Principle #3: Due Diligence

By Peter Neuwirth, actuary, reverse mortgage expert, and author, Money Mountaineering

In my essay earlier this month about Holistic Financial Wellness Principle #1, I talked about the need to adapt to changes in your own financial or life situation to make sure the financial decisions you make are consistent with who you are and how you are situated in the world around you. In that essay, I talked about how the wildfire that destroyed my home last year changed the way I now look at the decisions I make around money and the things I buy with it.

Today I want to talk about a different kind of change that is happening in the world around us and how it impacts the application of Holistic Financial Wellness Principle #3. That principle continues to be valid, but I believe that the way it should be applied, as I describe in Money Mountaineering, needs to be expanded somewhat to accommodate the way the Economic/Investment/Advisor environment has changed in the last few years. The changes I speak about are not directly related to the pandemic, but have been emerging over the last few years, and, in my opinion, have recently become too important to ignore.

The importance of due diligence in an imperfect world

“ 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, and Anthony was one of the more interesting. Anthony is 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, he is exactly the kind of person, HFW#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 those that he advises.

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 percent 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 who a mutual friend organized 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. Throughout the Spring, Summer, and Fall of 2020 we got to know each other quite well, and 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 6 of us) and a few months after we started, I sent my new friends a near final draft of my book manuscript to help them to get to know me better and to collect their feedback which I knew would be both honest and helpful. I was not disappointed, as the feedback I received from all 5 helped make Money Mountaineering a better book. But while the others in the group validated and fully endorsed my 6 principles, Anthony told me that he thought HFW Principle #3 was wrong – at least when it comes to getting a mortgage for your home.

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.

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, who was still personally conducting all the workshops on financial literacy that she designed and was beginning to write books about.

In Money Mountaineering, I tell Suze’s story, and it is a complicated one. While I believe that Ms. Orman’s books, and pronouncements today are likely to cause more harm than good, back in the mid 90s Suze Orman was teaching a lot of people how the world of money worked, and from everything I know about her, she was a good and caring person who truly wanted to help people do better with what they had. For Anthony, learning the fundamentals about how the world of money works by attending Suze’s seminar was a turning point in his career.

Shortly after completing the workshop, Anthony became a mortgage broker, and 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 his clients 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 been guiding his clients on this path, never letting them get overleveraged, focusing on “education and trust” believing that a client who understands the debt he/she is assuming and can trust the expertise of the broker who is facilitating the loan, will make better decisions and will be happier for it.

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 (IRA’s, etc.) to a big Bank that use a “relationship model” where they will have access to experts when they need them and in particular, can use 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 as in the last several years. 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 “premiere customers” (another recommendation in Money Mountaineering) 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 like Anthony can find.

I think Anthony makes a very good point about the changing nature of how big banks do business, though at least in my experience, the best loans I have been able to attain for myself were still those given by my banks to their “premiere customers” and though that competitive advantage may disappear over time, it hasn’t yet.

On the other hand, I think Anthony’s experience and observations highlight a much more important aspect of how our world has changed. Specifically, in order to apply HFW#3 when it comes to finding an expert who will be compensated for the help they provide, you need to do your due diligence.

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 the curtain back 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 service firms seems to be getting opaquer and it is becoming increasingly more difficult for a consumer to understand what they are paying to whom and for what. Forget all the noise around Robin Hood, just consider the “zero commission” investment brokerage services that some giant well-established firms now use to lure investors to move their money. Here is a promise from Charles Schwab that you will be able to invest your money for “free” and yet still receive the benefits of the expertise and help a giant firm like Schwab can provide: schwab.com/pricing.

I have not taken the time to dig into exactly how Charles Schwab makes money on these “no fee” accounts, but I think it is almost a sure bet that Schwab is not doing this simply to provide the public with service that does not financially benefit them in some unseen way.

So, when you apply Holistic Financial Wellness Principe #3, make sure you do your due diligence.

It is not enough to just look at compensation structure of the experts from whom you seek help. 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 getting too blurred for an outsider to discern without a great deal of analysis that almost no one has time for, and if you are dealing with an investment firm on the asset side of your balance sheet, following the money is exponentially more difficult.

On the other hand, the expert that you will need to turn to for help is, at least today, a human being and so, more important than the alignment of their compensation, it is the good will of the person(s) providing the help that you need to discern to know, not just whether an expert is 100% on your side, but to the extent they are not (and many times they are not), what of their interest you are competing with.

These days it is getting harder and harder to know what is happening behind the scenes in all areas of life, but at least transactions with money (and debt) are still executed by people, and therefore it is important to understand and learn as much as you can about the motivation, the expertise, and the good will of the people you will need to help you manage your financial life.

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.

Before we ended our last conversation on the mortgage business, 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 that due diligence works both ways and even if it wasn’t a part of HFW Principle #3, I think you will get better help and have fewer problems if you get to know the person who you have let into your financial life.

Specifically, after you have determined that you actually need help, by all means try and find an expert whose financial interests align with yours and who you believe is on your side, but then try and go further. Get to know the person who you are going to for help, listen to their story of why they want to help you and try to understand what their real agenda is. Ask personal questions and make sure you listen carefully to the answers they give. In a perfect world we would be able to hire experts who are clearly and unequivocally on your side, but unfortunately the world is not perfect and getting less so every day.

About Peter Neuwirth: Since graduating from Harvard with a degree in mathematics and linguistics in 1979, Peter Neuwirth has held actuary leadership positions at consulting firms including Aon, Hewitt Associates, Watson Wyatt Towers, Perrin, and Towers Watson. He also ran the actuarial firm Coates Kenney and spent a year at Price Waterhouse.

Currently a Fellow of the Society of Actuaries and the Conference of Consulting Actuaries, Pete regularly consults with the largest corporations in the world about their retirement plans with a focus on time risk and money. “These fundamental concepts shape our world,” explains Pete, who is a sought-after speaker for professional conferences, and is frequently quoted in national mainstream and trade publications.

After being asked too many times “What is an actuary, exactly?” Pete has written two books to answer another question: “How does an actuary think, and why does it matter?”

His first book, What’s Your Future Worth, is an accessible step-by-step guide to using the powerful concept of Present Value. Pete explains, “My goal is to help readers determine the value today of something that might happen in the future and evaluate outcomes that might arise from choosing one path instead of another.”

In his newest book, Money Mountaineering, Pete shares his views on the challenges we face to survive and thrive in a complex uncertain noisy and sometimes irrational wilderness. “I hope to help readers better understand the financial world they must live in and what they must do to make their way through it,” Pete shares.

Pete is also a senior consulting actuary for CapAcuity a member of the University of Illinois Academy for Home Equity in Financial Planning and the outside director at Rael & Letson. He is a longtime resident of Sana Rosa, CA. Learn more at www.peterneuwirth.com.