Wasting Your Money on Conflicted Financial Advice

I am in the process of writing a book specifically for medical students, residents, and early career attending physicians. One of the chapters is on conflict of interest, because by and large this is one of the biggest reasons that physicians make massive financial mistakes after getting financial advice.  In the process of writing that chapter, I had the opportunity to hear a WCI podcast episode. In this episode, he interviews Sarah Catherine Gutierrez who spells it all out.  She has converted me into a big fan of hers.  And it really got me fired up.

So, today’s post will be about separating the wheat from the chaff.  More specifically, what are eight hints that you should run the other direction when talking to a financial advisor.

Let’s dig in.

Number 1. They sell commission-based products

It’s pretty regular advice these days (despite many still not knowing it) that you shouldn’t mix investments and insurance.  Why then would you use a financial advisor who works for a specific insurance company?

Their job is to sell insurance products and to make money from the commission they get when they sell it to you.  That’s called a conflict of interest.  No matter how good of a person they are, it is going to be extremely hard for them not to sell you their products. In fact, this exact thing happened to me and is the reason I can’t get personal disability insurance to this day… and he was the brother of a medical school classmate of mine.

So, the first rule of spotting bad advice is when the person is trying to sell you something.  Often, this will come in the form of a free lunch/dinner/coffee.  The follow-up will involve products. Just say no.

Who then should you buy disability/life insurance from?  An independent insurance agent that can get you quotes from multiple companies and find what’s best for you.  Working specifically with physicians is a plus, too.

Number 2.  They operate under an Assets Under Management Model

This one is really important to me.  I think the Assets Under Management (AUM) model is a morally bankrupt system.  I realize those are harsh fighting words, but it’s the truth.

When you pay someone for a service you usually have a very concrete idea of what that service will cost you.  For example, before someone replaces your water heater they are going to give you an estimate and tell you what the expected bill is.  Right?  That’s honest, and that’s fair.

With AUM financial advisors you never directly cut them a check.  It is swept out of your assets unbeknownst to you every quarter.  At 1%, which is the industry standard, that is going to cost you a boatload (A boatload = millions of dollars).

For example, at 1%, of your $3 million dollar IRA in retirement is going to cost you $30,000 per year.  Compound that on 6% interest for thirty years and you’ll begin to get an idea of how big of a number AUM costs you.

A financial advisor working under the AUM model needs to find 50 people who all have 500,000 in assets to manage.  At 1% that’s a $250,000 annual salary.  If those 50 have a million, its $500,000, which is more than a lot of doctors make.  So, don’t feel bad when you break free from this system.

One of the biggest reasons this rubs me the wrong way is that there is an alternative to this.  It’s a really good one that isn’t morally reprehensible.  It’s called fee-only flat hourly rate advising where you pay by the hour or for a specifically priced product.  More on that in the “take home” below.

Number 3.  The advisor tries to sell you whole-life insurance

See number 1 above.  Don’t mix insurance and investing. I mention this separately because it gets pitched at physicians so often and it always saddens me to find out how many have this stuff.

If you want to read more on this, the White Coat Investor has written a bunch of posts on it.  I am not going to repeat what he says, but you can trust that it’s a bad idea for the vast majority of people.

For further reading:

What You Need to Know About Whole Life Insurance
6 reasons not to buy whole life insurance for your children
How to Dump Your Whole Life Policy

The point is… whole life insurance, which goes by many names (Permanent insurance, cash value insurance, cash value policy, etc), is bad for the overwhelming majority of doctors.  If someone is mixing investments with insurance, it’s probably whole-life insurance with a new name.

Number 4. A SEP-IRA is brought up without mentioning a backdoor Roth IRA

If you have a side hustle and you are making money, a financial advisor may tell you to open up a SEP-IRA also known as a Simplified Employee Pension – Individual Retirement Account.

This is one of the two main options you have when you have self-owned (employer) side hustle income.  The other is a solo-401K.  While a solo-401K takes a little more work to set up, it has one major benefit for a high income earner that cannot be overlooked.

A solo-401K still allows you to participate in a backdoor Roth IRA.  A SEP-IRA does not.  Well, that’s not entirely true.  You can do it, but you are going to get slammed by the pro-rata rule.

