Why we don’t trust financial planners: a rant

I remember recent posts by Plan Invest Escape and Slowly Sipping Coffee about bad advice from the experts, the so-called financial planners. The post itself and the comments from others about bad experiences with advisers can really raise your blood pressure. But you don’t even have to hire them. Sometimes just reading their posts online is enough to expose the empty suits. One of those nuggets was on Kiplinger (via Yahoo! Finance) today on why, ostensibly, the 401(k) is not a good option to save for retirementsee here.

This financial planner actually makes a half-way decent point that if (and that’s a big “if”!) your projected marginal tax rate is higher in retirement you want to max out the Roth options today (Roth IRA, back-door Roth, Roth 401k). Nothing wrong with that. But for most folks the marginal tax will be lower in retirement because their adjusted gross income (AGI) will be significantly lower:

  • Only up to 85% of Social Security income counts towards AGI
  • You no longer save for retirement and pay no more payroll tax, so you can achieve the same disposable net income with much less gross income putting you automatically into a lower tax bracket
  • You might move to a lower (or zero) income tax state
  • You now live off your capital gains and (long-term) dividends which are taxed at a zero (federal) rate in the first two brackets and withdrawals of principal from taxable accounts are not income

Another reason for maxing out your 401k: during your early retirement you can keep your ordinary income low and live off your dividends and then keep rolling your 401k to an IRA and then to a Roth IRA for the ultimate Roth conversion ladder, see Go Curry Cracker and Mad Fientist. You get the best of both worlds: a tax advantage while working and then a zero cost (or at least very low-cost) Roth conversion while retired. I’m sure our so-called financial planner hasn’t thought about that.

And it gets worse. Inexplicably the so-called financial planner also makes this jaw-dropping claim:

“Do you really want to be in a lower tax bracket when you retire? Think about it. Do you want to retire with a lower standard of living? You save for 30 years, and if you do a good job, you get to retire into the SAME standard of living. This means you will have about the same amount of income, which means the same tax rate. But now your home is paid for, your children are gone, and your tax deductions have vanished.”

If your house is paid off you can sustain the same level of after-tax-after-house-payment consumption with much lower income. True, you lose the deduction, but the cash-flow impact of having no more mortgage and no more mortgage deduction is a net positive, last time I checked. Same if the kids left the household. The guy disproves his own point. In the same paragraph. Do they teach this stuff in the CFP curriculum?

And then this quote:

“Reason #3: You are now a target[.] You might agree that the good folks in Washington, D.C., have a spending problem. But how are they going to pay for it all? You can bet your last dollar that they all know that there are trillions of dollars sitting in 401(k) and 403(b) plans that have never been taxed. This is like candy to a baby, and they want it. Do you really want the bulk of your retirement dollars sitting in the crosshairs of a government with a spending habit?”

True. But 401k distributions are already taxed at ordinary income tax rates upon withdrawal. The rates might rise somewhat and that’s definitely a concern. When projecting tax rates during retirement, maybe add 2-5 percentage points. But I doubt that would make the 401k suddenly unattractive because you could have a significantly lower AGI to sustain the same level of consumption. But if the guy is so concerned about politicians targeting retirement savings, what keeps those same greedy politicians from targeting Roth IRAs? What if populist politicians see all those rich lawyers and doctors (Sorry, Physician On FIRE) who tucked away large sums in their Roth IRAs? Could there be a temptation to double-dip? You betcha! Or what if the tax increase comes in the form of a consumption/value-added tax? Capture the Roth withdrawals that ways!

But the biggest whopper is saved until the end with this recommendation:

“Look into “maximum-funded life insurance” as a 401(k) option. Be careful on this one, but if you have a really good financial person on your side, they can help you set it up in the proper way.”

There is always an angle. I mean, there is always an angle when dealing with pathological, uhm, professional salespeople. Out of nowhere comes the recommendation for some product that they like to sell at their financial planner office; no doubt a high-fee product with lots of commissions for the financial planner. They got their foot in the door at Yahoo! Finance, fifth post from the top with a link to the Kiplinger page. That alone should bring lots of traffic to their site. Why put in such a shameless and thinly-veiled sales pitch? Out of nowhere, with no explanation of why life insurance is such a good substitute for a 401(k)! Pretty shoddy analysis finished off with a bad sales pitch. I will keep managing our money in-house. If I still need advice I will consult folks listed on our blog roll. For free.

