We have never in our lifetimes had more financial information at our fingertips than we do today. Financial advice is dished out in 60 second sound bites on radio and television, while magazines and websites promise to unlock the secrets of financial success. If you know where to look, it is easy to find good information about financial products and planning. This is a great benefit! Also, since motivation is such an important part of a successful financial plan, the constant reminders that you get from the media can promote action. What is wrong with that? Nothing, as long as you use caution.
Ted and Mary have three children. One is a freshman in college and the other two are in high school. Recently, they took a weeklong family vacation to Florida. While driving, Mary began listening to a popular financial program on the radio. She enjoyed listening to the callers problems and the stern advice dished out by the host.
Of particular interest was a caller who had asked if their life insurance cash values were a good place to build retirement funds. The host immediately went on a rant about how life insurance is a terrible investment and the caller should immediately cancel those policies and move the money into a Roth Individual Retirement Account (Roth IRA). Then the caller should invest in mutual funds. If the caller wanted life insurance, he should just buy term.
This sounded just like Ted and Mary’s situation. They also had owned some life insurance for more than 20 years and they get a statement every year showing the cash values. Mary always wondered if that money would be better in some other investment. Also, she hated those monthly premiums. Now, she had her answer. She decided that as soon as she got home, she would follow the radio host’s advice.
After a great vacation, Mary was energized. She pulled out the life insurance policies from her files and called the company. After a brief discussion with the customer service department, Mary had successfully canceled her policies and a healthy cash value check was on its way. She would set up those Roth IRA’s as soon the money arrived. In the meantime, she went on her computer and entered the website from the commercial that said they had the lowest term life insurance rates. The radio host was right! Their new insurance would save her hundreds of dollars per month. She printed off the application so that she and Ted could fill it out that evening.
A week later, the check arrived from the insurance company. Mary had forgotten to fill out the insurance applications. Also in the mail was their credit card bill. Mary was afraid to look. It had been several years since they had a family vacation and they splurged. When Mary told Ted about the bill, Ted suggested that they use the life insurance money for a while until they can “catch-up.”
Mary remembered the new life insurance applications and she and Ted filled them out. The health questions were the hardest. Ted felt great and was playing tennis twice a week even though he had been diagnosed with diabetes a couple of years ago. After Mary’s mother died last year, she had experienced some depression, but felt much better now and no longer took the medication. Within a week they had taken their exam and were awaiting the insurance company’s decision.
Finally, the new policies had arrived. Mary was proud of herself. She had taken some important financial steps. She was shocked when she opened the envelope to find that the premiums were three times what she had been quoted online. Due to medical history, Ted and Mary were no longer able to get standard rates. Also, to make matters worse, the cash values from the old policies were gone. It was not likely that they would be able to fund the Roth IRA’s.
As this parable illustrates, there are some potential problems in following financial advice obtained through the media. It is important to remember that the primary function of the media is the promotion of its advertisers and building an audience. Most of what we see and hear as advice is actually merely entertainment.
Here are some questions to ponder before taking action:
- Did the person offering the advice know the details of your personal situation?
- Did the person offering the advice understand your financial goals and objectives?
- Did the person offering the advice have any conflict of interest?
- Do you understand the downside risk of following this advice?
- Will you follow through on the steps necessary to follow this advice?
If Mary and Ted would have spent time discussing these questions, they may have realized that the advice from the radio host was given without knowledge of their personal situation and goals. A financial planning professional would take the time to learn about their personal situation and help them formulate their goals and objectives. Only then would planning be developed based on their specific situation. Also, the financial planning professional would guide them through the steps necessary to put the plan in place.
Financial information through the media can be very helpful. It can give you good ideas and motivate you to take action. However, it does not replace the need for a strong relationship with a financial planning professional. Listen and learn, but with caution!
FPA member A. Christopher Engle, LUTCF, CFP®, ChFC® is a partner with Argus Financial Consultants in Grand Rapids, Mich. Securities offered through LPL Financial, Member FINRA/SIPC.