Suggesting a SEP-IRA without discussing this consequence is bad financial advice that an advisor working directly with physicians should know about.

Number 5. Investing over paying down debt

If you ask a financial advisor who is working under the AUM model whether you should hammer away at your debt or invest money, the conflicted advisor is more likely to tell you to invest and “earn more in the market.”  After all, historical returns in the market average 10% and your loans are only at 4%!

With an AUM advisor, it would be impossible to tell their motive for the advice.  Is it really math?  Or is it that investing gives them more assets to manage and increases their take home pay?

By the way, this problem can present itself in any area where you are paying down debt.  Should you pay off your student loans early? What about your mortgage?  How about that car you financed?

All of these questions present possible conflicts of interest for the fee-based AUM financial advisor.

Number 6. They recommend an IRA over a 403B/401K

AUM advisors do not get to “manage” retirement accounts at your employer. So, that 1% AUM I was talking about earlier will not include money in your 401K/403B.

Naturally, if you change jobs and ask your AUM advisor whether you should roll your money into your next employer’s 403B/401K or into an IRA… they are going to tell you to put it in the IRA.

Why? Well, because they would manage the IRA and then take 1% from that pile of money, too.  It’s conflicted advice.  The only time this advice would even be worth considering is if your future employer’s retirement options are terrible (really high expense ratio actively managed funds).

If you change employers and they tell you to roll it into an IRA, ya better think twice.

Number 7. You don’t know how they are getting paid (see number 2 above)

This one is short and sweet.  If you don’t know how your advisor is getting paid or you think it is free, then please see number 2 above.

Unless an advisor is provided by your employer and you can be sure that they have none of the other conflicts mentioned in this list, you can bet dollars for doughnuts that they are working under an AUM model.

Run for the hills.

Number 8.  They prefer actively managed funds over index funds and cannot tell you why or they dismiss your question

Whether you should invest in actively managed funds versus passively managed index funds is an academic question.  It has been answered.

The answer is that you better have a really good reason not to invest in passively funded index funds (i.e. you aren’t offered one at work).  The data is just so solid on them that you’d be pretty foolish to think otherwise.

I realize that this is a controversial topic to some, but if your advisor is putting you into actively managed funds there is a good chance they are loaded funds or funds that provide them a commission.

You’ll see a theme here in that it is likely a conflict of interest for them.

Is there a better alternative?

Fortunately, there is a better way!

This is the kind of financial advising that Aptus Financial (founded by Sarah Catherine Gutierrez, who I mentioned above from the WCI podcast) performs.  As I always tell my kids, “If you are going to do something, do it right or don’t do it at all.”  Aptus financial gets it, and I think this business model will sink all of the ones mentioned above once people figure it out.

Most importantly to me, Aptus Financial believes in making sure your plan is set up correctly and then releasing you to do-it-yourself as much as you can.  They are there if you have questions or need advice (at her hourly rate).

This is the model of good financial advising and one that I can get behind.  For the record, I am such a fan that I am pitching this kind of adivsing to you, if you need it.  And I am NOT paid by them to do so.

Let the official record show that I am not against financial advisors.  I am against financial advisors who have a conflict of interest, which is unfortunately most of them.  If you need one, do it right..or don’t do it at all.

What do you think?  Are AUM financial advisors and advisors working off of commission a terrible idea?  Do you have one?  What’s your excuse. Leave a comment below.

TPP

26 thoughts on “Wasting Your Money on Conflicted Financial Advice

  1. Another well thought out and articulated post as usual TPP.

    I absolutely agree with every single issue you listed, having fallen for some myself (in residency made the foolish choice of going with a financial advisor who promptly put my money in a front loaded mutual fund with a pretty high expense ratio.

    Luckily the money amount was lower since I was just starting out, but I can see how these financial advisors can prey on residents/young attendings who don’t know any better.

    As this physician financial revolution is starting to take hold, I do hope this line of business will go extinct.

    Congrats on writing a book. That was something I always wanted to try but never took steps to do so. Look forward to it being published

    • I bet you are right, XRAYVSN. I bet as we all get the word out that this kind of financial advice will go the way of the Dodo Bird.