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16 thoughts on “Why we don’t trust financial planners: a rant

  1. So many financial planners are shady. It’s discouraging how often you have to wade through the weeds to get to the flower you were promised.

    Liked by 2 people

  2. Just another reason to DIY your finances. As this financial planner demonstrates, there are too many conflicts of interest. Probably a 401(k) doesn’t generate managing fees, but life insurance does.

    Liked by 3 people

  3. Thanks for the acknowledgement of our post. Appreciate it.

    Mrs PIE and I still get a newsletter from our former advisor. Mrs. PIE was threatening last night to pull a few gems of wisdom from it and make a post out of it. Some of the stuff is just comedy material, it really is. Our former advisor is a genuinely nice guy with lots of good attributes but his newsletter rants are hilarious and painful at the same time.

    Like

  4. Apology accepted. 🙂 The sad thing is, if you haven’t taken the time to understand what you own spending, income, and tax treatment might look like in retirement, you could easily buy into the concepts put forth in the “article”. I didn’t read it, other than the excerpts you included here, but I’ve read more than enough to know that it’s largely inaccurate for many people. and of course, there’s a reason. For shame.

    I wouldn’t take this article, or even hundreds of anecdotes, as an indictment of financial advisors as a whole. I’m a DIY guy but many DIYers vastly underperform the markets, due to emotionally charged bad decisions (buy high, sell low). As I’ve pointed out in The Top 5 ways to manage your money, DIY occupies the #1 (best) and #5 (worst) spots. http://www.physicianonfire.com/top-5-ways-to-manage-your-money/

    Cheers!
    -PoF

    Liked by 1 person

    • Thanks. Agree, we shouldn’t condemn the entire industry. For the DIY investors that seem to get it always wrong, your #5 folks, there is a value-added. (Nice blog post by the way, which I hadn’t seen before)
      Also I’m sure there must be something these guys can add that is indeed valuable that none of us ever thought about, maybe some tax tricks. But, as someone expressed it somewhere here, you will have to go through a lot of nasty weeds to find the prize-winning roses.

      Like

  5. Since 2 years, I have no complaints on my personal advisor and his network… It works pretty well for us. He know me in and out, is always there for us, even in the middle of the night, in the morning when I wonder what to do. And het charges no fee!
    Thanks to the rich community and my interest in the subject, we now are our own advisor, picking the products we want. I will not work for everybody. It works fine for us.

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  6. I have to say that I agree with you on financial advisors. I shouldn’t say that I don’t trust them but a part of me says that they are also mindful of the bottom line, that is, the money or profit that they will get from helping you. This is why I tend to believe in educating oneself about finances (e.g. retirement and investment) prior to making any moves even this moves mean hiring a financial advisor.

    Liked by 1 person

    • Hi Allan, thanks for your comment! Yup, we think the same way. We can’t do everything ourselves. For car repairs, appliance repairs, etc. it’s best to outsource. But financial stuff is easy to do yourself and saves you a ton of money.

      Like

  7. I don’t trust financial advisors because I interviewed for a position to become one! It was for a position with a well known investment firm who gave me one HUGE sales pitch on their training program. I left with a list of crap funds I would be required to sell and the numbers they expected me to meet. I understand this was a business that needed to yield a profit, but I turned it down because I morally didn’t have it in me to sell others a lousy product just to make a lousy commission.

    Liked by 1 person

  8. The spread of personal financial blogging is going to put off work most financial planners.

    I create my website with this purpose to help as much people as possible to become financially literate and independent so all the so-called financial planners get wiped out.

    Society will not miss them. They are useless to the system and only take away real wealth from others.

    However, even virus are part of our ecosystem, and I think God had created them with a purpose. However, until today, I don’t see any benefit in having a virus in my body like cancer or something else.

    The same apply to financial planners.

    What is the point to pay them a commission when successful investing can be written down in a post blog? (This sound like a challenge)

    Has anyone an idea?

    Liked by 2 people

    • Hi, thanks for the comment. I like the idea of financial planners eventually being driven out of business when people become more informed, thanks in part to all of us, the blogging community. It’s an uphill battle, though, because wherever you look, the image of finance as inaccessible rocket science is sold. But personal financial planning is not that hard and one can find lots of good information on the web. Cheers!

      Like

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