It amazes me how the national student debt crisis has overnight created an industry of “student loan experts.” Just three years ago, I would have to search google to find a financial advisor who was savvy in the ways of student debt. Fast forward to today and I meet so called “experts” at random social events. Often these individuals have little or no real financial experience or education. I’m sure that many of these folks are knowledgeable and well meaning; however, these folks are “fee-based” and this creates a conflict of interest.
Student loan experts and the conflict of interest
A veterinary colleague of mine works with a well known student debt advising firm that specializes in helping medical professionals. Their are a fee-based organization. After hearing she was getting engaged, her advisor immediately pitched the idea of loan refinancing. This was the deal of a lifetime! She could save a fortune by trading in her old, high interest federal loans for new lower interest rate private ones. There was never as discussion about her plans or concerns. He barely mentions that she would lose the ability to ever utilize income driven repayment plans in the future. Hardly a peep about how her repayment would change from ~$900 a month over 3k! Worse, when confronted, the advisor became belligerent. How dare she question the ”expert.”
Why would a financial advisor toss any and all appearance of representing his client’s best interest? He gets a commission (read: kick-back) for every federal student loan he converts to a private one. This creates an obvious conflict of interest and this is the issue with student loan advisors.
Although the world of financial advisors is confusing, most advisors basically fall into one of two categories: “fee-based” and “fee-only.” Sound confusing? Thats intentional. Fee-only financial advisors work exclusively for a fee – paid for by the client. These folks do not accept any commissions when their clients purchase a financial product and they have a fiduciary (legal) responsibility to put the needs of their clients first. Because of this, they have no potential conflict of interest when making recommendations. They may cost a little more but their advice is unbiased.
This has lead to an invasion of sound-alike “fee-based” financial advisors. Make no mistake, the term “fee-based” was selected to confuse you. Most student debt advisors fall into this category. These bad actors charge their clients for advise while collecting a kick-back from the sellers of financial products. As they do not act as a fiduciary, their only obligation is to recommend products that are “suitable.” Essentially they are free to recommend the option that benefits them. Since refinancing federal loans could be considered “suitable,” my colleague’s advisor was acting legally even if this wasn’t the the best option for her circumstances.
Moral of the story?
Do you know how your financial advisor is compensated? You should deal exclusively with fee-only advisors. If you have questions about your financial advisor, ask if they receive compensation from the products they recommend. Need help finding a fee-only advisor? Start with the NAPFA, the largest organization representing these folks. But don’t stop here. Make sure your advisor understands your personal situation and listens to your plans and concerns. If he/she doesn’t – its time to find someone who will.