      I hope the book will be helpful. The premise will be to focus on the 20% that gets the 80% of the results. I want it to be practical and helpful.

      TPP

  2. Hello TPP,

    Good for you for trying to help out the new docs. I have always tried to use the concept of “follow the money”. You would be surprised how this one concept brushes aside all the noise.

  3. TPP,
    Good points. I intensely dislike the AUM model. Those advisors take a progressively bigger cut as your portfolio grows. Lot’s of misalignment there. It’s the same reason why I also don’t like real estate agents around here taking 6% of a $2 million house. In Silicon Valley, these houses sell themselves.

  4. Good stuff. Unless someone has an incredibly complex financial situation there’s really no need for an adviser. Everything you need to learn to manage your finances can be learned in a few days, if not quicker.

    • I, for the most part, agree. There is some subset of people who simply want an advisor’s help regardless because they find it either too complicated or want a professional opinion on their plan. I think that’s a reasonable thing to do, but only if it is non conflicted advice at a fair price.

  5. In #6 above when discussing rolling your 401k/403b into an IRA you state:

    “The only time this advice would even be worth considering is if your future employer’s retirement options are terrible (really high expense ratio actively managed funds).”

    What is wrong with rolling your 401k/403b into a low-cost IRA like those at Vanguard?

    • The biggest dilemma there is that it will prevent you from performing a backdoor Roth if you have money in a traditional IRA because of the pro rata rule.

      So a 401k/403b would be a better option to roll into unless the options at your future employer are abysmal.

  6. Great post TPP!
    I whole-heartedly agree with everything in this post.
    However, I would like to point out that everything mentioned in Number 6 isn’t necessarily true. In fact, advisors CAN take an AUM fee from managing your 401k/403b. What happened to me is a prime example. The financial advisor had I had been working with asked for my username and password to all accounts (including my 401k and a 403b from a past employer) so that they can form a cohesive asset allocation plan. The wanted to make sure I was “well diversified” and that I had proper “Asset allocation”. Anyways… the $120,000 that was in my residency 403b was included in the AUM fee. They just took the money out of settlement account that was associated with the brokerage account that they were managing. They had a AUM fee of 1.75% and so this was $2,100 from this account a year alone. At the very least, they were transparent about this. Quickly realizing that I can do “diversification” and “asset management” myself, and that the AUM fees would end up being ALOT of money (especially in the long run), I fired my financial advisor.

    Long story short, just because you have money in a 403b/401k does NOT mean that an advisor can’t included it in an AUM plan.

    • You are teaching me there, Dr. McFrugal! That’s crazy. Didn’t know it worked that way for some. It doesn’t surprise me for some reason. They’ll take advantage however they can, I am sure.

      Thanks for catching that!!

  7. I don’t get why you hate advisors and always go to such hyperbole to discredit advisers. It seems like they threaten you because your response is so Quixote like. You always create a boogey man and then set about to slay him. A bogelhead approach is an adequate starting point. Merely adequate. It does not take many finer points into account.

    I use an aum adviser. My cost is 29 BP not 100. I have access to funds that over the past dozen years have provided a net 150 BP over a vanguard equivalent. My portfolio is more efficient than the typical bogelhead portfolio because for an equivalent return I have 23% less relative volatility because my portfiolo is risked correctly. I have accumulated half a million bux in tax loss harvesting which means my cap gains on my post tax money will be tax free for decades. I cashed in 600k of stock last year and paid zero tax. I never got bad IRA advice and my portfolio is about as tax efficient as it can be. My adviser has lunch with Warren Buffet and Cliff Assness twice a year. My present tax bill for living expenses is 0 while I Roth convert. When I RMD MY yearly tax bill will be under $1500 per year for the first 15 years of my post RMD retirement and never goes above 13000 till I’m 95 years old. The increase is due to SS growth. My adviser is fiduciary has published 10 professional finance books, and has a PhD. He writes for Forbes. My adviser has optimized my SS which over the course of my 30 year retirement will result in my obtaining an extra 150k. If I don’t last 30 years my adviser will guide my wife. I have taken into account her tax situation after my death as well. My plan is in depth, and well reasoned and I understand it perfectly unlike the typical bogelhead 4% x25 abba dabba..My WR is about 2% and the likely hood of my portfolio success is 9988/10000. according to the Monte Carlo calc. My adviser does nothing without my approval and I understand exactly what I’m approving. His aum is not my total portfolio net worth but he includes the excess in the portfolio analysis so I can set the risk correctly. He has a panoply of professional optimization software. So pretty much you get what you pay for. To me the financial benefit of professional management is well worth 29bp. Over the decades i’ve reaped multiples of the 29BP off the deal. I’m nothing if not anal about managing my dough. The way I chose him was I read his books called him up, gave him 1m to start, liked what he did and gave him more. It was organic as a partnership. This is the other side of the story.

