I was listening to one of the What’s Up Next podcasts (Episode 18). This particular episode featured four financial advisors. Interestingly, I know all four of them (and one of them is a recommended financial advisor on this site, with one of the other four soon to follow). The podcast was wide ranging, but one of the focuses of the episode was on the relationship between the FIRE blogging community and the financial advising community.
During this part of the episode, one of them said something that I found very interesting. He said that there is no financial advisory model that can claim the “moral high ground” over any other kind of model. His point was that it is all about the heart of the advisor. If it were that simple, I’d just tell people to type “financial advisor near me” into their favorite search engine, and go with the first one they find that seems like a good person.
The perspective of the “no moral high ground” is an interesting perspective. Let’s see if it looks the same when attacking this question from the perspective of the customer, client, or consumer of financial advice.
Financial Advisor Near Me
Let’s start with the easy stuff.
There are really only a few things you want from any financial advisor. You want them to give good advice, be a trusted source of information, and provide these services at a reasonable price.
The difficulty in teaching people how to find all of this is that the target audience of many financial blogs are people who range from personal finance junkies (at best) to those who don’t know anything about personal finance (more common in the real world).
So, when personal finance bloggers write about this tough topic, the best tactic to take is to write these posts with the person who is most likely to get hurt from the financial industry – the person with a low financial literacy.
For this reason, the financial advisor who provides the best advice with the least conflict of interest at the most reasonable price wins out in the blogging world.
This isn’t a personal attack on other financial advisors. The fact is that most people looking for paid financial advice do not know enough about personal finance to be able to “fight fair” or find the right advisor.
Most people wouldn’t even know what a good advisor looked like if it was sitting across from them at the table. The opposite can also be said. Most people don’t recognize a bad advisor until it is too late, which brings me to my next point…
The Financial Industry Created This Beast
I don’t feel bad for financial advisors who feel attacked by the personal finance blogging community. Many of the blogs that exist in this space have very strong opinions about the financial industry for a reason. Many of us have experienced the depth and breadth of how bad the industry can be.
This isn’t callous. It isn’t mean. It’s simply the truth.
In fact, you don’t have to look very far into the first posts on this site to find that one of the biggest reasons that I started writing about finance for physicians is because I was screwed over by an insurance salesman. This idea hits close to home for me.
To this day, I can’t get personal disability insurance because an insurance agent in the financial industry was trying to earn a commission off of me. And he was a “good guy.”
I don’t want something like that happening to anyone else. Not even my worst enemy (if I had a “worst enemy”). If I am going to fall off one side of the fence, its on the side of keeping people safe.
Many financial advisors would argue that these “bad apples” are an exception to the rule. But that’s just not the case. I can recount dozens of stories of malignant advice given to people I know. In medicine, it is really common.
How bad does it get? Here are a few examples.
Examples of Malady in The Financial Industry
I know medical students who have been sold whole life insurance policies. (Something I don’t even recommend for attending physicians who can theoretically “afford it”).
There is also that group of friends I have who have who were placed into loaded funds. This usually occurs because of a commission that wouldn’t exist in the model I recommend.
Don’t tell me that these advisors don’t know that index funds outperform their actively managed counterparts more than 90% of the time. They know better. Yet, they still recommended the more expensive (and less successful) funds. Why? Because they make a commission for recommending these products.
What about the people who were sold unnecessary products (e.g. whole life insurance, annuities, long-term care insurance, etc) despite the fact that they were not maxing out their tax-advantaged retirement space? This is all too common for physicians.
All of these examples don’t even include the financial advisory firm that was introduced to me as a fourth year medical student as a trusted source of information. They were brought in for our Intern Bootcamp. Only a few years later, the owner was given a 9 year sentence in prison for fraud.
So, you’ll just have to excuse me for feeling like my readers are financial targets of the financial industry. It sure seems like more of a norm than an exception to many of us who created blogs because of these experiences.
Note: this may be unique to the physician community where we often have a high income and low financial literacy. I’d suspect that is not the case, though.
Gold Standard of Financial Advising
Combining the first two points (the potentially low financial literacy of our audiences and the bad history of the financial industry), it should come at no surprise that the blogging community recommends a certain kind of financial advisor.
