Good advice isn’t something to take lightly. And that goes particularly for money issues — bad financial tips are a lot easier to find than solid money advice. Listen too often to the wrong people and you can do serious damage to your retirement accounts.
Financial advisor Mary Beth Storjohann saw this first hand when she met with a client to review his IRA. The client’s parents placed all his assets into a gold fund instead of a diversified portfolio of stocks and bonds. Over the last five years, gold prices have dropped 29 percent, while the Standard & Poor’s 500 index shot up 70 percent. The parents’ well-meaning advice cost Storjohann’s client thousands of dollars.
It’s natural for young investors to seek advice from friends and family. But those closest to you don’t always have the right answers — because they aren’t financial experts.
[See: 8 Gold ETFs to Buy Anytime.]
And to complicate matters, you can’t always trust a financial advisor, either.
Those claiming to be financial advisors sometimes aren’t. Paid financial advisors could represent a different problem from the well-meaning advice of friends and family. If the advisors are paid through commissions by third parties to sell insurance or exotic mutual funds, they may have their own best interests at heart rather than yours.
“It’s hard,” says Barbara Roper, director of investor protection at the Consumer Federation of America. “The average person isn’t going to understand an investment advisor [sometimes] isn’t an advisor, but a salesperson.”
There’s a debate going on in Washington over this issue. The Obama administration instituted a rule that would force anyone that handles retirement accounts to be held to a fiduciary standard — meaning that advisors would have to provide advice that’s in the best interest of their clients. It would, in effect, hinder commission-based advisors, since it’s difficult to determine if they’re working for their clients or an insurance agency, for example.
The rule is set to go into law in April, but the Trump administration has ordered a review the rule. Banks and financial institutions worry about the costs involved with adhering to such a law.
Without the fiduciary rule, it’s up to everyday investors to determine if their financial advisor is putting their best interests forward. In order to do so, ask the advisor how they get paid. If it’s by commission, then look for a fee-only advisor who will get paid a flat amount for work.
Parental bias can leave children in harm’s way. UBS has found that more than 40 percent of millennial-aged investors turn to parents for financial advice. But parents are limited by their own experiences, says Storjohann, who runs Workable Wealth, a financial advisory service that targets millennial clients.
“They’re recommending funds they’re using in their portfolio,” she says. “It’s a limited scope that you’re pulling from.”
Also, parents can’t see the whole financial picture very clearly, since they’re too attached to their kids’ success. They can “be swayed by emotion when it comes to advising their child,” says Jonathan Duong, a financial advisor and founder of Wealth Engineers in Denver.
“While the parent probably means well, emotionally charged financial advice rarely results in good decisions,” Duong says.
Finally, there’s the issue of risk tolerance. The parent’s taste for risk may differ from the child’s. While a millennial investor has decades to save — and can therefore take more risk — an older investor could be more inclined to choose a strategy that favors bonds and less volatile equities. Millennials copying that strategy could be left wanting when they’re ready to retire.
And if things go awry, it can cause conflict within the family. Remember Storjohann’s client, who had an IRA invested mostly in gold? The parents’ bad advice created tension between them and the client, Storjohann says.
Friends often share successes, but forget about the failures. Storjohann is seeing more clients who are considering buying a first home and converting it into a rental property. She says they often hear from friends about the potential profits, but not the effort or risk.
She recently had a client who wanted to buy a home, live in it for three years and convert it to a rental. When it was time to place a bid, he chose a house that was $100,000 more than his initial budget. Storjohann intervened, showing him that the average rents in the area wouldn’t have covered his mortgage, taxes and fees. He was “letting emotions take over and wanted what was nicer for himself,” Storjohann says.
More than a quarter of millennials take advice from friends, according to UBS; it’s often difficult to ignore someone who brags about a sweet stock pick or huge returns from an investment. But people are less likely to talk about stock picks that fail or the hard work involved on a real estate property.
Chip Hymiller, an advisor at Beacon Financial Strategies, says he’s had clients buy investment property at the peak of the real estate boom on the advice of friends. “They are still underwater on the property and maintenance costs have been much more than expected,” Hymiller says.
“I’m certain that there will always be people who put a certain amount of credibility in the off-the-cuff recommendations of friends and family,” he says. “In my experience, that has always been a bad idea.”
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