    • Gasem, surely you recognize that your advisor is the exception and not the rule, right?

      It sounds like your advisor has done wonderful things for you. At an AUM equivalent to a roboadvisor, I would consider a lot more of them. Unfortunately, advisors in the medical community become an excuse to not learn the stuff yourself. Given the propensity of advisors to be very different than yours, I just cannot recommend them at 1% AUM.

      Also, I am not anti financial advisor. I am anti-conflicted financial advising. I think the AUM model will eventually go the way of the Dodo bird when people realize that they can get the same quality of advice for a flat hourly fee. You can check in with that advisor as often as you want and still save yourself thousands of dollars each year compared to the AUM advisor.

  8. The reason advisers charge 1% is clients bring tiny little portfolios. As portfolio size grows management cost goes down. My first house was on a 100×75 lot. I mowed my own grass. Now I live on several acres in the country. I do not cut my own grass. One year in med school at Thanksgiving I needed a new clutch. I dropped the transmission and changed it. Took all weekend in 10 degree Michigan weather. Today I use a dealership. Are there unscrupulous advisers, sure. Is a bogelhead DIY portfolio the best you can do? No. My compounded tax savings far far outweighs my compounded 29BP. The value of My tax loss harvest far far outweighs the 29BP. In my life I ran an anesthesia practice. I had to see everyone got paid. I had to do the contracts. I had to make sure all the OR’s were covered and the call schedule was worked out beside doing my own anesthesia and pain management. Plus I have a family. I was very happy to offload managing tax lots to someone who had the proper software, time, and responsibility to do that, and reap the benefit. Well worth 29bp. Making money is about what you keep, not about the gross of how much you make. It’s about truly understanding how much risk you are paying for your return. If I hire someone who makes me more money than he costs, its a damn good investment. Over decades that delta compounds more than your 1 % drag argument by far. Especially since that argument is a straw man. I’ve seen people say if they won a 500m lotto they would invest in a vanguard 3 fund portfolio. Those people are stupid. They don’t understand money. They deserve having the government extract half their income every year. Buffet says he’d set up his wife in a 3 fund, if it’s so good why doesn’t he set himself up in a 3 fund? The reason is Buffet knows it’s not good, it’s adequate and simple.

    If you actually want to be a guru for residents and young attendings be very honest about the pro and con. Know the pro and con. Teach them the pro and con and let them decide. You don’t have to decide for them. You want to pay loans early, in general that’s not smart. In your case it’s a specific risk management maneuver. Both are totally legit. In general by paying early you are trading compounding for feeling good. It’s a free country but make no mistake paying early is costing you compounding. A portfolio is best evaluated not in dollars but in shares owned. The more shares the wealthier you are. It become reflected as money only in relation to a snapshot of the economy and that is variable and indirect. The number of shares owned and the length of time of ownership is the engine of wealth.

    The 3 fund is what it is. A managed portfolio is what it is. A three fund is smart for a novice but in no way addresses more advanced portfolios. Doc G and MD proudly have a bunch of real estate. Where is that covered in a 3 fund portfolio? Some real estate guys have management some DIY. It’s no different for a pro money manager. It is true my situation is exceptionally good, but that is because I made it good. I didn’t walk into Billybobs financial management and fried chicken stand and plunked down 5M I did the research started small and tracked the cost and results. I measured how much I knew about finance at the end of each year. I did purchase a product which I was happy to purchase, given the return. Every year of my financial life is planned for the next 32 years. Inflation accounted, taxes accounted, variability due to SORR accounted, likely portfolio failure accounted. Roth conversion advantage v disadvantage accounted. Safe WR accounted. There is variance and unknowing but the future is not random. It is likely, and failure modes can be calculated, understood and protected against.

