On poor financial advice or buying expensive investments from relatives and friends

Here’s a risk to your financial health that may surprise you!

Rick Kahler MS CFP

By Rick Kahler CFP

There are two reasons for this.

First, we tend to trust and rely on people we know.

Second, research finds that humans have a deep-seated desire to meet the needs of others, so “helping” a relative or friend get started in their financial sales career is just human nature. Unfortunately, brokerage and insurance companies know this. They train their new agents that the easiest sales to make when getting started are to relatives and friends.

Any time I find an ill-advised financial product a client has purchased from a relative or friend, I cringe, anticipating the client’s resistance to canceling it. Regardless of how bad the advice was or how outrageous the fees of an investment product may be, the deeper the relationship the more difficulty there will be in changing course.

Here’s a typical example 

Jim and Sofia, two young professionals, married at around the same time Jim’s uncle went to work for a financial services company. The uncle sold Jim a $250,000 Variable Universal Life (VUL) policy with a $500 monthly premium. Jim and Sofia were happy, thinking they had made a prudent choice to start saving for retirement and help out a relative at the same time.

When Sofia became pregnant, the couple decided to engage a fee-only financial planner. She found they were underinsured to provide for a family and also that the VUL policy was incredibly expensive and ill-advised for their needs. She recommended canceling the VUL policy with its $500 monthly premium, instead paying $300 monthly for two $1 million term life insurance policies and putting $200 a month into a tax-free Roth IRA.

Sofia and Jim told this to their uncle, who was “shocked” at the planner’s “poor advice.”

He contended that any competent financial planner would know a person needs permanent insurance as a foundation to “raise their child in the case of a premature death, fund their retirement, pay estate taxes and just like a Roth, it is tax free.”
Sadly, the uncle was unwilling to admit that $250,000 of insurance wouldn’t be enough to raise their child, fund their retirement, and pay estate taxes; nor was it truly tax free. He also didn’t mention that he had a vested interest in their keeping the policy. While he probably earned 55% to 100% of the first year’s commission, it is common practice that an agent will also receive 10-15% of the annual premium from years 2-10.

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Sofia and Jim agreed with the financial planner’s recommendation. They could see the sense in having $1 million of insurance on each of them instead of $250,000 on just Jim for almost half the price, plus the tax-free growth of $200 a month in the Roth IRA.

Yet they didn’t follow the planner’s advice, because they didn’t want to upset their uncle. They chose to weaken their financial health, plus risk the well-being of their family if one of them died prematurely, in order to enrich their uncle for fear of offending him.
This happens more frequently than you would think. And it isn’t limited to life insurance. I’ve seen clients invest in a variety of “opportunities,” based on advice from a family member, that were not in their best interest.

Assessment

Next time a friend or family member offers to sell you a financial product or give you some great advice, you may want to do yourself a favor and decline. If you really want to help them out, invite them over for dinner.

Conclusion
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