Many students, residents, and physicians wonder about the process of choosing a financial adviser. 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 properly, you may not need one at all. These 12 guidelines should help you make your decision.
1) Consider whether you need an adviser 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. First, you avoid paying the fees associated with paying someone else. In investing, unlikely most of life, you get (to keep) what you don’t pay for. Second, there are fewer surprises because you are intimately involved with the process. You’re not going to “Bernie Madoff” your own account. Lastly, 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 my previous post, The Default Portfolio.
2) You need to understand how your adviser is paid.
This helps you understand his conflicts of interest. There are basically four models:
Commissions
The first is a commission based model. The adviser gets paid when he sells you a product. These commissions can range from 3%-8% of the amount invested in a mutual fund (a “load”) to 50% or more of the first year of premiums for a life or disability insurance policy. The obvious conflicts of interest are that the more you buy and sell, the more the adviser makes. Also, it is in the adviser’s best interest that you pay the highest loads possible. An adviser (or more typically, his 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 adviser 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 adviser gets paid 0.25%-2% of your portfolio a year. These advisers 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 adviser is interested in seeing your portfolio grow, because as it gets bigger so does his take. The adviser, 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 adviser should offer a break. Perhaps 1% on the first $500,000, 0.5% on the next $500,000 and 0.25% after that.
Hourly Fee
The third is an hourly-based model. The adviser is paid for his time, like an attorney. This is a difficult business model for an adviser 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 be difficult to find an hourly fee-only adviser. 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 adviser trying to avoid spending time on you and your account, since he gets paid the same no matter how much work he does for you. This could cause him to use an overly simplistic portfolio, neglect tax-saving strategies, fail to educate you appropriately etc.
Advisers 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 adviser makes money off commissions too. Just because an adviser collects a flat fee each year, doesn’t mean he isn’t making commissions off the recommended investments.
3) You need to 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 adviser. 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!
4) You need to understand that designations can mean very little.
When it comes to credentials for a financial adviser, 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 adviser who has the designation RIA (registered investment adviser.) 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 CLU (Chartered Life Underwriter, an insurance designation). Each of these requires at least a year of coursework and many hours of examinations. If an adviser doesn’t care enough about his career to earn at least one of these designations, you need to look elsewhere. 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 advisers 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, most financial advisers are crappy. If you haven’t yet read my post on What Advisers Think About Doctors, you may find it eye-opening. You should also realize that most advisers, even those who carry the weighty certifications discussed above, may demonstrate an appalling lack of knowledge of what actually works in investing.
6) You should know that most financial advisers cannot take care of all your financial needs.
There are very few financial advisers 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 5 different financial advisers:
- An hourly fee-only adviser 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 adviser may only be helping you with one of these needs, you’ll see just how high fees can get!
7) You need to have a realistic view of what an adviser actually does.
An adviser’s role is not to help you beat the market or to predict the future. He cannot do this anyway, although he may believe he can, and might even try to convince you he can. (You should avoid an adviser who claims he can through security selection or market timing.) An investment adviser’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, generally in reaction to changes 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 adviser. Unfortunately, those who don’t believe this don’t hire advisers and those who do don’t need advisers. Although 1% a year is pretty expensive for investment advice, if he can keep you from selling out at the bottom of a bear market like 2008, he’ll have earned his fees. The best planners do this not just by hand-holding during crises, but by designing an appropriate plan in the first place!
8) Your investment adviser should have 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 adviser. 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 adviser JUST TO GET THE FUNDS but if you are hiring an adviser anyway, you might as well get “DFA Access” at the same time. Likewise, you don’t want an adviser that is wedded to a particular company. If an adviser works for Edward Jones, guess whose investments he’s going to recommend? Anyone managing your investments should be able to invest them with any firm, not just his own. Watch out for conflicts of interest, some advisers get paid more by their company to get you into their own funds.
9) You should interview multiple advisers, and realize this is a business relationship, not personal.
Don’t hire your father’s adviser 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 adviser 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 adviser 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 his office, lest you walk out with an expensive cash-value insurance/investment hybrid plan like whole life insurance. Many mutual fund companies such as Vanguard will have a CFP do this for a low fee, or even free if you have enough assets with the company. 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) Remember that hiring an adviser 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 adviser 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 advisers “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 etc), most of their 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.