By Dr. James M. Dahle, WCI Founder
Many students, residents, and physicians wonder about the process of choosing a financial advisor. In many respects, the process is similar to choosing your physician. There are no rigid guidelines, the personality fit can be key, expectations need to be realistic, you should avoid the bad apples, and by the time you know enough to choose a financial advisor properly, you may not need one at all. These 12 guidelines should help you make your decision.
#1 Consider Whether You Need a Financial Advisor at All
Many successful investors, including physician investors, draw up their own financial plans, do their own taxes, and manage their own investments. This has several advantages.
- You avoid paying the fees associated with paying someone else. In investing, unlike most of life, you get (to keep) what you don't pay for.
- There are fewer surprises because you are intimately involved with the process. You're not going to “Bernie Madoff” your own account.
- Since you are intimately familiar with your financial plan, taxes, and investments, you can make decisions on the fly that are most beneficial to your portfolio, rather than waiting to meet with your planner. A successful investment plan need not be complicated, as you can see from this post, The Default Portfolio.
#2 Understand How Your Financial Advisor Is Paid
This helps you understand their conflicts of interest. There are basically four models:
Commissions
The first is a commission-based model. This model essentially consists of “financial salespeople masquerading as financial advisors” and is not a model I recommend you use. The “financial advisor” gets paid when they sell you a product. These commissions can be 3%-8% of the amount invested in a mutual fund (a “load”) or annuity and 50%-110% of the first year of premiums for a life insurance policy.
The obvious conflicts of interest are that the more you buy and sell, the more the advisor makes. Also, it is in the financial advisor's best interest that you pay the highest loads possible, and unfortunately, the worst investments offer the highest commissions. A financial advisor (or more typically, their company) may also get “soft money” in addition to the load to offer particular mutual funds to an investor. This, of course, all comes out of your pocket. This type of advisor also has the incentive to sell you expensive, complicated investments, such as variable annuities, privately traded REITs or Master Limited Partnerships, and cash value life insurance.
Assets Under Management Fee
The second is an assets under management (AUM) model. The financial advisor gets paid 0.25%-2% of your portfolio a year. These advisors tend not to take you on as a client until you reach a certain level of assets, usually from $100K-$1 Million.
This does you little good when you really need the advice, such as educating you in the beginning, developing a financial plan, acquiring appropriate insurance, and selecting your first few investments. Conflicts of interest are fewer than in the commission-based model, but still present.
At least the advisor is interested in seeing your portfolio grow, because as it gets bigger so does their take. The advisor, however, is more likely to recommend against anything that would decrease the size of the portfolio, such as appropriate levels of retirement spending or even alternative “investments” such as paying down your mortgage.
The other issue with this method of compensation is that it really doesn't take any more work to manage $1 Million than $100,000, so as your portfolio size goes up, your advisor should offer a break. Perhaps 1% on the first $500,000, 0.5% on the next $500,000 and 0.25% after that. However, I run into investors all the time who are paying 1% on several million dollars in assets. There is little point in paying someone $50K a year to do what you could get for $10K.
Hourly Fee
The third is an hourly-based model. The financial advisor is paid for their time, like an attorney. This is a difficult business model for an advisor because of the lack of a steadily growing stream of income and because investors don't like seeing just how much advice costs (the above models are much better at hiding it from you), and so it can often be more difficult to find an hourly fee-only advisor. This model is becoming more common, however.
Conflicts of interest include working slowly, withholding information so more visits are required, and making things overly complicated so they require more time. In addition, it introduces the factor that since each time you get advice it costs you money, you are less likely to ask questions that could save you money in the long run.
Annual Retainer or Flat Fee
The fourth model is a flat-fee model. You pay one flat fee each year for all the advice and services you need. This is a particularly uncommon model, at least used alone without being combined with one of the other models. The conflicts of interest include the advisor trying to avoid spending time on you and your account, since they get paid the same no matter how much work they do for you. This could cause them to use an overly simplistic portfolio, neglect tax-saving strategies, fail to educate you appropriately, etc.
Advisors like to use the terms fee-based and fee-only to confuse the picture. Fee-only means there are no commissions. The advisor makes money only from you, whether you pay hourly, annually, or as a percentage of AUM. Fee-based means that you pay a fee and then in addition, the advisor makes money off commissions, too. Just because an advisor collects a flat fee each year doesn't mean they are not making commissions off the recommended investments.
