Do I Need a Financial Advisor? The Simple Truth

Lawrence B. KellerI still remember reading the headline, “GL advisor founder sentenced to nine years in prison.”  Just years prior, this was the group that my medical school entrusted to talk to the fourth year medical students for their intern bootcamp.  It was not a great introduction to the financial advisory industry, but it did help me start to answer some important question, namely: (1) Do I need a financial advisor? and (2) How do I choose a financial advisor?

Just months before, I had already been screwed over by a commissioned insurance agent who worked for a prominent insurance company (yes, the same one that no one names out of fear of retribution, but everyone interacts with in medicine).  The road to understanding conflicts of interest was just beginning.

So maybe you are asking the same question, “Do I need a financial advisor?” Today’s post will hopefully help you sort this important question out. This should accompany my post over on Physician’s Money Digest quite nicely.

Three Groups of People

In my mind, most people – including medical professionals – can be broken up into three very distinct groups of people when it comes to managing their finances.

Group 1:
The DIY Investor

The first is the DIY (do-it-yourself) group who has the ambition and interest to learn this stuff on their own.  They care about minimizing fees and maximizing their savings.  With a little bit of elbow grease, a few books, and keeping up with a website like these – they realize that financial independence is not too far away!

For this group, a financial advisor is just not necessary.  In fact, it’s likely going to cost them more money in the end.  They are already familiar with safe withdrawal rates, sequence of return risks, and passive index fund investing.

Group 2:
The Well-Informed Investor Group

Just because the first group would not benefit from an advisor doesn’t mean that’s the case for every physician.  In fact, a lot of doctors (maybe the majority) don’t fit squarely into the first group.

The second group is in between the first and third for a reason. They became doctors, not financial advisors – and so they want the help of a professional.

These doctors know enough about personal finance to realize it’s important.  They understand many of the concepts that are familiar to the first group, but they also want a little bit of help.

Making sure that the i’s are dotted and the t’s are crossed can’t be a bad thing right?

Group 3:
There’s Only 24 Hours in a Day Group

This group is the typical doctor who is bad with money.  They know they make a lot, and want to make more.  However, they have zero interest in being involved in managing their money.

They outsource their childcare, lawn care, car maintenance, and everything else.  Money management is no different to this group. There are professionals who went to school for this kind of thing – why should they handle their own finances?  Certainly, they would be more qualified to handle a doctor’s money matters.

This group is all about efficiency.

After all, there’s only 24 hours in the day and when 14 of them are spent at the hospital, who has time for personal finance?  This group just leaves their money maters exclusively to the professionals!

Do I Need a Financial Advisor?

If you are in the first group, the answer is almost certainly no.  If you can find the time to read a few books and to spend a little time each week thinking about this stuff, it really isn’t that complicated.  Plus, you’ll save yourself the advisory fees.  However, it does take a little bit of time, energy, and motivation.

If you are in group 2 and 3 above, a financial advisor might be a great thing for you.  After all, they are likely to keep you on the right track and to prevent you from making major financial mistakes (like not sticking to the plan).

By simply preventing you from avoiding mistakes like selling in a down market, timing the market, buying whole life insurance, and speculating – a financial advisor can be worth their weight in gold.  In addition to this, a good financial advisor will understand your goals and help you get there.

How Do I Choose a Financial Advisor?

This is really where the rubber meets the road.  Let’s say you are in group 2 and 3 above.  You might be asking the question above, “How do I choose a financial advisor?”

To answer this question, we need to change the question a little bit.  The question really should be the following: How can I find a financial advisor who has the least conflict of interest and is right for me?

Limiting Conflicts of Interest

I’ve written before about the conflicted advice that the financial industry often provides. Without making you go back and read that post (though, you really should – it’s a good post), here is the take home:

The most important way to limit conflicts of interest with a financial advisor is to follow these three simple steps:

  1. Do some reading about the differences between fee-based and fee-only advisors.
  2. When one approaches you to ask if you might need help (or you go looking for one yourself), look them directly in the eyes, and ask the following question, “How do you get paid?” (Notice this is a different question than “how will I pay you?”)
  3. Stare awkwardly into their eyes until they tell you open and honestly their fee structure, including any commissions that they might make off of products.

What’s the right answer?

Okay, so you know what to do now.  But, what sort of answer should you be hoping for?

In my humble opinion, the gold standard financial advisor has the following features about them:  They are a fee-only advisor with a flat fee-structure.  Said differently, you want a fee-ONLY financial advisor who operates as a fiduciary (and signs a contract saying as much) utilizing a flat-fee advisory model and has extensive experience working with physicians.

Ideally, they would also have some financial credentials behind their name like a CFP, CFA, etc.

In other words, you should avoid financial advisors who sell products and earn a commission, such as life or disability insurance.  Otherwise, their major responsibility is likely making money from selling products, and not on financial advisory or planning services.

A fee-only advisor, on the other hand, promises to do what is best for you even if it earns them less money, which is called a fiduciary.  And you play a flat, transparent fee for their time.

Wait, my advisor uses an AUM model?

You may have noticed that I did not mention anything about an assets under management (AUM) model.  This is because I am not a huge fan of it.

When someone asks for 1% of your assets each year, this implies that as you earn more money in the market, your financial situation becomes more complicated.  Therefore, they should get paid more.  I don’t buy that.

