Author’s Note: This is the third in a series of essays on the six foundational principles of holistic financial wellness (HFW) that I describe in my book “Money Mountaineering.” Principal #3, due diligence, needs to be expanded somewhat to accommodate the recent changes in the economic/investment/advisor environment. These changes are not directly related to the pandemic, but have been emerging over the last few years. In my opinion, they have recently become too important to ignore.
Principle #3: Due Diligence
“You know something is happening here but you don’t know what it is. Do you Mr. Jones?” – Bob Dylan from “Ballad of a Thin Man”
Like many others, my year of Covid isolation included getting to know (via Zoom) a lot of interesting people I would not have met otherwise. Among them is Anthony, a mortgage broker who makes his living from the commissions he collects on helping his clients obtain loans on the properties they own or are trying to purchase.
On paper, Anthony is exactly the kind of person my HFW Principle #3 counsels being cautious of since it is pretty clear that his compensation is directly a function of the transactions he facilitates, and almost by definition his financial interests will not be completely congruent with his clients.
While that general advice is still valid, the significant and largely unseen changes that have occurred in the home loan market since the financial crisis and housing crash a decade ago, and a recent conversation with Anthony, have caused me to reexamine and see that I need to expand on the last part of HFW#3 which says, “…make sure those you hire are 100% on your side.”
Anthony is a member of what became a weekly discussion group consisting of myself and a group of mostly tech and finance-oriented individuals scattered across Northern California. A mutual friend organized the group during the pandemic when we all had time to think, converse, and think again. The topics we discussed each week were wide ranging and often quite personal. Though we no longer meet regularly, we have all come away with a better appreciation of the wider world of finance and technology that we each operate in.
The focus of our weekly discussions tended to move from person to person (there were six of us). A few months after we started, I sent my new friends a near-final draft of my book manuscript to help them get to know me better and to collect their feedback, which I knew would be both honest and helpful. I was not disappointed. But while the others in the group validated and fully endorsed my six principles, Anthony told me that he thought my Principle #3 was wrong — at least when it comes to getting a home mortgage.
Not used to being told I was wrong, I got very curious. What exactly did I miss? He was happy to explain, and I wanted to very much know where he felt I’d made a mistake. But first I wanted to hear more of his professional story.
A little background
Anthony told me that in 1995, after a few false starts working for large commercial real estate firms, he decided to sign up for a seminar given by Suze Orman. At that time, she still personally conducting all the workshops on financial literacy that she designed and was beginning to write books. For Anthony, learning the fundamentals about how the world of money works by attending Suze’s seminar was a turning point in his career.
Anthony became a mortgage broker shortly after completing the workshop. Knowing too well the suffering that too much debt can cause, he steered his clients into loans that were responsible, prudent and designed to help them achieve their home ownership goals without putting their financial futures in peril.
From 1997 through the housing crash of 2008-9, and until today, Anthony has guided his clients on this path, never letting them get overleveraged. He focuses on “education and trust,” believing that a client will make better decisions and be happier as a result when he/she understand the debt being assumed and can trust the expertise of the broker who is facilitating the loan.
A more ‘transactional’ business model
What Anthony took issue with when he read my book was my contention that when it comes to mortgages, the compensation of the expert that we each must use to get our house financed is the most important factor for someone to consider. One of the recommendations I give in Money Mountaineering is that individuals should consider moving their retirement savings (IRAs, etc.) to a big bank that use a “relationship model” where they will have access to loan officers who are paid a salary and do not receive commissions based on the loans they place.
Anthony pointed out that while that may have been true in the immediate aftermath of the financial crisis, when banks needed to restore trust in both their solvency and the people who provided financial services to their customers, it is not nearly as prevalent today. Many big banks have changed their business model and have become much more “transactional” in their approach to making loans and accumulating assets and liabilities for the firm’s balance sheet.
In addition, Anthony suggested that the “proprietary products” that the big banks offer their “premier customers” are not necessarily that much better than the best loan that can be obtained from the wide array of lenders that a good independent mortgage broker can find.
He makes a very good point about the changing nature of how big banks do business. Although the best loans I have been able to attain for myself were still those given by my banks to their “premier customers,” this competitive advantage may disappear over time.
Anthony’s experience and observations also highlight a much more important aspect of how our world has changed: Everyone needs to do their due diligence when looking for experts who will be compensated for the help they provide. Specifically, in order to apply HFW#3, you need to do your due diligence in an imperfect world.
It’s not just mortgages
One of the joys of being a writer is the opportunity to meet other writers and thinkers in your field who write good books. The first of my favorites is “A Capitalist’s Lament” by Leland Faust. The second one is “The Big Investment Lie” by Michael Edesess.
Leland is a top-notch tax lawyer and Michael is a serious mathematician, but both have worked behind the curtain for firms that provided investment advisory services. Then they both wrote books pulling back the curtain and letting their readers know exactly how Wall Street deals with the individual investor. They are not whistleblowers, but they are both truth tellers, and that is something very valuable these days.
The truth about what goes on behind the scenes when we try to invest our money in a prudent way is sobering.
The sad fact is that the business models of almost all financial services firms seems to be getting increasingly opaque. It is becoming increasingly difficult for a consumer to understand what they are paying to whom and for what.
Forget all the noise around Robinhood; just consider the “zero commission” investment brokerage services that some giant well-established firms now use to lure investors to move their money. It’s unclear how firms get compensated, but it’s a sure bet they aren’t doing this as a public service.
These days it is too hard to “follow the money.” In the mortgage business, the distinction between a commission and a “performance-based bonus” is too blurred for an outsider to discern without a great deal of analysis that almost no one has time for.
But it is important for everyone to understand and learn as much as they can about the motivation, expertise, and good will of the people they need to help them manage their financial lives.
Many times, you will find that it is not all about the money, and as confusing and impenetrable as the wilderness is, it is still possible to find trail guides like Anthony who you can trust to guide you through the woods.
Anthony told me that he ascribes much of his success to the fact that he always took the time to get to know his clients as individuals — not just their financial situations, but who they were as people and what their goals, desires and fears were about the home they were about to purchase.
He is not alone in wanting to get to know his clients, as almost all financial services firms want to know as much as they can about the person who seeks their help. But I believe due diligence works both ways and even if it wasn’t a part of HFW Principle #3, I think clients will also get better help and have fewer problems if they get to know the person who they have let into their financial life.
Your client is already working with you, and trusts you. Encourage them to also be more diligent when hiring other centers of influence and service providers.
Specifically, after they determine that they actually need help, they should by all means try and find an expert whose financial interests align with theirs and who they believe is on their side. But then they should try and go further by getting to know the person, listening to their story of why they want to help them, and trying to understand what their real agenda is. They should ask personal questions and make sure they listen carefully to the answers they give.
In a perfect world we would be able to hire experts who are clearly and unequivocally on our side, but unfortunately the world is not perfect and getting less so every day.
Peter Neuwirth, FSA, FCA, is a fellow of the Society of Actuaries and the Conference of Consulting Actuaries and a consultant for large corporations on their retirement plans. This excerpt is from an essay about principle 3 of holistic planning that he writes about in his book, “Money Mountaineering.”