#3 Understand How Much the Advice Is Really Costing You
For instance, if your investment fees total 2% of your portfolio a year, that's the equivalent of your investments earning 2% less a year than they otherwise would. Thanks to the miracle of compound interest, that adds up to a lot of money over your lifetime.
Consider two investors who invest $20,000 a year over a period of 30 years. Both have investment portfolios that earn 6% after inflation a year. One pays 2% to an advisor. After 30 years, the first investor has $1.58 Million. The second investor has only $1.12 Million, 29% less. Over the years, that advice cost the second investor $460,000, or over $15,000 a year! That's almost as much as he was investing!
What? I can become a financial advisor in a week?
#4 Understand That Designations Can Mean Very Little
When it comes to credentials for a financial advisor, there are dozens and dozens of credentials, and the minimum requirements are almost nothing to get some of these letters behind your name.
Medicine can be a little confusing with designations such as MD, DO, DC, ND, PAC, RNP, etc., but that is nothing compared to financial advising. Most physicians wouldn't go searching for a doctor for their family and accept the designation of DC, but for some reason, they are just fine with a financial advisor whose only designation RIA (Registered Investment Advisor). Never mind that the chiropractor spent years learning his craft and the RIA may have spent less than a week.
So which of the hundreds of designations mean something? CFP (Certified Financial Planner), CFA (Certified Financial Analyst), ChFC (Chartered Financial Consultant, an insurance designation similar to CFP), and CPA/PFS. Each of these requires 200+ hours of studying, some experience (although it can be in sales), and usually (but not always) an exam or three to pass.
If an advisor doesn't care enough about their career to earn at least one of these designations, I worry at least a little about their commitment to the profession. Note that although one of these designations should be considered minimum adequate training, they are not sufficient to ensure quality advice.
#5 Realize That 95% of Advisors Out There Are Not Very Good, and Many Are Likely to Be Harmful to Your Financial Health
Unlike in medicine, where a basic level of competency is generally present and most doctors are very qualified, many financial advisors are crappy. If you haven't yet read my post on What Advisors Think About Doctors, you may find it eye-opening. You should also realize that many advisors, even those who carry the weighty certifications discussed above, may demonstrate an appalling lack of knowledge of what actually works in investing. If you're planning to get help, I highly recommend including a WCI recommended advisor in your search. Each is vetted initially by WCI and then continually assessed based on feedback from white coat investors. If we get concerning negative feedback, we take them off the list.
#6 Most Financial Advisors Cannot Take Care of All Your Financial Needs
There are very few financial advisors who can help you with financial planning, insurance, investments, taxes, and estate planning. Even if they do consider themselves qualified to help you in all these areas, they may be a jack-of-all-trades and a master of none. You actually might be better off having five different financial advisors:
- An hourly fee-only advisor to help you develop an overall financial plan
- An insurance specialist to help you get adequate life, disability, liability, and property insurance
- An investment manager to manage your investments
- A certified public accountant to help with your taxes and
- An estate-planning attorney to help with wills, trust, estate plans, asset protection, etc.
When you realize an advisor may only be helping you with one of these needs, you'll see just how high fees can get!
#7 Have a Realistic View of What an Advisor Actually Does
An advisor's role is not to help you beat the market or to predict the future. They cannot do this, anyway, although they may believe they can, and might even try to convince you they can. (You should avoid an advisor who claims they can through security selection or market timing.) An investment advisor's role is to help you set up an adequate investment plan, maintain the investment plan, to know when significant tweaks should be made to the plan (Hint: they should be made rarely and with a great deal of thought. Changes should generally be in reaction to differences in your life circumstances, not changes in financial markets), and mostly, to help you avoid shooting yourself in the foot.
Managing YOUR non-productive financial behavior is the biggest benefit of a financial advisor. Unfortunately, those who don't believe this don't hire advisors, and many of those who do, don't need advisors. Although 1% a year is pretty expensive for investment advice, if they can keep you from selling out at the bottom of a bear market like 2008, they'll have earned their fees. The best planners do this not just by hand-holding during crises, but by designing an appropriate plan in the first place and continually educating clients about them.
