In the medical world, it is routine to get a second opinion. The more serious the condition, the more likely a patient will seek a second opinion. Most doctors take no offense to this, nor should they. However, in the world of financial advisors, a second opinion is rarer than pediatric cancers and worse, some advisors are personally offended by it. It shouldn't be any big deal to have one of your clients go pay for an hour or two of someone's time to make sure you're not doing anything too crazy with their money. Of course, I understand why it is a big deal since most clients that go for a second opinion never come back because most “advisors” aren't giving good advice. For the client, the second opinion may be retirement saving. If you've never had a second opinion, I highly recommend it and will discuss three ways to get that second opinion on your financial plan. But first, let's discuss four reasons you should consider doing it:
1. You're Probably Getting Bad Advice
It takes precious little training to become a “financial advisor,” and the vast majority of them had most of their training in sales, not financial planning. Most “advisors” are commissioned salesmen and face terrible financial conflicts of interest in answering questions about the best thing to do with your money. The worst products tend to have the highest commissions. Can you imagine if you got paid more to recommend a more expensive, less effective drug with more side effects? That's the problem with a commissioned salesman providing advice. A fee based on a percentage of assets under management is better, but still suffers from the fact that the advisor has a conflict of interest to recommend anything that increases assets under management (IRA rollovers) and against anything that decreases assets under management (pay off student loans, pay off mortgage, invest in real estate, spending more, using a higher withdrawal rate in retirement etc.) While a fiduciary duty (and written agreement) helps, it is key to understand your advisors conflicts of interest.
At any rate, since most “advisors” are giving bad advice, a second opinion is likely to result in you getting a new advisor. So the sooner you do this, the better.
2. You Will Feel Better Afterwards
The good news is that not all advisors give bad advice. If you go get a second opinion, you may discover that you were lucky enough/skilled enough to pick a good one. Great! Now you can forget about the worries that made you seek out that opinion in the first place. Chances are you didn't really know what to look for in an advisor when you hired your current one. Now that you do know, the process of getting another opinion will help you understand what you own, teach you how and what you are paying in fees, and build your level of trust with the advisor. Ideally, you find out your advisor is awesome and your fees are fair, but I still think that a couple of hours of your time and a few hundred dollars were well spent.
3. You Are Likely to Lower Your Fees
If your advisor recommends canyoneering, steer clear!
Most clients pay too much for financial advice, even for a good advisor. Inertia keeps clients from leaving and, when combined with physicians' discomfort with negotiating, keeps clients from lowering their fees. A second opinion may convince you that your advisor's way isn't the only reasonable way to do things and that there are much lower cost ways of accomplishing the same thing.
The best way to negotiate is always from a position of power. If you have already met with another advisor who you like and who charges less than your current advisor, you are now in a position of power from which to negotiate your fees. Either your current advisor lowers the fees, or you're leaving!
Most advisors charge what the market will bear (can you blame them?) but since the market (you) will now bear less, you're likely to be charged less. Don't worry, they won't lower your fees so far that they'll go out of business. If you're getting them down to the point where they're indifferent as to whether you stay or not, you know you've arrived at “the going rate.” Bear in mind that a more established, wealthier advisor may have a higher “going rate” than a hungrier one. That's okay, a hungrier one is more likely to spend more time on you and your portfolio anyway.
4. You Will Probably Improve Your Financial Plan and Position
The advisor doing the second opinion is going to do their darnedst to impress you. They're going to be pulling out all their best ideas. Even if you don't hire him, chances are good you will learn something new that can be implemented by you and your old advisor. That's part of the reason why I wouldn't mind paying a fee for the opinion- it is likely very valuable.
3 Ways to Get a Second Opinion on Your Financial Plan
There are several ways to get another opinion, and all have their pluses and minuses.
