Q: I recently met with a financial advisor who appeared to be steering me clear of no-load mutual funds. He said that "no-load funds do not really exist--it's a misconception."
After our meeting, I researched the funds he mentioned, and all had a 5.75% maximum sales charge. I appreciate his time and counseling, as I do want guidance about how I should allocate my money to meet my financial goals, but I don't want to pay a percentage every time I invest more money in a fund. Is it possible that he is making his money from this load fee? And that there are indeed no-load funds but that he just won't make money from them? Should I ditch this guy?
A: Of course, of course, of course.
Of course no-load funds exist. Of course he's making money when clients take his recommendations. And of course you should ditch him--but perhaps not for the reasons you think.
Brokers have to get paid somehow. If you're using this broker's time and seeking his guidance, he's going to want to get paid in the form of commissions on what you buy. If you buy a no-load--a mutual fund that has no up-front or back-end sales fee--the broker makes squat, and he's not in business to be a not-for-profit counseling service.
You can blink your eyes innocently and say you didn't understand, but wasting the guy's time--or stealing his advice to implement on your own later--is akin to pumping a lawyer acquaintance for free legal advice or asking a doctor you meet at a party to take a look at your bum knee. It's cheap and it's sleazy.
The fact that you're asking these questions, by the way, indicates that either you do need a professional's advice, or that you should do a lot more research to educate yourself about mutual funds before you invest. I recommend picking up a copy of Eric Tyson's "Mutual Funds for Dummies" for a start. You also can find insight in my colleague Paul J. Lim's weekly column, next door.
If you do decide to use a professional, however, don't use this broker; he never should have told you that no-load funds are a "misconception." They do exist and are used successfully every day by do-it-yourselfers, and by advisors who are paid by fees from their clients rather than by commissions. He should have just been honest with you about how he gets paid, so you could make an informed choice.
One Income, One Big Question
Q: My wife and I will be having our second child soon. We were thinking of having me stay home for the next three to five years as a full-time dad. We have enough in our savings to pay off our mortgage now, but we were wondering if that's a good idea. We've run some numbers through TurboTax, and it seems that we'd get a smaller tax refund because we wouldn't have the mortgage deduction. On the other hand, we wouldn't have to make those monthly mortgage payments. If we pay off the mortgage, though, we'd only have six months worth of my net monthly pay put aside. Should we do it?
A: Normally, the should-I-pay-off-my-mortgage-early question is a toughie. The answer typically depends on your interest rate, your risk tolerance, your tax bracket, your time horizon, rates of return on alternative investments and a whole list of other factors.
This one, however, is a no-brainer. No!
Try this scenario: You quit your job, pay off the mortgage and settle in to the absorbing, exhausting and we hope rewarding career of a full-time dad. And then your wife loses her job.
After your heart starts beating again, you think, "Well, we can always tap the equity in our home for cash and just get another mortgage." Yes, there are indeed lenders out there who will give money to two unemployed people with their house as collateral, but the interest rate you would get would make your eyes cross.
Families with one income need a bigger savings cushion, not a smaller one. If you want to pay down your mortgage, go ahead and make an extra payment once a year or add a little bit more to your monthly payments. But don't take away your financial flexibility just when you need it most.
Forever in Her Debt?
Q: My mother enrolled at a major university late in life and used student loans to pay her tuition. Unfortunately, her degree was not in a field in which jobs are easy to come by, and it looks as if she will never be able to pay off those loans. My concern is this: As her only child, will I someday be liable for her loans? Or will they be written off as bad debts?
A: In this case, the "sins" of the mother are unlikely to be visited upon the child. Most student loan lenders forgive the debt if the student dies before repaying the money. Your mother's estate might owe additional income taxes, however, since most forgiven debts are considered taxable income.
Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her at email@example.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. For past Money Talk questions and answers, visit The Times' Web site at http://www.latimes.com/moneytalk.