Should I pay off the balance of a loan with money from an investment account?
I am in my late 50's and inherited a substantial IRA, investment account, and large home. Instead of paying PA inheritance tax out of the investment account, my financial advisor had me take out a line of credit at a bank that was secured with the investment account while I sold the house. After estate expenses, I was able to pay off $330,000 of the loan and have a balance of $220,000. I asked my advisor to pay the balance from the investment account and he is dragging his feet. He wants me to pay it in smaller chunks while I pay some principal and all the interest due each month (approximately 4.3 percent variable). I want to pay the whole thing now. He is so hesitant about me touching this account. Why would I not want to pay the balance off now?
Sounds like you could benefit from a consultation with a fee-only financial planner. If I had to guess- your financial advisor only gets paid on assets under management from your investment accounts. If you pull out money to pay off the home- his income goes down.
Just to be clear, this isn't to say there isn't any reason to not pay the house off. But, it sounds like your so-called advisor is not making his reasoning if any, clear to you.
The issue you're dealing with with your financial advisor is a common one and it actually generates a conflict of interest. If you withdraw funds from his account his fees are going to go down. This in and of itself should give you some thought as to whether you should stay with this person or not. A number of us practice in the world of fee-only advising where the well being of our clients come first and foremost. If you agree that this does in fact pose a conflict of interest, my recommendation is to find a fee-only advisor in your area and do some interviewing. You indicated you were in your late 50s and it is my professional opinion that going into retirement with no mortgage is about as good as it gets. The interest deduction simply has little or no value and I can actually prove to you that although your income taxes will go up slightly if you don't have a mortgage deduction, the after-tax cash flow to you personally is significantly higher. I hope this helps and good luck.
I can think three reasons of your advisor’s hesitation to pay off the entire balance.
1) He might be worried about the tax consequence. After all, any trades made in a taxable account has some tax consequences in terms of short-term capital gain tax (unfavorable) and long-term capital gain tax (favorable) to you.
2) If he has worked with you for a while, he may know your overall finance better. For example, he may try to help you build up an emergency fund. In doing so, you will less worried about the market volatility knowing that your basic need is covered.
3) If your advisor is paid to manage this investment account, the reason is pretty obvious.
I think the only reason to hold on to the debit balance is if your investment advisor is earning more than 4.3% on the portfolio. If that's the case then by paying it off, you would forego the spread between the return you are getting and the 4.3% interest cost. We hold leveraged portfolios for clients and invest the assets (at least partially) in income-generating preferred and common stocks that produce about 7%. We do this because the margin rate is about 3.5% so the client nets about 3.5% on the money he has borrowed. I think your advisor might be doing the same thing. Depending on the size of your "substantial" investment account, a debit balance of $220,000 might be sustainable and actually work to your advantage. In fact, if you hold a lot of common stocks, it has already helped you a lot because the market is up about 17% this year (and up slightly from its previous highs last September). If you are concerned about investment risk then it might be an OK time to sell some of the investments and retire the loan. But as I mentioned, it all depends on what you are earning from them.
Hoenstly i have no idea why an advisor would be hesitant to have you pay off the debt. Well, I have one idea... a fee or a comission was or is going to be generated. But I absolutely could be wrong on that notion. Keep in mind your advisor works for you and has a responsability to execute YOUR orders, with YOUR money, in a timely manner. In my opionion, calling the advisor and having an up-front conversation would be the best bet. If you would like me to review what investments you are in I would be happy to at no-charge, and no-obligation. To book a time to review this you can follow this link: https://calendly.com/jcjones/investopedia
Hope to hear from you,
Jordan Jones, RFC