#8 It's Nice If an Advisor Has Access to DFA Funds
DFA funds are passively managed funds similar to index funds with a great long-term track record and a sound theoretical basis. They are generally not available to individual investors without an advisor. They cost a little more than typical index funds but are probably worth it. It is not clear that they are worth the additional cost of an advisor JUST TO GET THE FUNDS, but, if you are hiring an advisor anyway, you might as well get “DFA Access” at the same time.
Likewise, you don't want an advisor that is wedded to a particular company. If an advisor works for Edward Jones, guess whose investments they will recommend? Anyone managing your investments should be able to invest them with any firm, not just their own. Watch out for conflicts of interest; some advisors get paid more by their company to get you into their own funds.
#9 Interview Multiple Advisors, and Realize This Is a Business Relationship, Not Personal
Don't hire your father's advisor or your brother-in-law. It'll be much harder to fire them later. You should also check with regulatory authorities to see what kind of complaints have been filed against your advisor and his firm. You can check this out on the FINRA site, or the SEC. You might also check with state authorities and the Better Business Bureau. Just think about what you would do if an advisor screwed you. Who would you complain to? Check with them. Ask for references also.
#10 Realize That Just Because You Are a Do-It-Yourselfer, Doesn't Mean You Need to Be a Rabid DIY-er
You can always get financial advice a la carte. You can manage your own investments, but still pay a CFP to help you develop an overall financial plan and pay a CPA to do your taxes for you. You can also get a second opinion about your financial plan. You have to hire an insurance agent to buy an insurance policy, but you would be well-advised to know what you want before you walk into their office, lest you walk out with an expensive cash-value insurance/investment hybrid plan like whole life insurance.
If you set up a simple plan, you might only need financial advice every year or two. Paying 1% of your portfolio a year is an awful lot when you only need an hour of advice every 5 years.
#11 Hiring an Advisor Doesn't Absolve You from All Responsibility to Know About Financial Subjects
This is still your second job, whether you like it or not, even if you hire someone to help you with it. You'll still need to read at least a handful of books on the subject and keep up with new developments over the years. A good advisor will provide you with some education, but you still have to know how to speak their language.
#12 Being a Specialist in Advising Physicians Doesn't Mean Much
Lots of advisors “specialize” in physicians because they think, like most of America, that M.D. means mucho dinero. While there are a few unique things about the financial life of physicians (late start, lots of student loans, highly specialized, rapid increase in income upon residency completion, some asset protection issues, some retirement account issues, etc.), most financial needs are the same for them as for anyone else.
What has been the most effective way you've acquired financial advice? Comment below!
Hello. I wanted to ask a little something…is the following a wordpress site as we are thinking about transferring over to WP. Furthermore did you make this template yourself? Thanks a lot.
Yes this is WordPress. This is the weaver theme.
Sorry to ask another question, but your blog is a wealth of info. I am a college student who wants to invest in some index funds through a financial advisor (in this case Edward Jones). My question is, when I am older and more financially able to do so, can I take over the management of my holdings? That is, will I always have to go through Edward Jones to access these investments?
#1) Yes, you can take over the management of your holdings at any time without using Edward Jones.
#2) The reason index funds work so well is they are very low cost. If you buy them through Edward Jones, they will not be very low cost. You will be placed into expensive index funds and you will also pay loads.
#3) Edward Jones would be very low on my list of advisors. Their associates receive far more training in sales than in investing. In fact the firm is well known for sending its associates out knocking doors to find more clients. I would encourage you to give it a go yourself with a very simple portfolio rather than buying mutual funds through a high expense shop such as Edward Jones.
I just met with the associate at Edward Jones today, and you are right on the money (no pun intended) about them. I am just going to buy a Vanguard Index Fund on my own. Would you recommend using my bank BofA (and therefore Merrill Lynch) or go directly through the Vanguard website to purchase? Do you use a central website to buy your holdings or go to multiple websites for everything?
thanks again, this is great.
I go directly through the Vanguard website. Some people who like to buy funds from different companies open a brokerage account and then buy ETFs and funds through that. Wells Fargo and Fidelity are often mentioned as being good places for that. Since most of my non-401K investments are at Vanguard, I just go directly there.
