The best-selling book, “Freakonomics,” explores the hidden side of everything. I was dazzled! The authors examine the beauty of incentives, as well as their dark side.
They note “nothing is more powerful than information, especially when it is abused.”
My profession, financial planning, is no different. MarketWatch columnist Paul Farrell says that “Freakonomic research shows experts have an ‘informational advantage,’ and use it against their clients.”
I asked several financial columnists and financial planners what they considered to be the worst “professional” financial advice they had ever heard. I compiled the following from their feedback, and would like to present my Top 10 list of awful financial advice given by financial professionals:
No. 10 Claiming that in order to reduce risk in 1999, a 73-year-old woman should migrate out of Vanguard index funds and into such “moderately risky” stocks as Cisco, Exodus Communications, Enron and WorldCom.
No. 9 Selling “B” and “C” share mutual funds claiming they are “no load funds:” In the long-run, they can have the highest loads.
No. 8 Almost anything said by TV “talking heads” pretending to be gurus: Whether they’re screaming their advice or talking calmly, they consistently increase risk and pick stocks after they have gone up.
No. 7 Replacing a tax-deductible catastrophic Health Savings Account with health insurance covering part of your first $50,000 in expenses: This leaves you uninsured for anything you can’t afford to lose.
No. 6 Pitching the client a maximum death benefit in “permanent” life insurance she didn’t want or need, because she could always sell that death benefit to someone else later: She was told, “It’s what the rich people do.”
No. 5 Unlocking all the equity in your home by borrowing the maximum you can against it to buy financial products that generate great commissions
No. 4 Buying the best performing mutual funds then selling them if they perform poorly: Sounds good, but actually guarantees you will have bought them after they performed well and held them while they performed poorly. It’s a great buy high/sell low approach.
No. 3 Putting a client into a high-priced loaded S&P 500 index fund: Any high cost index fund is nothing more than an oxymoron that guarantees you lower results.
No. 2 Selling an out-of-state loaded college 529 plan when the money was needed in the next year: The client lost the state tax deduction and paid a hefty unnecessary commission.
What was the No. 1 abuse submitted? It wasn’t even close.
No. 1 Selling annuities within an IRA account so that the client gets all of the expense of the annuity without a tax benefit: Nearly everyone who responded mentioned this one. Perhaps because it’s the most common. The trite “safety net” argument plays to our emotions as it transfers our wealth to trusted advisors.
What does it all mean?
I asked the “Freakonomics” author, Steven Levitt, if he had ever done any research on financial planners. He hadn’t, but he asked to see this column when written. So, for Dr. Levitt and everyone else, here is what I think is going on.
As with every profession, there is a hidden side to financial planning. That hidden, dark side comes in the form of incentives that drive many financial professionals to push solutions designed to make themselves rich. Each of the 10 items above generated economic gain for financial advisors.
Do these advisors believe they are doing a disservice to their clients? Au contraire. After speaking with many who are pushing the 10 on the list, I am absolutely convinced they believe they are a force for “good” and are doing a great service for their clients. All responses included some spin on the statement, “I never let financial incentives drive my recommendations to the client.”
In the easier-said-than-done department, Dr. Levitt shows that economic incentives are hard to ignore. When you think about it, the economic well being of the professionals giving this awful advice is dependent on the belief that they are a force for good.
Yes, Freakonomics is alive and well in financial planning, as it is in other professions. One big difference, however, is that in most professions, a higher price leads to better results. In the world of investing, just the opposite is true. The numbers are crystal clear that you actually get what you don’t pay for, and numbers don’t lie.
What does this mean for you? Whether your advisor is in financial planning or any other field, always ask yourself what’s in it for him. Healthy skepticism will help protect your interests. Never completely trust any trusted advisor.
I’d love to read a sequel to “Freakonomics.” Given that the book has a chapter entitled “The Ku Klux Klan and Real Estate Agents,” I can’t wait to see whom (or what) he compares my profession to.
Say Dr. Levitt, as long as you are mentioning the “dark side,” how about “Darth Vader and Financial Planners?” Just a thought.

Submissions to the Top 10 list of Awful Financial Advice
I asked these top national columnists and local financial experts for the worst advice they had ever heard:
National Columnists
Jonathan Clements, The Wall Street Journal
Paul Farrell, Dow Jones MarketWatch
Jason Zweig, Money Magazine
Local Financial Experts
Bernard M. Benyak, Stockman Kast Ryan & Co.
Alex Cherubin, Cherubin Asset Management
Kevin Kaiser, Huntley Thatcher Ellsworth
Mike Rivers, Athena Capital Management
Michael Shafai, Smith Barney/Citigroup Global Markets
James Shambo, Lifetime Planning Concepts
Bill Stanley, The Money Coach

Allan Roth is a CPA and Certified Financial Planner. He is the founder of Wealth Logic LLC, an hourly based financial planning and licensed investment advisory firm, and is an adjunct finance faculty member at the University of Colorado at Colorado Springs. He can be reached at 955-1001 or at