Q&A: Questioning financial advice

Question: Our financial advisor advised us to borrow money to invest for income
tax purposes. We borrowed from the bank and paid the principal, plus interest.
He then advised us to transfer the loan from the bank to their firm and we only
pay the interest on it. He also advised us to take a universal life insurance
policy on our married daughter, taking the money out of our portfolio. My husband
and I are both retired, and have a moderate income. Our ages are 64 and 68.
Are we doing the right thing? Thank you. – J. J.

Gordon Pape’s answer: You are certainly doing the right thing
from the sales person’s perspective. He earns commissions on the invested
money and the insurance policy. He probably also received a commission on the
transfer of the loan to his company – I suggest you ask him that question
directly and at the same time ask how much in total he is earning in fees and
commissions from all these transactions. You may be shocked.

Whether you are doing the right thing for yourselves is highly questionable.
You say you are both retired and living on a modest income. It seems to me that
your priorities in that situation should be to stay out of debt and use whatever
savings you have to increase your cash flow through low-risk investments.

It’s true that borrowing to invest can work to your advantage because
the interest then becomes tax deductible. But the only way you end up ahead
is if the after-tax return on your invested money exceeds the after-tax cost
of the loan on a consistent basis. And you have to be willing to assume the
additional risk that a leveraged portfolio entails.

I suggest you seek a second opinion before you do anything more. Consult a
fee-for-service financial planner who has no axe to grind and who will give
you some unbiased answers. The cost will be more than worth it in terms of peace
of mind and may end up saving you a lot of money.

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