In regard to the fee-only financial planner, I would make these observations. There may be *potential* conflicts of interest, but with an ethical adviser this is no problem; in fact, he is bound by law to make decisions and give advice which is the BEST for the client – a fiduciary responsibility.
And it is more complex to manage a several-million dollar portfolio than a small one: more rebalancing, bond maturities, tax considerations. Finding tax-free municipal bonds takes time.
Finally, my adviser takes clients of any size net worth; he especially focuses on physicians. The fee system is tiered so the net in my case is 0.3%/year plus four small fixed retainer payments. I’m more than satisfied.
Sounds like you’re paying a fair price and I’m glad you’re happy. I agree that an ethical and competent advisor should be able to work with most modes of payment despite the conflicts of interest, but I want to make it as easy as possible for him to do the right thing.
I’m also not convinced there are huge benefits to managing a portfolio of individual muni bonds (rather than just buying a combination of muni bond funds at Vanguard). Kon Litovsky disagrees with me, and we’ll probably get around to doing a Pro/Con post on it at some point. There certainly isn’t more rebalancing with a larger portfolio, and portfolio size per se doesn’t necessarily dictate tax considerations. If you start early and max out retirement accounts (and are lucky enough to have profit-sharing plans/defined benefit plans) it shouldn’t be difficult to arrive at a mid 7 figure portfolio that is mostly or even completely tax protected. But I agree that the larger the portfolio, the more likely there is a sizable taxable portfolio involved.
Do you think a financial planner with an MBA also need to have one of the designations you mentioned (CFA, CPA, etc) to be considered qualified enough for the job?
Many thanks.
There are bad advisors with these designations and good advisors without them. An MBA is nice, but really has little to do with being a good advisor. It’s such a low bar to get one of the major designations I think it’s lame not to get one.
WCI, Great website. Apologies if you mentioned this elsewhere; however, while having designations/accreditations (CFA, CFP, etc) is important, I think it is important to note that in order to obtain some of these a certain level of experience is mandatory/required. For example, I was an engineer and recently decided I would rather be a financial advisor. In my situation, I cannot even apply to take the CFP exam until I have had 3 years of experience! I absolutely plan to pursue this, but to my knowledge, there is no other way around it. I know it’s not a direct comparison, but an ER resident (who has his MD or DO) doesn’t know how to obtain spinal fluid until he/she sticks that MASSIVE needle into someone’s back for the first time. Ultimately I agree w/ your viewpoint…
Also, whoever passed the Series 7 and 66 with only ONE week of studying (#4 above), my hats off to them! wow. 😉
Thanks again.
Well, you’re kind of making my point for me. If you get someone with a CFA/CFP, at least you’re guaranteed they have at least 3 years of experience. I don’t really want a doc with 1 year of experience, nor do I want a financial advisor with 1 year of experience.
Nice. 🙂 If every human being took your advice and stayed away from advisors without a “designation”, there would be no possible way for anyone to gain experience and become an advisor. Similarly with a Residency program, if every patient requested not to be seen by a resident/fellow, because “they don’t have enough experience”, how would a resident learn to perform procedures? I really am not disagreeing with your viewpoint as I fall in the same boat as you. I want the expertise/experience and would pay for it. However, like you said a few comments up, there are bad advisors with designations and good advisors without. Should people take financial advice from you? If they did take the advice on this page, they should ignore everything else on your website simply because you don’t have the credentials/designations? (I hope you realize that was a joke)……….. kinda 😉
Since I started in this profession, it is my criticism of the financial industry as a whole. There is no standardization of the term Advisor. Even between someone who has completed their RIA and someone who simply sells insurance…. they are “both” Financial Advisors…. :/
Terrible Catch-22 isn’t it? It’s like they tell you what to say when a patient asks how many times you’ve done a procedure before- “You wouldn’t believe how many times I’ve done it.” I had one patient call me out on it about a year out of residency. It was a procedure I never did in residency and had just looked it up in my specialty’s big procedure book. It was a minor procedure, and very similar to others I had done many times, but it was truly the first time I’d done it. The patient asked if I had just gone and looked it up in a book. I told him yes, then did the procedure (perfectly, I might add.)
