Here are a couple of stories that highlight the conflicts of interest you may be subjected to when working with a financial advisor.✓ While serving as an expert real estate wit- ness, Robert had a case where a retired couple was given some self-serving advice by their financial planner. This couple owned their principal residence plus three other rental homes valued at $1 million. All of their real estate was owned free and clear,
and the rentals were in great condition with good long-term tenants. The properties pro- vided a nice monthly income stream that was mostly tax-free due to their deprecia- tion deduction (see Chapter 18). Although the real estate was clearly their largest asset and completely debt-free, they also had nearly $500,000 in liquid assets such as stocks, bonds, and IRAs and seemed to be fairly set. That was, until their new financial advisor told them that their retirement was at risk because they had too much invested in real estate. The planner’s recommenda- tion was to keep their own home as their real estate investment, but sell the three highly appreciated rental properties and invest the proceeds in mutual funds and other financial products from companies affiliated with the planner. The planner failed to disclose his relationship with the sponsors of the new investments and also failed to warn them about the significant capital gains taxes that would be due upon sale. By the time they met with their accoun- tant, it was too late — two of the three rental properties had been sold and over $200,000 in taxes was due. The accountant advised the couple to contact an attorney and file a law- suit against the financial advisor. Although
the couple prevailed, they recovered only a small portion of what they paid in taxes. Even worse — they lost the benefits of cash flow and appreciation on their real estate while now owning fully taxable investments.
✓ In Eric’s previous work as an hourly-based financial advisor, he often had clients come to him who were disappointed with the biased and confusing advice they got from various so-called financial planners. In one typical case, a widow had been told by an advisor to sell her two investment
properties because he believed that the stock market would produce better returns. She set the wheels in motion to unload the properties but put the brakes on at the last minute after deciding she needed a second opinion. She met with Eric. The first thing that she noticed working with him was that he was far more thorough in examining her overall financial situation, including all of her investments, insurance, and resources for retirement. She also realized that she was happy with her real estate holdings and really didn’t have any motivation to sell them. Furthermore, she found out from Eric that over the long-term, the returns from stocks and real estate were quite com- parable. She thus decided to keep her life simple and stable and hold onto her nicely performing rental properties. Don’t get us wrong, selling real estate can make sense at times. However, you must ask a lot of questions and run any proposed invest- ment strategies by good independent advisors before you make the decision to liquidate your real estate and shift your investments to other opportunities
and the rentals were in great condition with good long-term tenants. The properties pro- vided a nice monthly income stream that was mostly tax-free due to their deprecia- tion deduction (see Chapter 18). Although the real estate was clearly their largest asset and completely debt-free, they also had nearly $500,000 in liquid assets such as stocks, bonds, and IRAs and seemed to be fairly set. That was, until their new financial advisor told them that their retirement was at risk because they had too much invested in real estate. The planner’s recommenda- tion was to keep their own home as their real estate investment, but sell the three highly appreciated rental properties and invest the proceeds in mutual funds and other financial products from companies affiliated with the planner. The planner failed to disclose his relationship with the sponsors of the new investments and also failed to warn them about the significant capital gains taxes that would be due upon sale. By the time they met with their accoun- tant, it was too late — two of the three rental properties had been sold and over $200,000 in taxes was due. The accountant advised the couple to contact an attorney and file a law- suit against the financial advisor. Although
the couple prevailed, they recovered only a small portion of what they paid in taxes. Even worse — they lost the benefits of cash flow and appreciation on their real estate while now owning fully taxable investments.
✓ In Eric’s previous work as an hourly-based financial advisor, he often had clients come to him who were disappointed with the biased and confusing advice they got from various so-called financial planners. In one typical case, a widow had been told by an advisor to sell her two investment
properties because he believed that the stock market would produce better returns. She set the wheels in motion to unload the properties but put the brakes on at the last minute after deciding she needed a second opinion. She met with Eric. The first thing that she noticed working with him was that he was far more thorough in examining her overall financial situation, including all of her investments, insurance, and resources for retirement. She also realized that she was happy with her real estate holdings and really didn’t have any motivation to sell them. Furthermore, she found out from Eric that over the long-term, the returns from stocks and real estate were quite com- parable. She thus decided to keep her life simple and stable and hold onto her nicely performing rental properties. Don’t get us wrong, selling real estate can make sense at times. However, you must ask a lot of questions and run any proposed invest- ment strategies by good independent advisors before you make the decision to liquidate your real estate and shift your investments to other opportunities
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