    So it all depends on what kind of money machine you want to entrust your future too. I wrote a post over at xrayvsn.com looking at various money machines and SORR stress. The bogelhead 3, in a 30 year retirement 3.5% WR with bad SORR had a 42% failure rate. The 50 year horizon version of this portfolio has a 75% failure rate. Even with no SORR loading the 50 year 3 fund at 3.5% WR failed 1 out of 5 times in the 50 years period. Why is this vulnerability not hawked in bogelhead land? Oh yea I forgot financial bloggers are about entrusting your future to entertainment. I figured this out using a standard Monte Carlo analysis. Nothing weird. Oh all you need for 50 year FIRE is 4% x25 right? And a second job, side gigs, and 4 apartment buildings.

    • I am all about presenting both sides. I just disagree with your assessment on some of it. I think most docs have a giant target on their back that the financial industry looks at with greedy eyes. You’ll have to forgive my inability to trust an industry that has hurt a lot of people who didn’t know any better and took advantage. Many of them being docs.

      The vast majority of people I know are docs that use a financial guy who charges 1% to put them in actively managed funds with expense ratios of 0.8 to 1%. I realize that is far from your experience, but it is easily the overwhelming experience of the vast majority of docs I know.

      The premise you are missing is the first part: simple and adequate is just fine for me. I am okay with that. I dont neef fancy, and I am not trying to beat the markets. And, no, I don’t subscribe to early retirement and multiples of 25. I think a SWR is probably more towards 3 or 3.3, but with a 70/30 model I am not sure it would have as high of a failure rate as you are espousing. I’ll check out the guest post, though, before I make a decision on it.

      I genuinely appreciate your view of things and for trying to show the other side. I think there are very intelligent people on both sides.

    • P.S. I just read your post on xrayvsn’s site. I don’t think that we are that far off. You espouse a two index fund model there that does quite well. It appears that would be a good portfolio for the distribution phase (i.e. retirement). I don’t think you and I are as far apart as it seems in terms of our views.

      I just prefer fee-only, hourly rate advisors over AUM or commission based advisors.

      TPP

  9. Not apart is the point. I’m rich and retired and never heard of a bogelhead till 2 months after my retirement. You’re last statement implies there is a market in ways to do this. Choices which have different advantages. Retirement occurs over a lifetime. Retirement occurs in epochs. Accumulation is not retirement, it is an epoch in retirement. Bogelhead is perfect to get started. What I have is perfect to an age that is beyond accumulation. What I have is for an epoch of deflation. The risks and maneuvers are very different. Your wealth is what remains after medicare and the government gets done working you over. How the government treats you is a function of what you do a decade or two before deflation begins. If you want to be a guru become expert in both. I have an article coming out on xrayvsn talking about the notion of epochs and how epochs affect choices as retirement unfolds. I can’t remember quite when but sometime this summer.

    • Sorry I never saw this, Gasem. My commenting plug in registered it me as saying it. I need to fix that.

      I hear ya. My main focus is on students, residents, and early attendings. So most of my readers will be in the accumulation phase. It’s a fair point that the asset allocation may need to be very different in retirement to deal with a very different set of problems.

  10. One issue is that whole life, variable annuities, commission based mutual fund loads and the like are lousy business models yet they persist to exist. Why? Because the profit margin is so high you don’t need to find a lot of suckers to make a living.

    I think AUM is certainly less bad than the other business models out there but is worse than flat fee hourly planning. However, the hourly planner needs to make enough to stay in business, and that’s tough to do.

    Hence, I think the AUM model is going to last for a long time because of how high the profit margins are.

    • Completely agree, Travis.

      I think the more of us that help people figure out who they should be seeking advice from, the more likely it’ll be that the good ones stay in business.

      Good advice is worth paying for and your business is a great example of that.

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