Why Are Financial Advisors Keeping Quiet About A 25% Risk-Free Return?

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Why Are Financial Advisors Keeping Quiet About A 25% Risk-Free Return?

Written by Peter Diekmeyer (CLICK HERE FOR ORIGINAL)




American financial advisors have tough jobs. It’s hard to keep clients happy when bond yields are near zero and stocks are trading at historic highs.


However, a quick look at the data suggests that there is a simple investment available to nearly 120 million Americans that will enable them to earn 15% risk-free, after tax, and in many cases, much more.


Yet, financial advisors are keeping quiet. So are politicians and big bank economists.


This column does not provide investment advice. That said, according to one expert, the best financial move most Americans could make would be to pay down their credit card balances.


“It seems obvious,” says Edouard Pahud, a Montreal-based financial and management consultant. “However, high current debt levels suggest that many consumers aren’t getting the advice they need.”


Pay down credit card debt

The stakes are huge. According to CreditCards.com, the average credit card interest rate was 15% last year. That means paying off a credit card balance equates to a 15% annual return.


Better still, paying down debts is risk-free.


Creditcards.com figures that the average American between the ages of 18 and 65 has $4,717 worth of credit card debt. At a 15% rate of interest, using a minimum payment level of $189 a month, it would take 10 years to pay that down.


Total payments would amount to $22,869, including a stunning $18,155 in interest costs.


Worse, says Pahud, those interest costs come in “after-tax dollars”, which means that the real returns related to paying down credit card debt are much higher.


“A person in the 40% tax bracket would have to earn an extra $25 for every $15 he wants to pay down on his credit card loans,” says Pahud. “That means his real returns from paying down interest bearing credit card debt are near 25%.”


Why aren’t Americans getting the straight goods?

What is stunning is how few financial advisors are explaining this simple strategy.


According to the US Census Bureau, 183 million Americans own credit cards. Of these, around two-thirds (say 120 million) carry revolving balances and are thus subject to those high rates of interest.


Clearly many financial advisors aren’t doing their jobs. Why that is, is unclear. In today’s busy world, perhaps advisors just assume their clients aren’t carrying credit card balances.


Marc Faber, of the Gloom Boom Doom report, suggests that many Americans burdened by credit card debts simply don’t have access to good financial advice.


Another possibility is that financial advisors, as a group, are just one example in an entire class of experts who aren’t giving Americans the straight goods.


Politicians, economists and teachers also at fault

For example, economists learn about the “Paradox of Thrift” in their first weeks of Econ 101, which states the importance of individuals paying down their debts. But when was the last time a big bank economist said that publicly?


Politicians know the dangers of high debt loads too.


However Donald “I am a low-interest rate guy” Trump would never risk telling Americans to pay down their debts in a forceful way, as that would hurt his election chances and his real estate business.


Trump is not alone. Politicians of all stripes quietly pray that Americans will borrow more, hoping that the resulting spending and economic activity will put voters in a good mood come election time.


Perhaps the worst culprits, though, are the nation’s teachers. Today’s high school graduates emerge from 12 years of drudgery knowing essentially nothing about saving and financial management.


What else aren’t they telling you?

Given the lousy advice Americans are getting, it’s hardly surprising that the American Association of Individual Investors calculates that two-thirds of clients don’t trust financial advisors to act in their best interests.


But there is a lot more at stake than just credit card balances.


Because if financial advisors aren’t providing advice about a simple trick that will help earn clients a 15% (and in many cases 25%) risk-free, after-tax return, maybe they are missing other stuff, too.


For example, gold bugs complain that mainstream financial analysts don’t give precious metals the respect they deserve.


We don’t take a position on this.


However, investors would clearly be well-served by asking harder questions of all their experts and leaders.



Questions or comments about this article? Leave your thoughts HERE.





Why Are Financial Advisors Keeping Quiet About A 25% Risk-Free Return?

Written by Peter Diekmeyer (CLICK HERE FOR ORIGINAL)

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truthalwayswinsout's picture

Investing in your self is always the #1 option. Paying down debt is fantastic and never getting into debt again is even better.

exonomic halfbreed's picture

In China, one can go around the corner to a shop and buy and sell gold without the government being notified.  Profits are not traxed I assume and PM assets one holds are not revealed.  I envy them for their freedom which I don't have due to the FED.

ToSoft4Truth's picture

If you ever have to mention to anyone it's a good idea to pay off debt, why bother? 

Madcow's picture

CFAs should be legally prohibited from recommending investments in markets that have proved (again and again and again) to be unregulated criminal frauds - such as foreign currencies, precious metals, equites, fixed icome assets and whole life insurance policies. 

stacking12321's picture

No one should be prohibited from communicating their opinion, ever.

If that's a problem for you, I recommend you give North Korea a try, it may be more to your liking.

U4 eee aaa's picture

I called my bank and they said I was ineligible for this investment plan because I don't owe them a freakin' dime!

Though I did take full advantage of this investment plan in the '00's

Living debt stress free ever since :)

JBilyj's picture

As a financial professional that helps others with their retirement and knows others in the business, I don't know ONE financial advisor who doesn't recommend paying down debt AFTER the client has built a rainy day emergency fund. Majority of FA's won't let someone invest through them if they don't have 6 months salary stashed away so as not to invade the principal and let it work for them long term. After the rainy day fund, debt is attacked while putting consistent savings away for retirement. It's never an either/or thing and to believe so shows you shouldn't be advising people what to do with their money. 

But I will agree with you on one point, and that's the point of your article - pay down high interest debt (it's a no-brainer)...

panhead20's picture

Pay off the debt first, then save emergency fund. Use your credit as emergeny fund until your debt is payed off.

Erek's picture

"... I don't know ONE financial advisor who doesn't recommend paying down debt..."

I guess you don't know yourself then?

Anon2017's picture

The term "financial advisor" is very deceptive when used by commission salespeople. They don't get paid if you close your mutual fund account and pay off your credit card bills. 

OverTheHedge's picture

And all other comments are just froth and irrelevance. This is exact it. One of several reasons why I stopped being a "financial advisor".

Handful of Dust's picture

Opening-up fuels a glittering two decades

“The center of gold and silver trading has shifted from West to East in tandem with the Chinese mainland’s opening-up and Hong Kong’s emergence as an offshore renminbi center, driving up demand in the past two decades, according to experts.

Haywood Cheung, president of the Chinese Gold and Silver Exchange Society (CGSE), said the sector has seen “fruitful growth” since the 1997 handover, with the trading volume having gone up tremendously….”



OverTheHedge's picture

Luckily there has been a huge increase in mining production to cover the growth in Chinese and Indian gold sales, otherwise the price would have risen dramatically. Wouldn't it?

konputa's picture

Wow. Yeah, on the contrary, I've met few advisors that don't preach the importance of eliminating credit card debt. This is kind of like how the guys down at the oil change shop tell you to change your oil every 3000 miles.

overmedicatedundersexed's picture

banks get our money in savings accounts and pay .1% or less - then lend to creditcard serfs at 20% or more..

that is how the elite get richer and us serfs get debt..the economy run by the fed is a crime scene

rf80412's picture

If I were dictator, I'd force all banks to become non-profit credit unions.  At the very least, there would be no stockholders for them to have a sole fiduciary responsibility to and they'd be paying out all the interest they make to their own depositors.