The importance of understanding before hiring

Over the many years I've been writing this column, I've received countless emails from readers telling me about bad experiences with a financial product or service. They often ask me for recommendations, though I'm often unable to help them.

One reader, for example, had registered his car with Uber to make some extra money. It was a car he used to commute to work, but in his spare time, he did one or two other services. He never realized that his policy excluded any other use, because the risk changes, and so does the premium. He once had an accident on his way to work, without any passengers: the insurance company declined his offer because the vehicle was an Uber and his insurance wasn't adequate. Unfortunately, there was no way to help him.

Some time ago, I received another example: a person who purchased insurance for a car they purchased from an insurance company that had been damaged, a total loss, but fully repaired. Since it was a model from that same year, they decided to insure it at invoice value and expect to be paid as new. Not only was it underinsured, but the insurance company, in accordance with the terms of the contract, was applying additional depreciation to the commercial value.

There are many cases like this. For example, those who complain that the bank took money from their payroll account without authorization to pay their credit card, which was not current. They obviously didn't read the contract they signed. Almost all of them contain a clause authorizing the bank to make an automatic transfer of funds to keep the accounts current (autopay).

The same applies to prepayments on mortgage loans. Some banks reduce the monthly payment, others the term, and some even offer the option. But it's impossible to know the specific case without seeing the signed contract. In general, it's better for the monthly payment to remain the same and for the prepayment to reduce the loan term.

Stories like these—and others—are all too common because people purchase financial products and services completely blindly. They don't read or understand the features of what they're purchasing, or even how that product works or whether it's appropriate for their needs.

In the case of insurance, they don't understand basic concepts such as the use of the insured asset. For example: you insure your house, then move and use that property as a warehouse for your tire business, while renting it out. If something happens, the insurer won't pay you, because the risk is very different. You insured it as a house, not as a warehouse. This is a fundamental increase in risk and is covered not only in the general coverage conditions but also by law. The same thing happens when you also use your personal car for passenger transportation, which is why you need to purchase the appropriate insurance for your situation.

I've always had a hard time understanding why people do this, when it comes to something as important as their own money. Their assets. Many simply trust what the financial institution executive tells them, because they should know better. But often that's not the case: they are poorly trained salespeople who work for the companies, not for us, and whose income depends, for the most part, on selling us something. Therefore, they have a strong conflict of interest. Of course, there are also knowledgeable people with professional ethics who put the client's interests above their own. But they are the minority.

That's why we have to learn to assume responsibility for making financial decisions, because ultimately we make the decisions (including the decision to do what others tell us). I've also emphasized that good advice is very valuable, but you have to know how to advise yourself. It's up to us to decide whether the advice we're being given is good or bad for our particular needs.

On the other hand, when you purchase a financial product or service, you always sign a contract (or an application that forms an integral part of a contract). It establishes the rights and obligations of both parties. Before signing it, you should at least know what you're agreeing to, what you're obligated to do, and what you'll receive in return. It's the least we can do for ourselves and our money.