Also, it adds conflicts of interest that don’t need to be there.  Here are some examples of things that would negatively impact the take home pay of a financial advisor operating under an AUM, if they recommended it to you:

  • Paying down your debt sooner instead of investing in the market.
  • Taking your social security at age 70 instead of age 62 or 66.
  • Paying off your mortgage in twenty years instead of in thirty.
  • Investing in real estate

One could argue, and I would, that all of the above are not only reasonable things to do, but are often recommended.  Yet, all of them would be hard for an AUM advisor to recommend because they potentially decrease the amount of assets under their management when that money isn’t going into an investment account.

This doesn’t mean that rock-star advisors can not avoid the conflicts listed above.  The problem is that the doctors in group 2 and group 3 above may not even realize that they are conflicts and could get fleeced.  This is why I can’t recommend it.

What is the bare minimum requirement?

In this conversation, people tend to be human.  They always want to know what the bare minimum is for the financial advice that they get.

If you don’t want to go seek the gold standard of financial advising that I’ve laid out above, I’d at the bare minimum recommend that you find a fee-only advisor who operates as a fiduciary.  This way, they’ve at least promised to “do what is right for you” even if it makes them less money.

Of course, this is just a promise and rules are meant to be broken.  That said, if they are actually sticking to their fiduciary agreement, even if they operate under an AUM, it should be okay.  Just make sure that AUM decreases with your increasing amount of assets.

You should not be paying a 1% AUM when you have $2 million dollars (read: $20,000 annually in fees at 1%) in assets being managed.

Take Home

what's up next podcastWhile this site, and many like it, want you to become as much of a do-it-yourself investor as possible – we also recognize that you may need some help.

Hopefully, this post as helped you sort out the muddy picture of figuring out exactly where that help should come from.

As a bare minimum, fee-only and fiduciary advisory models are non-negotiable for me.  And, they should be for you, too. Of course, you could always settle for less than the gold standard.

What do you think?  Did I hit it out of the park or am I striking out?  If you have a financial advisor, how do they stack up to the guidelines set above?  Leave a comment below.

TPP

 

8 thoughts on “Do I Need a Financial Advisor? The Simple Truth

  1. I would suggest that even groups 2 & 3 don’t need one – if of course they just put a little effort into learning. But we all know in America that just won’t happen, which is why most people suck at money.

    The sad part is most people probably spend more time diving into the owners manual of the wealth-draining new SUV they bought (on loan) than they’ll spend on the web learning the basics about money.

    • Yeah, there is certainly a chance for people to transform from group 2 and 3 to group 1… But they’ve gotta make it to the books, blogs, and resources that can help them.

      Unfortunately, most of the time they don’t even know these things exist or think about them. All about the converts when they find it though!

  2. Thank you for this post, I’ve been tossing around in my head whether I am doing myself a disservice by using Personal Capital as my advisor, I am a private client with them and they use the AUM model. I am in the .79% AUM and while I do get a number of perks all under one roof (auto rebalance, tax loss harvest, financial/estate/legacy planning and a dedicated advisor–all which I value), I still wonder if ultimately if its worth paying that pesky AUM fee? My investment report card is great (according to a recent post on another blog) except in the area of tax loss harvesting, and this is where Personal Capital keeps me hooked–they do it automatically, I’m not certain I can effectively execute the tax loss harvest when the time comes. In a perfect world for my age (40) I’d follow a Bogle portfolio of 75% VTSAX and 25% VBTLX. I’d love thought on pulling the personal capital cord!

    • Well, you have two options:
      1) learn how to do it yourself. It’s not tough to tax loss harvest, and there are plenty of tutorials out there on it.
      2) create a relationship with a fee-only advisor for a flat fee and check in with them when the market is down. I am sure they could do it for you, but they would charge their rate to do it.

      Obviously, choice number 1 minimizes fees and is the route I’d take, but there is nothing “wrong” with number 2.

      Do the math on how much that 0.79% AUM is going to cost you over fifty years and youll probably decide to go with one of the options above.

  3. I asked two different financial advisors to work with me on a different model. I would gladly give them 10% of my PROFITS in the market, if they would be willing to manage my portfolio. However, if the value of my portfolio went down, they would get nothing (but still no cost to them). Of course, both of them refused. But I wonder, if they were not even willing to risk their fee based on THEIR advice, why should I risk my whole portfolio on THEIR advice? Didn’t really make sense. I’m still looking for a financial advisor who wants to do it my way.

    • That doesn’t surprise me one bit.

      I will say that there are several advisors out there who charge a fair and flat fee for work. Unsurprisingly, many of them are full and cannot accept clients because there are enough smart people that have “wised up” to the notion.

  4. I definitely agree that at a minimum, you should pursue fee-only fiduciaries to manage your money. The AUM compensation scheme certainly throws in some complications but if it can be structured in a declining block fashion (the % fee decreases as certain AUM thresholds are hit), it should be of some help to guard against unfair compensation for the advisor.

    But the AUM scheme also creates a glaring conflict of interest with regards to how you make financial decisions: sometimes the best decision for you is decreasing your liquid financial assets (or not growing them as quickly) and instead targeting debt repayment. This course of action increases your net worth but not the advisor’s fee income. Most advisors wouldn’t enjoy that outcome I’d bet despite it being the best decision for their clients.

    • AUM isn’t the worst thing in the world. But it is a conflict, and one someone needs to be well versed in if they use an advisor with an AUM model.

      Some argue that an AUM makes an advisor care more about your success… But I just don’t buy that. The other advisors don’t get repeat service either if they aren’t performing. So they all have skin in the game, honestly.

      I stand by my gold standard as what I’d recommend to readers and to my residents and colleagues.

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