Wednesday, February 14, 2007

Financial Planners

We experimented with financial planning a few years ago. We tried a planner that doesn't charge any fees. But it is implied that they will try to sell you their products, which give them the best commissions. As I've now seen the process from both sides, I think I've learned a bit about incentives in the financial planning industry.

Of course, some things are abundantly obvious. When we looked at life insurance, the planners pushed very hard for us to get whole life insurance (big commission). They were disappointed when we made the decision to get term insurance (small commission). But some other things were more subtle.

One strategy I noticed is that when they calculated our "net worth", they included the entire value of our house. I asked why they wouldn't just include the down payment (since we had just moved in). They basically said "don't worry about it". In retrospect, I think their goal is to inflate your apparent net worth as much as possible, to loosen up your perspective about investing.

Something else I've been thinking about recently is that 529 plans (college savings) are really being oversold. The advisors give you these frightening projections, like how 4 years of college will cost $200K in 2020. Then they push these 529 plans, which let you get tax-free investment earnings as long as you earmark the money to pay for college. The problem I figured out with these plans is that they are preying on people's bias about their children. Everyone thinks their children are geniuses who will be going to a top 4-year college. But in reality, only about 50% of people go to these types of colleges. (I actually think too many people go to college, but that is a topic for another time.) I really have my doubts about whether the tax break on this investment is enough to offset the risk of paying a stiff penalty if the child does not ultimately use the money for college.


Post a Comment

<< Home