Regarding financial advisors, you’ll be comforted to know that I’ve never found an advisor that met all of the criteria I tell people to look for as discussed here:
https://www.whitecoatinvestor.com/the-perfect-financial-advisor/
So while I recommend a CFA or a CFP, and while I recommend some gray hair, you might not be able to get both of those and everything else I tell them to look for.
Today, I met with a Larsen Group financial advisor who mentioned he is sure you sit on their board. Do you mind commenting on what you think of the group? Thanks for your time.
https://www.whitecoatinvestor.com/larson-financial-review-friday-qa-series/
Read the comments for more opinions.
Interesting to see how often the fact that I sit on that advisory board gets mentioned to prospective clients.
Very helpful. Thank you!! I mentioned your book during the conversation and that’s when he told me.
READ THIS ARTICLE WITH CAUTION! I usually don’t comment but there are just too many fallacies in this article. If you pay 2% a year you need to give me a call, I’ve got ocean front property in Kansas you will love. You obviously aren’t in the industry with how you spoke about designations,commissions,and how advisors are paid. Finally bringing a Forbes 500 heavily awarded company into the conversation, showing how little you know about how each company works. <— If you were in the industry you would know!! I know how all of my competitors operate.
Why don’t you point out the fallacies rather than merely alluding to them. Your post contains no actionable content. I presume you’re an Edward Jones financial “advisor,” meaning a financial salesman. The whole point of this post is to keep you from having any new clients and get your old clients to move away from you, so I’m not surprised it makes you upset to read it.
My time and advice is too valuable to correct your click-bait blog. I just want to warn readers. Good “advisors” with any firm don’t have time to write blog post to sell ads for student loan refinancing. Do your research on your advisor like you would your doctor. Brokercheck.com is a great tool to find out their educational and experience background. You have a great purpose buddy, don’t muddy the waters and with bad research.
Clearly your time is extremely valuable. Thus the reason why you’re spending your evenings posting meaningless insults on a website. Feel free to keep warning readers against things like actually learning how little expertise is required to call yourself a financial advisor.
I’m glad that you remind people that, just because they’ve hired a financial advisor, that doesn’t mean they’ll never have to mess with their money again. After all, it is still their business and ultimately their decision on where the money ends up. The advisor is there to help you understand your options and not to choose those options for you.
Yes, too often it is viewed at dichotomous- you’re either DIY or you use an advisor. But there are many different ways to use an advisor ranging from occasional check-ups with an hourly rate advisor to hiring a “full-service” firm. You can also use an advisor for a few years before going out on your own or vice versa. But no matter how you use an advisor, the more engaged you are the better you’re going to do.
My wife was telling me that we might want to hire a financial advisor to help us out, and I was curious about how you would find one. It’s interesting that you say to see if they have an hourly fee. It would be nice to be able to plan how long you want to meet with them and how much you will have to pay in that time.
Your website has the words “financial planning” in it and your wife wants you to hire a financial advisor? Something seems a little odd about your comment. You know comments on WordPress sites are “no follow,” right?
My husband and I have been coming up short on our mortgage payment for the past three months and we don’t know why. It was convenient to know that you can always get financial advice a la carte. We will be sure to get the services we need in order to keep up with our mortgage payment!
Stop spamming my website. I’ve contacted the firm you’ve linked to and told them about your lousy excuse for SEO marketing. I hope they fire you. Don’t sock puppet here.
My husband and I are looking to invest our money in some different ways and start to really plan our financial future. We want to make sure we have someone that is qualified to help us with this. Like you said, it’s a good idea to find an advisor that has access to DFA funds and aren’t trying to get you into their own funds. Thanks for sharing!
Is this the new thing? Is there someone out there that thinks SEO works like this? It doesn’t. Quit sock-puppeting on my website.
(For those who wonder why I’m being so rude, this is the third time this week someone has pretended to not be a financial advisor while linking to their financial advisor website.)
I agree with you in that it is important to check with the BBB when trying to find the best financial advisor for your needs. It is important to remember that taking the time to do some research can help you find the best help you can get and who can help your finances stay in order and improve. A friend of mine was talking about how he needed to talk to a financial planner, so I’ll share your page with him for some help.
