Financial Planning for Doctors

When it comes to getting financial advice, there are only three considerations from the consumer’s perspective.  You want (1) good advice, (2) at a good price, with (3) the least conflict of interest.  You won’t know whether you are getting good advice or not until you know enough about money to discern that.  A good price requires simple math.  So, really, the only variable we have left to consider when choosing a financial advisor is conflict of interest.  Understanding advisor conflicts of interest makes a lot of difference. 

It is my contention that the least conflicted financial advisory model for doctors to utilize is a flat, fee-only model where the advisor acts as a fiduciary and has experience working with physicians. If your advisor has signed a fiduciary oath then you will know your future wealth is in good hands. By signing the oath your advisor has expressed an intent to put your financial well-being first. They have basically pledged to behave ethically.

I keep a recommended list of financial advisors who meet this criteria here.

How then are we to determine where conflicts of interest exist in the financial advisory world?

A Case Study on Conflicts of Interest

I have strong beliefs about conflicts of interest, because my family was hurt badly by one early on in my medical career.  It’s what led to my disability insurance debacle that, to this day, prevents me from obtaining disability insurance. 

For those that don’t know my story, this is where my story about conflicts of interest begins:

I was at the very end of my third year of medical school. My wife and I were new parents for the first time. I didn’t know much about money, advisors, conflicts of interest or what a true fiduciary might be.

But I did know that I wanted to get term life insurance (at least I knew enough to avoid whole life insurance!). 

I approached someone who I thought I could trust. He was the brother of one of my medical school classmates, and he sold insurance. He agreed that the term life insurance was a good idea, but then he said that I should also get disability insurance. I didn’t undertand why I needed that with no income to protect. 

However, after a few conversations he encouraged me to apply for disability insurance. He asked if I had any medical problems. I told him that I had essential tremor and that I took medication to control it. 

My Disability Insurance Debacle

Let me stop here and say that there are things he should have known. 

  1. There is a guaranteed issue disability policy that exists in training (no medical history or exam required).
  2. And that by applying with a known medical history there was a good chance I would be denied for disability insurance (then and in the future).  

He told me my medical history wouldn’t be a problem, and had me apply — and I was denied the disability insurance. 

That’s not the end of the story, because when I got to residency, I needed that guaranteed disability insurance policy. When it comes to the guaranteed issue policy offered at my institution, there was only one major stipulation: You can get that guaranteed disability insurance if you haven’t been denied disability insurance  in the past.

I put my trust in his hands (and should have researched more about it before pursuing).  However, because there was a commission at stake, and he worked for a big insurance company – he was inclined to have me apply even if it would prevent me from getting a personal disability insurance policy in the future.  

I can’t get personal disability insurance because someone was putting their interests ahead of mine, and attempted to sell me a product when I didn’t need it. The lesson in my story is that conflicts of interest are your red flags. That’s why I’m teaching you to look out for them.  

He should have known there was a chance that I would get denied, and that it would be an issue afterward.

Becuase I know this person is otherwise a good guy, I choose to think that he didn’t know better, and wasn’t trained well enough by the company. I don’t think he was intentionally trying to harm my future. 

Your Goal with Advice

A little skepticism goes a long way when it comes to financial advice. Conflicts of interest can threaten your future. That is why I am passionate about the financial education of physicians.

As mentioned earlier, you’ll need three things to get the advice that will help you build wealth:

  • Good advice
  • At the lowest price
  • Without conflicts of interest

I’m able to recognize most medical students and residents don’t have any financial training.  Financial literacy is not taught in our world. That means they have no idea how to evaluate financial advice. 

However, you are able to determine conflicts of interest.

Questions to Determine Conflicts

You look at the fee model, and how much you’ll be expected to pay. That means look for areas where there might be conflicts of interest.

There are some very direct questions that you can ask advisors.  Namely, “How do you get paid?”  You will notice that this is very different than the question that is more commonly asked, which is, “How am I going to pay for your advice?”

If you ask the second question, a financial advisor who makes money from commissions might tell you that their financial advice is free since your purchased a product.  What they aren’t telling you is that they made a commission from the product your purchased, and that’s how you are paying for the advice.

I have a gold standard for financial advice that includes four things.

  1. A fee-only model.
  2. A flat-fee basis (no AUM fees – yes, this is a controversial topic).
  3. The advisor must be a true financial fiduciary.
  4. Experience working with physicians

You might notice how short my recommended financial advisor list, and that is because this model is rare, because it is much less profitable running a financial advisory business this way.  Yet, it’s likely the best model to get good advice, at a good price, with the least conflict of interest.

Conflicts of Interest

While I think all four of the characteristics mentioned above make the “gold standard” of financial advisory models, let’s not throw the baby out with the bath water. Of those four criteria, the most important is that your financial advisor is a fee-only advisor. 

What does fee-only mean?

Less than 3% of advisors or financial planners are fee-only.  These financial advisors do not sell commissioned based products.  This means that they cannot place you into loaded mutual funds, or sell you commissioned insurance products like life and disability insurance.

Instead, they can recommend the right product to you that fits your financial needs.  They’ll like have someone that they recommend, but –  again – you don’t have to worry about a conflict with the recommendation, because they cannot take “kick backs” from the person they recommend.

Fee “based” models are very different.  In a fee-based model, the advisor gets a portion (often most) of their income from commissions. Those commissions come from the products they sell to their clients and kick-backs. This poses a potential problem given that they can recommend the product that provides the best commission to them.

If you get your advice from a fee-only financial planners, you can avoid a lot of conflicts of interest by getting your advice and products in different locations. 

Take Home

The take home here is pretty simple.  You should know that you cannot blindly trust the financial industry.

Get your financial advice from a fee-only planner, and buy your insurance products from independent insurance agents you can trust.  That’s the best way to get advice and to limit conflicts of interest in the financial industry.

Have you experienced a conflict of interest that impacted your personal finance situation? What advice do you offer others to avoid these conflicts?  Leave a comment below.

TPP

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