Not everyone wants to become a Do-It-Yourself Investor. Some people need the help, and I want people to be able to find that help with the least chance of getting hurt (read: least conflict).
If I want my readers to have the best chance to locate a financial advisor with the least amount of conflict of interest, the best experience, and the most reasonable cost… doing that does not involve pretending that all financial advisory models are created equal. And it certainly doesn’t involve leaving it up to the reader to determine who the “good guys/girls” are in the industry.
I’ve shared it before, but it is worth sharing again. This is my definition of the gold-standard model for financial advising:
- Fee-Only (The “only” kind of advising you should use – i.e. they don’t make commission off of products)
- Fiduciary (ethically/legally bound to do what is best for you, the client)
- Flat-fee (i.e. avoids the AUM model, which can introduce additional conflicts of interest)
- Experience working with people like you (i.e. experience working with doctors for my readers)
Why is this the Gold Standard?
You can call it what you want, but the advisor who meets all four of the above criteria is the MOST likely to provide the least conflicted financial advice at a fair price. And their advice should be of equal quality. They should have the same level of training as any other financial advisor.
The only conflict of interest in this model is that they might be inclined to work more hours (if paid hourly). Otherwise, they are just trying to do a good job. For a fair price. And provide less conflict.
This is the reason that bloggers recommend certain advisors over others.
You might notice that these advisors are harder to find. That’s because their fair pricing makes it more difficult to earn decent money. Doing things the right way isn’t always easy.
It also explains why my recommended financial advising list will never be very long on this site. Making less money on my blog is fine by me if I am making sure the people I recommend are really worth your time. I’ve done the hard work checking them out so that you don’t have to.
Take Home
There are good reasons to use a financial advisor. When you find yourself in need of one, let’s not pretend that all financial advisory models are made equal, though.
Our readers don’t (always) eat, sleep, and drink personal finance.
For this reason, it is our job to do the hard work of helping them figure out the right kind of advisor that offers the least conflict and the best chance of giving good advice at a fair price.
This is a contentious topic. If you disagree, let’s battle it out in the comments. I’m always happy to hear a differing opinion. Let’s just make it respectful, please. If you want to rail on me, you can write whatever you want on your own site, just like I do on mine. Let’s keep it civil.
TPP
I agree absolutely. So much so that I got my series 65 (and CFP courses) and am a physician who does financial advising for physicians. I know you chose not to go down the series 65 route and to keep up with the blogging. I encourage you to keep pushing the “right kind of advisor that offers the least conflict and the best chance of giving good advice at a fair price.”
Thanks, Fi Physician! Appreciate your support. And thanks for doing it the right way!
I agree that there are probably good advisors in all types of financial payment models out there but why add potential conflict of interest to the mix when you don’t have to.
I also was pushed a front load commission based mutual fund when I first started investing in a Roth IRA as a resident/fellow which made it worse since not all of the money I contributed actually got into this highly coveted retirement vehicle. (and the fact that my tax rate was much lower than I have now, it even exaggerated the mistake).
We weren’t told what to look for back then. It was only on the advice of my CPA who I am pretty sure had a kickback deal going on with this advisor.
There are good advisors in the more conflicted models and bad advisors in the good models. The same could be said of doctors. But I agree, most are not told what to look for and (even if they were) will not know if the answers they receive are good or not. This is why the least conflicted model must be recommended.
Jimmy,
First of all fair warning – a TL/DR is coming!
You know I have a lot of respect for you. I do, however, find your views on advisors rigid, nonnuanced, and reasonably unopen to other views. As a participant on the podcast you reference, I think you took the comments on moral high ground out of context.
As I heard it, his point was that advisors in any compensation or business model often use that as a blunt instrument against the other types. Fiduciary advisors are most guilty of this. They hold their model out as the only way to go. You do as well. I’m a fiduciary advisor but don’t agree with bashing other forms of doing business. That was his point as I understood it.
I grant that your experience as a physician is shaped by lots of bad experiences with advisors in the physician space. I do, however, have to challenge this statement,
“Many financial advisors would argue that these “bad apples” are an exception to the rule. But that’s just not the case.”
