in the life insurance department. It is quite irritating to hear her continue to give advice in an area that she obviously lacks knowledge. Stick to the facts and get over yourself.

  • Marco - Tuesday, February 27, 2007, 12:37PM ET  Report Abuse

    • Overall: 2/5

    Same old tired advice - it really starts to irk me that every self-anointed pundit thinks owning a VA inside an IRA is a bad deal. If you have been "outsourced" and handed a lump sum payment in lieu of your pension you might want a VA, especially if you plan to work for some time to come. Many of the products on the market offer return guarantees which the market does not. They also let you play in the market and when it comes time to take home your "pension" you have the choice between market returns and your guaranteed returns. Yes, this comes at a price and yes, you should check the financial stability of the company offering the VA (e.g. A.M. Best), but in contrast to the black and white assertion by Ms. Orman, there is a gray area where sometimes it does make sense to have a VA in your IRA.

  • Yahoo! Finance User - Wednesday, February 21, 2007, 3:34PM ET  Report Abuse

    • Overall: 5/5

    Looks like some here must sell this stuff!

  • Yahoo! Finance User - Wednesday, February 21, 2007, 2:58PM ET  Report Abuse

    • Overall: 5/5

    My experience has been with advisors that were not in my best interests. Job one was to secure their commissions first and offered advice that was questionable at best. I'm sure there are good advisors but I'm still looking. It is excellent advice to acquire knowledge on your own by researching things first.

  • Yahoo! Finance User - Wednesday, February 14, 2007, 10:52PM ET  Report Abuse

    • Overall: 1/5

    Dismissing all fee-based advisors as greedy, commission-chasing brokers is not only unfair to honest advisors, but also a disservice to individuals looking for valid guidance towards their retirement goals. Many, many honest and trustworthy advisors are fee-based and build their businesses on client trust, not client commissions.

  • Ranger14 - Wednesday, February 7, 2007, 5:09PM ET  Report Abuse

    • Overall: 1/5

    Once again Suze bashes financial advisors. Why, because people who have a trusted financial advisor don't need to read her bs. Also her blanket statements are outrageous. A cash value life insurance policy makes perfect sense for estate planning, a Variable Annuity could have certain living benefit or death benefit riders that benefit the client greatly depending on their situation, and B shares aren't more expensive than A shares if you don't receive a breakpoint. I just hope people don't actually follow her advice or they'll be in bad shape.

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