Money Meets Medicine Podcast
Show Me the Money (In the Financial Industry)
The personal finance industry is meant to help you manage your assets, but particularly for doctors, many questions remain around what that kind of support actually means.
Does your financial advisor have your best interest at heart? Do you know how they get paid? Are they transparent in their disclosures about how their company actually works? Where are the conflicts of interest?
Because you can rest assured there are conflicts of interest. It’s just a matter of how they show up. And once you can say “Show me the money” and find them, that’s when you can make intentional, informed decisions regarding your personal finance.
Why you want to say show me the money and mean it
In a study from Northwestern Financial Advisors, it was found that 40% of all Americans use a financial advisor. 80% of Americans who have more than $5 million in assets use them, yet 65% of Americans don’t trust financial advisors to act in their best interest.
Right: over half the people using these services don’t trust the people providing them, and yet 80% of high earners use them.
In addition to that, $670 million was spent on education in the financial industry, and in 2013 they spent $17 billion (yes, billion with a B) on marketing products to sell you.
When you let those figures sink in, it’s easy to understand why we say that it’s absolutely critical for doctors who are looking to work with a financial advisor say, “Show me the money.”
Other studies have reported financial industry misconduct and the percentage of financial advisors that take part. Some firms specifically target people that A: have high incomes, and B: have low financial literacy. By the way, there’s a word for people with high incomes that have low financial literacy: doctor. So it behooves you to understand where your money is going, how people are getting paid, and to have a generic mistrust of anybody giving you financial advice or education until you know where that conflict exists.
How doctors fall prey to less-than-honorable financial practices
Too many doctors are working too hard to take care of people and don’t know enough about money. They find out 10, 15, or 20 years down the road that they bought annuity or whole life insurance (or any other product that they didn’t actually need) because they didn’t understand how the conflicts worked.
It often goes something like this:
A doctor meets someone in finance. They seem like a really nice person and they’re saying that they can help you. I know that I want help, and they seem nice. You’re nice, too. You vibe with them, they vibe with you. It seems like a great partnership. Here’s where it gets tricky.
A financial advisor can be a nice person and still not be a right fit for your particular situation or purpose.
In order to go into this partnership with a full yes, it isn’t just a matter of asking “Do I like them?” It’s “How are they paid and are they incentivized to help me the best way possible?” This is what tends to be one of the biggest conflicts. Doctors don’t fully understand how people are paid, and don’t realize sometimes that a financial advisor’s incentives don’t align with your values.
For example, in their document “My Commitment to you as a CFP Professional” Northwestern Mutual says that their certified financial planners are incentivized to:
- sell Northwestern Mutual insurance products to a client often
- sell permanent life insurance and annuities with higher initial premiums than term products
- to sell more expensive products and services to [the client] which will have the effect of increasing [the CFP agent’s] compensation
This isn’t just limited to financial advisors. Bloggers and podcasters are incentivized like television shows through sponsorships, ads, and selling products.
On blog sites or in Facebook groups, you may see advertisements to refinance your loans with SoFi or Laurel Road or CommonBond, and they’ll even give you an incentive to accept their offer through a lower rate or a cash back option.
What many people don’t realize is that this decision is binding and will potentially prevent them from getting their student loans forgiven through public service loan forgiveness (PSLF) or any other governmental student loan forgiveness program.
Just a reminder that the people advertising to refinance your loans are getting paid to do that and are getting an incentive whenever someone refinances their loan.
It’s not a bad people issue – it’s a broken system issue
People trying to sell you insurance or money management products you don’t need aren’t bad people. They’re trying to put food on their table for their family just like you are. They’re trying to sell you a service, but they don’t understand that these products may not be what’s best for you.
They’re brought into a company as a financial planner or financial advisor, and they’re trained and instructed how to sell products because that’s what the company truly believes is best. Individuals aren’t trying to carry out these wrongs against people, but when you’re uninformed, all too often you’ll get stuck with mismatched policies or services that are binding.
So if you go to an insurance agent, for example, and you have a disability policy, that you ask them to review, their answer is always going to be yes. That way they can then tell you “This is actually missing something you need, let me sell you a new product.” And guess what they make? Commission.
These exact terms are cited in their own document, as we linked above.
How financial advisors make money from working with you
There’s nothing wrong with needing or wanting help. And there’s nothing wrong with paying for good financial advice. Our goal in this discussion is to inform you that conflicts exist, and your job as a consumer is to figure out what those conflicts are before you sign on the dotted line, before you buy this product, before you pay this person this money.
One of the things that I recommend people do before they pay somebody for a financial service, is to ask certain questions. One of those top questions should be, how do you get paid? And they should be able to explain that and articulate it in a way you understand.
Take life insurance sales for example. A company will pay the seller 50 to 110% of the annual premium in the first year in which they sell it. So if they sell you a $75,000 whole life policy, they’ll make somewhere between 35 and $80,000 that year, per policy sold.
Do the math on that and it’s clear that if a policy of that value is sold to 10 people, the seller makes 350 to $800,000 in a year. It’s a lot of money.
It bears repeating: ask how they get paid. Some will use catchphrases like “I get paid when you get paid.” Don’t take that for an answer. If they can’t tell you how dollar bills hit their bank account, don’t commit.
Yes, it might feel like an awkward question to ask, but when you’re paying somebody for a service, it’s 100% warranted and the right thing to do because then you find out they operate using an assets under management (AUM) model. If they said, “I get paid when you get paid,” it’s only half true. Because when the market went down by 20% this year, they still got paid because they’re Uh, no. The answer is yes, they still got paid. They’re 1% of your portfolio.
If it feels confusing, it’s not you, you’re not broken. It’s just a really complicated situation where products and services are meant to be sold and not to be used by the person that’s actually considering buying it.
“Show me the money” take-home points
One: Separate advice from products.
Two: There are ALWAYS conflicts. If you want to find them, (1) follow the money, and (2) ask the tough questions (how do you get paid?) until you get a satisfactory answer.
Three: Don’t invest in things you don’t understand.
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