It may not be the case for physicians, but it’s factually inaccurate to say it’s not the case for the rest of the public. You can say in your experience that’s not the case, but you can’t state it as a fact without backing it up with some empirical data. The vast majority of financial advisors are in the business to help their clients. And there are far more good ones than bad. We just don’t hear about them.
I just finished my Commonwealth of Virginia securities audit. You see, as a financial advisor, I’m regulated and required to meet some pretty stringent standards.
I’m accountable to regulators to what I say and how I do things, including blogging. I produced close to 200 documents to these auditors this morning. Any financial advisor has to do some version of the same thing. We’ll save the argument on who should regulate whom for another day. The point is we don’t get to just go out, hustle people, and screw them over to make a buck. We can’t get away with that. There’s a price to pay.
Bloggers, on the other hand, aren’t held to any standard. They can say anything they want and often do.
I’m a fiduciary advisor who offers clients a choice. Docs are among those who hate AUM fees like the diseases you treat. You put those of us who offer this type of fee in the same category as the bad advisors most of the time. But I am a fiduciary advisor bound by law (a choice I made when I formed my firm) to operate in my client’s best interest. The nuance is lost because I take AUM compensation.
The gentleman you added to your approved advisor list has 50% of his business in AUM fees. He stated that on the podcast. Why doesn’t that bother you? He’s transitioning to a different compensation model but still has those AUM clients.
Here’s the deal. We’re in business. If our revenue model was built on AUM fees, we can’t all of a sudden say I’m not going to do that anymore. We would be out of business. We can gradually move toward another model, but we can’t shut down our businesses. I wish it were that simple. But it’s not.
There just seems to be so little room for nuance and so much negativity based on past bad experiences. My best friend, who pastors a church has a phrase he uses that applies here – “Don’t let an incident (by one or a few) become an indictment of all.” For those, like you, with strong opinions based on your own experience, that seems to be what’s happening. There’s only one way to do things, “the gold standard” and anyone who doesn’t do that is bad.
RIAs under the same fee model you advocate and in which I’m a member have engaged in Ponzi schemes just like anyone else.
Someone looking for financial advice, doc or otherwise, first and foremost needs to know what they want the advisor to do for them. They should set up interviews with 2 or 3 advisors, ask them a series of questions to flesh out how they do things, and make a decision accordingly. I put a couple of posts out on my blog offering some of those questions and pointing people to places where they can do their research before the interview.
I don’t see much of that from the blogosphere. It’s much easier to paint advisors with a negative brush then to do the work and teach them how to find one that fits their needs.
And how about all the blogs who rave about Personal Capital and get paid when someone opens an account there? Does it seem at all ironic to you that Personal Capital is a huge proponent of the AUM fee model? They have close to $8 billion they manage under that model. I guess as long as they pay bloggers a commission they can overlook that business model. It’s just disingenuous to me.
I love your passion for teaching physicians how to be better with their personal finances. You’ve helped and will continue to help your profession. You’ve done more to educate your readers about financial advice than most. I respect and appreciate that as well. I’d like to see you more open and less rigid in your approach.
Thanks for letting me speak my mind. I’m sure my response will raise some passion among your fellow physician bloggers and friends. I welcome the debate.
Well, Fred. You know that I love you, brother. That said, I can agree on some things you said and disagree on others.
I (personally) have a pretty nuanced view of advisors. That said, most of my target audience does not. I hear you on the idea of teaching them how to vet an advisor… but teaching them the questions isn’t enough. The answer they get may be total rubbish, and with the financial literacy that many health care professionals have… they won’t know the difference between a good and a bad answer. The idea of teaching them all of the good and bad answers that could come to their questions is going to result in paralysis by analysis.
I hear you, though, that you guys have a lot of regulations and that there are a lot of good advisors out there. I am not going to argue with you on that. You are right. You are also right that there are good advisors in bad models and visa versa.
My point is this… why would I recommend a more expensive or more conflicted model to my readers if there is a less expensive and less conflicted model that exists that provides the same solid advice? If this model didn’t exist (like back in the day), I’d understand. But it does exist.
Back at you with the love, brother.
I don’t have a problem with you recommending the model you do. I offer that fee structure as well. The problem I have with your and many other physicians view is the bashing of the AUM model. If you don’t like it, great. It’s a perfectly reasonable model and falls into the category of fee only.