It really is important to take the article’s advice and make sure that you interview multiple financial advisors first. You will ideally need to sit down with them and discuss their experience and skills when it comes to financial planning. You will also want to make sure that they have experience with business that are specifically similar to your own.
I truly enjoy your site WCI. Super-informative. I’m not a doctor, but your website has been one of the strong reasons why I love finance and have taken charge of my financial life.
Congrats on your success.
I’m a successful financial advisor and this is all really really good advice.
I’m a fairly successful Edward Jones financial advisor and I don’t really have a problem with anything WCI has written here. I would say the business has really changed the last few years. When I started with Edward Jones it was all about sales. Doorknocking and cold-calling on stocks, bonds, and mutual funds and building up a clientelle of people you could sell commission based investments to. The criticisms of conflicts of interest with that business model are valid. That isn’t to say advisors don’t add any value. Some of them don’t. But some of them do. Like you mentioned, if I persuaded people from pulling money out of the market it February of 2009 I more than earned all the commissions I would make on that for all time.
But the point I wanted to make here is the Edward Jones business model is changing. Their value proposition now aligns much better with what a financial advisor should be doing. When I meet with prospective clients I tell them “My job is to understand what is important to you. I use an established process to create a personalized strategy to help you reach your goals. Then you and I partner together throughout your life to help keep you on track.” And this is all true. That’s fundamentally what we’re selling right now. I don’t spend very much time talking about investments. Normally I call people and discuss their overall plan, how they are progressing toward their goals, etc. And it’s also true people have to pay about 1.5% of however much money they have with me for me to do that. Arguing about whether that’s too expensive is kind of moot. I think if you’re up front about it and remind people of what they are paying on an ongoing basis and why its ok. Its true there are conflicts of interest (I am incentivized to have them consolidate everything with me) but I think those are manageable and the business model is legitimate.
Sorry to keep replying to my own posts. I wanted to add one more thing: I think the industry is generally changing in this direction also, it isn’t just Edward Jones. The business is moving away from investment sales and commissions and toward overall financial planning and AUM fees. Selling people investments and money management they can buy for free isn’t really a viable business model. There is a market for helping people make and execute financial plans. As an advisor that is what you have to sell people on now. Selling performance is obsolete. Or just dishonest.
Glad to hear Edward Jones may be changing its terrible business model, but it’s a “trust but verify” situation in my view. Edward Jones, like NML, is a company I wouldn’t send anyone I liked to and I recommend any “good advisor” working for them leave so they aren’t tainted by the EJ reputation. That reputation is going to persist for a long time, even if they actually change.
I don’t think Edward Jones has a bad reputation. Their reputation has certainly not discouraged people from doing business with me. At least as far as I can tell. If anything I think it has helped over the years. Edward Jones has a nationally recognized brand and that lends a lot of legitimacy to their financial advisors.
Plus I think most Edward Jones clients actually have a fairly positive experience with their advisors. Their whole business model is geared toward keeping clients happy so they keep paying for their services. And they are really good at that.
I’ve thought about leaving but it is really hard to walk away from a situation where I’m happy and my clients are happy and I’m making good money.
You work for EJ so I’m not sure you’re an unbiased observer. Try this, go to Bogleheads.org, search Edward Jones, and find a positive comment about them. You might spend all day looking and still be unsuccessful.
So what’s the AUM fee you’re charging now that you’re trying not to be a commissioned salesman?
I doubt any of my clients are on bogleheads.org. Nor are the people they are referring to me on a monthly basis.
1.35%. I usually discount it to 1.2% to make it easier to quote. $234k costs $234/mo for example.
I actually get paid quite a bit more now that we’ve transitioned to AUM fees. For all the conflicts of interest inherent in the commission based busineas my business only yielded about 0.5% per year in revenue of my total Assets Under Care when I was primarily commission based. Edward Jones has always been buy-and-hold oriented and pretty strict making sure clients hit breakpoints whenever possible. Now I’m at about 1% per year of my AUC in revenue on the fee-based accounts.
Im still a salesman but instead of selling investment products im selling the services, the planning. And that by its nature is an ongoing process. People pay as they go so I have to keep providing value to keep their business. There is no way to hide the fees. They are there in bold on the front page of client statements. And I think it’s better that way. The business has evolved and is continuing to evolve. The old way is obsolete now. Edward Jones has adapted well. They have made drastic changes in the last 5-10 years.
