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Liz Weston, Published January 01 2012

Money Talk: Borrowing to invest is not best advice

Q: We are getting coaching from a finance adviser. He suggests using a home equity line of credit as investment capital. Your opinion on this?

A: You’re not dealing with a financial adviser who has your best interests at heart. You’re dealing with a salesman who is mostly, if not solely, concerned about the commission he’s going to earn from selling you an insurance or investment product should you take his unsound advice.

Borrowing to invest is a risky strategy. Putting your home on the line to do so is particularly unwise. The interest rates on your home equity loan may be low now, but the rate is variable and can rise substantially. If you can’t make the payments, you could lose your home.

Furthermore, the products he’s trying to sell you probably have high fees and expenses. Between that and the cost of borrowing, turning a profit will be tough.

If he were honest, this is the pitch he would have made to you: “You don’t make enough money to afford the product I want to sell to you. Therefore, I want you to put your home at risk so I can make this commission. Your borrowing costs and the costs of this investment will likely eat up most of your returns, but at least I’ll have my money.”

If he’s selling insurance, you should report him to your state’s insurance commissioner. If he’s selling stocks or other investments, report him to the Securities and Exchange Commission.

If he has any professional investment credentials – which isn’t likely, but anything is possible – you should report him to the organizations that granted those.

Remember that anyone can call himself or herself a financial adviser. There are no education, experience or ethics requirements. If you want someone who meets higher standards, look for a certified financial planner or a personal financial specialist (a designation given to certified public accountants with financial planning training).

And pay attention to how the planner is paid. A fee-only planner accepts only the fees you pay, while a “fee-based” planner may accept commissions from the products he or she sells. If you don’t want commissions to affect the advice you get, consider a fee-only planner.

Liz Weston is the author of “The 10 Commandments of Money: Survive and Thrive in the New Economy.” Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604 or via http://asklizweston.com.