The example I see used a lot with the AUM model and the conflicts with it are when someone has a mortgage that can be paid off with the money the advisor is managing. I’ve been in that situation and advised the clients to pay off the mortgage. Contrary to the view that most advisors wouldn’t do that, I completely disagree. If they’ve signed up to be a fiduciary, that’s what they have to do.
And again, one of the advisors on your list has 50% of his business still on the AUM model. He, like me, is trying to move away from that model. But it’s still a reasonable model, even though you don’t agree with it. Here’s an example.
Let’s say someone meets with 2 or 3 advisors, does the due diligence, talks to some of their clients, and compares recommendations across the advisors. The recommendations they like are from an advisor who gets paid under the AUM model. The other two are a flat fee. But the client doesn’t feel as comfortable with either of the other two. Should they choose one of the two advisors they don’t feel as comfortable with because they are cheaper?
The advisor-client relationship is a long term deal. The advisor and the client should make sure there is a good fit before deciding to work together. Compensation is one factor, but not the only one and shouldn’t necessarily be the deciding factor. Clients are going to be working with the advisor for 10, 15, 20 years or more. They have to have trust in one another.
Before I agree to work with anyone, we have an initial meeting to get a feel if our personalities are going to mesh. If they don’t (and it’s pretty easy to tell) I’ll suggest they look for another advisor.
The other thing that I find ironic about many, not all physician bloggers is the victim mentality. “I make a lot of money so I’m a target. No one taught me about finance.” News flash gang. No one teaches anyone about finance. Physicians don’t have a corner on that market and they aren’t, by any means worse off than others. At the end of the day, we’re all responsible for our own money.
And I seriously doubt that someone living paycheck to paycheck will have any sympathy for the poor physicians who buy the big houses, the fancy cars, join the country clubs, etc. and then whine about no one teaching them about money. Many became physicians so they could do just that. You can’t then whine about it when it happens.
I admire you and a few other physician bloggers whose goal it is to teach residents and younger docs about personal finance. Most of the country needs that education, which is why many of us blog. You do as good a job as anyone with that effort.
Let’s leave room for others to make the decisions to do things the way they want to. If that means they choose to hire ad advisor who gets paid differently than what you think is fair, it’s their choice. Let’s not shame them for that choice. There are many other factors that go into choosing an advisor.
Fred, may I ask why you are moving away from the AUM model? Is it due to the perception that AUM presents an automatic conflict of interest, or does it have more to do with a better model for your own business? Does an hourly model often include execution of the advice when desired by the client or is that typically left up to the client? In that case I could see where it might often be beneficial for a busy (and often non-investment savvy) client to pay for having timely and knowledgeable execution of investment advice.
I have spent quite a bit of time thinking about how to structure my compensation as I begin my journey as an independent adviser. What I came up with is a two model approach.
One compensation model is FEE ONLY. I charge a flat fee for GOAL-BASED financial planning and CASH FLOW-BASED financial planning.
As part of the planning process, I will make investment recommendations as well as insurance recommendations, but the client will find their own solutions. I will not refer clients, because there is a conflict of interest. (Advisers will say they do not receive compensation for referring, but when it’s reciprocal, isn’t that a form of compensation?)
The other model is a FEE-BASED model, in which I charge the same flat fees for the financial planning, but also offer investment management and insurance services. So in addition to the planning fees, I charge a base flat fee for AUM over 300k plus .125%. For AUM under 300k, I charge 1%. I do not make commissions on investments. I do not sell proprietary products.
If the client chooses to work with me under the FEE-BASED model, I WOULD MAKE COMMISSIONS ON INSURANCE PRODUCTS. That is the conflict of interest, but my recommendations are and will be the same regardless of whether the client wants the FEE ONLY planner relationship or the FEE-BASED planner, investment manager and insurance broker relationship.
When I am audited, I will have to prove that my recommendations on investments and insurance didn’t vary based on whether or not I was compensated. I take my final test for the CHfC designation at the end of this month. I have many years of experience, but was never motivated by corporate goals. After a lot of reflection, I realized I didn’t fit in a commission driven environment. But I am passionate about helping people, so the independent RIA model was the right decision for me. I would be happy to answer any questions you have for me. Thanks.