You can’t even place a trade in a retirement account anymore without having a completed and up to date financial analysis on file.
Mod ate my last comment. My business revenue went from 0.5%/year to 1%/year when I went from commissions to fees. I was already doing a lot of planning but that has really become the focus the past few years. I think Edward Jones and the industry is moving away from asset management and toward planning and goals.
Not sure why it held that comment, but I approved it.
I know this isn’t fun to hear, but the fact that EJ lets you charge 1.35% tells me that EJ is still a terrible place to get financial advice. Given the plethora of advisors willing to work for much less than that, I think you charge too much. Maybe not if all your clients have sub $500K accounts, but for those who frequent this site with higher incomes and net worths, 1.35% is a rip off. There’s no way I’d ever take your money to advertise here.
That’s okay. You won’t hurt my feelings. It’s just a job. The fees are a little lower with bigger dollar amounts. I have a couple $4-5M clients and they pay ~$3-4k/mo, so maybe. 0.75%. An ideal EJ client has $500k to $1M. Obviously more is always better but that’s kind of their niche.
I found it interesting because when I went from commissions to fee-based I basically doubled my fees and I lost basically zero clients because of it. If someone is working for substantially less than what I’m charging they could probably raise their prices substantially without losing any clients. Especially if they are a good advisor and have loyal clients.
But whatever. If someone wants to work for less, I don’t care. It doesn’t effect me. My business is vulnerable to supply and demand like any other and I don’t know exactly where the ideal price for my services is which is why I rely on Edward Jones guidance as to where I should set my fees.
I think there’s a balance with fees just like with anything. If you set the fees too high people don’t do business with you. If you set them too low too many people or the wrong kind of people do business with you. There’s a balance with how much I work and what I get paid.
It’s kind of silly to say “you’re fees are too high”. I could just as easily say to guys that are charging less “your fees are too low”.
My business model is working great. The price point at 1.2% seems to be working well for the services I offer. If someone else is setting their prices lower and it’s working well for them that’s OK too.
Also I don’t advertise. Word of mouth only. I don’t like people who haven’t been vouched for.
In case you didn’t believe me about the EJ reputation: https://twitter.com/WCInvestor/status/1369059651820662790
That poll doesn’t look good but I don’t know who makes up the sample n~400. If you polled Edward Jones clients (and the home office does this constantly) most of the people would report favorably. They have a niche business model that works really well and the price points they set are a big part of that.
I think at the root of the issue is in financial services competing on the basis of price is a double edged sword. If you undercut the competition to get clients you often get clients whose major loyalty driver is low fees, and they are only loyal until the next company comes along with even lower fees.
I’ve been there. When I was first starting out I was incredibly inexpensive to do business with. Between transferring assets in-kind, doing in-kind exchanges between funds, and using a buy-and-hold strategy on stocks and index funds I could keep my fees really low. Near zero. But that didn’t help anything. Only a few clients really cared and did business with me because of it and they were mostly the wrong kind of people anyway, basically cheapskates. On the other hand there were a lot of people who wanted a face-to-face relationship with someone who could give them confidence navigating financial stuff and they didn’t really care what it cost.
So that’s the nature of the Edward Jones business model. To focus on those kind of people. And there is a lot of competition for those types of relationships. I think Edward Jones sets their fees on the middle-high side of that. They don’t want to be the cheapest. But they aren’t the most expensive either. They set their fees to be competitive in their niche. If you aren’t in their niche it probably looks like a ripoff. But millions of their clients don’t feel like it’s a ripoff. Most clients feel like they get a good value. Edward Jones is growing. They are everywhere and they are expanding all the time.
The poll shows the general reputation of EJ. I would argue EJ clients are mostly ignorant of the general reputation of EJ or they wouldn’t be there.
This is silly. Who took the poll? If the poll is WCI readers then it isn’t representative. The only thing you can infer from that is Edward Jones has a bad reputation among WCI readers, which isn’t suprising at all. Of course a moderately expensive full-service brokerage firm isn’t going to have a good reputation among low-fee oriented, DIY investors. It’d be like if I surveyed my 65 year old widows about the Robinhood App their 25 year old grandsons tried to set them up with, then said “see what a bad reputatoin the Robinhood App has” based on that.
