A Financial Planner's Disaster (Free Money Finance)

MSNBC has a piece about a "financial planner" (he was actually a Certified Financial Planner, but doesn't really deserve the title IMO) who made a ton of financial mistakes and ended up losing everything. Here are snippets of his story:

I felt we could afford around $350,000 [for a house]. We ended up buying the house and paid the asking price of $575,000.

We borrowed 100 percent of the purchase price.

I shouldn?t have relied on someone else to make that calculation, let alone the guy who was making money putting me in the loan.

I was a financial adviser, and I never sat down to figure out what it would take to make this work.

Ok, let's stop here for a minute and review the mistakes he's already made. And let me remind you, this guy is a CERTIFIED FINANCIAL PLANNER. He's supposed to know how to handle money. The list:

• He bought a house he couldn't afford. This violates point #2 in my formula for buying a house.


• Then he made it worse by borrowing 100% of the home's price. I'm not sure what financial planning school this guy went to, but it wasn't up to snuff.


• He relied on the bank to tell him how much he could borrow. Really? Isn't this a "financial mistake 101" offense?


• He was an advisor and yet he never even figured out whether or not borrowing almost $600k would work out or not. Wow.

But wait -- it gets worse:

The market?s continued strength meant we could borrow even more. It was easy. In late 2004, a year after buying the house, we refinanced our mortgage with World Savings Bank. We picked the lowest possible payment, the one that added to our balance each month instead of subtracting from it. And we added a line of credit with Wells Fargo.

The extra borrowing power was important, because while my income was growing rapidly it wasn?t enough to support all our expenses. We were borrowing against the house to finance our lifestyle. In hindsight it is clear that we were spending more than we should have on things like recreational gear and family trips for ourselves and our four children.

It was extravagant, but it seemed modest compared to what some of our neighbors were doing.

So he started out bad, then made things worse by spending at an ever high rate (trying to keep up with the Joneses) as well as refinancing with a loan that made the amount he owed go UP. Ugh. And people relied on this guy to give them financial advice? It just makes me sick to think so.

But it turns out all was not lost -- he had an opportunity to get out from under it all:

As late as February 2006, a comparable home in our neighborhood sold for $998,000. We made the classic mistake of projecting recent trends ? even extreme ones ? into the future.

I can see how this reasoning went. If the house doubled in price in a few years, then in a few more it would be worth twice that -- then a few more twice that. And so on and so on and so on. In about 10 years they would be millionaires.

But that's not what happened. Instead of growing at its frantic pace, everything collapsed. The market toppled -- both the housing and investment markets -- and his income dropped as a result (because he managed fewer assets). The bank cut off their HELOC, which was a problem since they were using it to fund their lifestyle. Then this:

By that fall [2009], I was convinced we had to move back (they had moved to Utah to live with parents) permanently to save the business. But that meant we faced the question of what to do about the house. By then, we owed over $200,000 more than our original loan balance.

You can read the rest of the piece if you like, but basically they lose the house and life gets really rough. It's actually surprising to me that they lasted as long as they did. They took so many wrong steps that disaster could have hit them years earlier.

And what messes with me so much is not that this happened, but that it happened to a guy who supposedly knew better (or at least should have known better). A guy that was advising others on how to manage their money. And yet he didn't even follow the basics of personal finance himself. I would never turn my money over to such a person (in the same way I wouldn't go to a fat doctor.) If he can't apply his own advice, then he's not fit to give me advice.

This then brings up the question "how do I know if someone is actually a good financial manager of his own money before I hire him?" The answer: you don't. That's why I'm an advocate for learning how to manage your money yourself, then bringing in experts only when you need advanced advice (like with complicated tax matters, in drawing up a will, etc.) All the other (fairly simple) principles that lead to a good net worth are ones that almost anyone can learn and apply. That's why I recommend knowing and applying the basics yourself and not trusting someone else to do it. Because no one else cares about your money as much as you do.

Source: http://www.freemoneyfinance.com/2011/11/a-financial-planners-disaster.html

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