Yes, most Edward Jones clients are ignorant of the reputation Edward Jones has among WCI readers, but this is hardly “general”. I think the general reputation among people who do business or have done business with Edward Jones is good, or they wouldn’t be growing as much as they are.
Reminds me of the famous Upton Sinclair quote: It is difficult to get a man to understand something when his salary depends on his not understanding it.
I understand exactly what’s going. The difficult thing is what you are trying to do, which is to convince a business man to cut his prices when his services are in high demand and his business is growing rapidly.
I don’t care if you cut your prices or not. What I’m trying to do is keep anyone from going to see you for advice. You’re not the target audience for this blog, you’re the subject matter.
Ok that’s fine. I don’t care if you dissuade people from doing business with me, or Edward Jones, or financial advisors generally. I really don’t care. But what you are saying is false.
Edward Jones does not have a bad general reputation. And I don’t say that because I have any particular loyalty to them. I really don’t. If their reputation was detrimental to my business I would leave them without a second thought. I get headhunters calling me all the time offering large sums of money to change firms. I stay precisely because Edward Jones has a good reputation and it makes my job and life easier.
Upton Sinclair was right. It is difficult to get a man to understand something when his salary depends on his not understanding it.
I think the bottom line is that with proper education, the general consensus of this population of investors is going to be that you and most of your colleagues whether at EJ or not are grossly overcharging. It’s your prerogative to charge what you want if people will pay for it. But that does not make it good or fair. And of course it is going to be tough to see that through the perspective of the one who is providing the service.
Wishing you the best of luck
PPS
Recent Financial Literacy Reports still says Americans lack financial knowledge and SO MANY are paying such outrageous fees without really understanding it. Nor do they know if their returns are better or worse than market averages. As Ric Ferri said, the AUM model is Obsolete as it should be
I am pondering doing my own investing now. Have been with a fixed fee advisor with DFA funds. The fee is quite fair (0.14% currently based on my portfolio size). My gripes are:
1) 12 different DFA funds
2) No tax loss harvesting
3) A bit bond heavy percentage wise
4) Having to go through the advisor to make trades/advocating for what I want instead of what they recommend
I definitely have the interest and drive to do it myself now. I started out with them as a young attending due to lack of knowledge & desire at the time.
Thoughts appreciated.
You sound like you’d be happier as a DIY investor, no? But you can’t say you’re being given “bad advice” nor that you’ve been overcharged. It’s fine to use an advisor for a while and then move on.
Yes, it would be fair to say I feel ready to be DIY at this point. I have gotten a fair deal from my advisor and the advice has been overall sound. Its mainly the lack of future access to DFA funds that keeps me from switching over at this point.
WCI…you haven’t commented much on DFA lately that I have seen so I was more inclined to go DIY but your nod to DFA makes me second guess it again. LOL.
I like DFA and own the DFA SV fund in my kid’s 529s. When small value does well, the DFA fund tends to do better than the Vanguard fund because it is smaller and more valuey. It’s one year return today is 104%+. That’ll be even higher a week from now!
I wouldn’t get (or keep) an advisor JUST for DFA access, but it’s a nice bonus if you’re into factor investing. More on DFA here:
https://www.whitecoatinvestor.com/dfa-vs-vanguard/
Fun article, especially the comments. The Edward Jones guy held his own. 😉
Still will probably never hire a financial advisor, mostly because I enjoy doing it myself.
What? You’re not going down to the local EJ office to get an advisor? I thought he held his own justifying his 1.35% fee.
Just wanted to add that DFA has started introducing ETFs. Avantis also has more ETF offerings as well.
What do you guys think of Citi Personal Wealth Managment?
They have Managed Portfolios, Structured Notes, and Options Accounts managed by a Wealth ADvisor
Well, I don’t think much of Citi, managed portfolios, structured notes, options accounts, or “wealth advisors” masquerading as financial advisors while selling managed portfolios, structured notes, and options.
Interesting story about Citi (formerly called National) in Bernstein’s new book. Their actions certainly contributed to The Great Depression.