1. Go See a Fee-Only Advisor
The most obvious method is to go see another advisor. Since there are too many financial advisors, most end up spending a big chunk of their time marketing, “prospecting”, and trying to build their business. They're more than happy to spend a little of that marketing time with an interested client who is pounding on their door. That's a super-high yield way to build their practice. In fact, most advisors don't even charge for an initial consultation, so you're getting that second opinion for free (not that I wouldn't pay for a good second opinion- totally worth it.) l think every real financial advisor in the country who hasn't yet closed their practice ought to be widely promoting their second opinion service. While they might meet a lot of “tire kickers,” it'll help them realize just how rare advisors like them are, and it's still pretty cheap marketing.
2. Post on a Forum
Another great method of getting a second opinion is posting your financial plan and portfolio on an internet forum such as the WCI forum or the Bogleheads forum. Writing it out will help you understand your plan better. You can do it from the comfort of your own easy chair on your own time. It's totally free. The yeahoos on the internet have little incentive to sell you anything. Most importantly, an experienced do-it-yourselfer can rapidly point out a terrible plan. There is no perfect plan or perfect financial advisor, but you're looking to make sure yours is reasonable. You also might get a half dozen second opinions very rapidly and easily, instead of just one.
There are some downsides to using a forum for a second opinion. No one has any incentive to help you, so you might not get all the help you hoped to get. Do-it-yourselfers also generally have an inherent bias against any financial advisors. They have concluded that, at least for them, the price outweighs the value and that attitude is likely to shine through in their recommendations. Some do-it-yourselfers can't understand why anybody hires an advisor at all. And of course, there is also the fact that the loudest voices on the internet aren't necessarily the wisest; the barrier to entry is even lower than that of getting into the financial field!
3. Do It Yourself
Here's another option. Go back and start over. Knowing what you know now, start your search for an advisor over again. Would you still hire the same guy or gal? Write down the services you want the advisor to provide, what philosophy you want them to have, and how much you'd like to pay. Then go looking for someone who meets that description. Ask probing questions. Review your advisor's ADV2. Do some self-education about personal finance and investing. Still happy with your advisor? Great! Ready to negotiate your fees lower? Great! Now ready to do it yourself? Fine! There are no bad outcomes to spending the time doing this.
Second opinions are a great way to improve your financial plan and situation. As investors become more financially literate and fee-sensitive, many will become do-it-yourself investors. Those who don't choose to DIY are likely to pay less for better advice, build a better relationship with their advisor, and have more financial success. If you have an advisor and have never gotten a second opinion, get off your duff and go do it.
What do you think? Have you ever gone to get a second opinion about your financial plan or advisor? Why or why not? What was the result? Did you stick with the old one, hire the new one, or become a do-it-yourselfer? Comment below!
I wholeheartedly endorse getting a second opinion, especially for those starting out. Education is the best defense against being taken advantage of. The advisors don’t have to be criminal, or even bad people. They just sometimes represent plans that are not good for your financial well being.
Here is my cautionary tale. As a young naval officer I managed to save $10K in cash (that was six months living expenses for me, I was unmarried at the time). I also was going to sea a lot and was looking for a financial advisor to start an investment plan. I unfortunately found USPA/IRA, which put me into a heavily front loaded mutual fund. They had a good sales pitch, delivered by a former military officer. Who could I trust more, I thought. What can I say, I was young and ignorant. I eventually figured out the deal was bad and started a self-education campaign that continues today. But I sure wish I had a second opinion before I signed up for that plan!
A 50% front end load on your first year’s contributions is a pretty big bite. USPA &
IRA (now First Command) claimed that this near-criminal 50% load was necessary to keep people committed to investing for the duration of their ten year or longer contractual plan. If the intent really were to penalize quitting the contractual plan, then the salessweasels could take their commission from the last six months of contributions to the plan instead of taking half of your first year’s contributions. Turns out time value of money matters after all.
Say what you will about Hillary Clinton, but she deserves a fair bit of credit for leading the charge against these contractual investment schemes targeting military members.
First Command isn’t the only one with unclean hands. Fidelity had a similar plan marketed toward naive and trusting junior officers and NCOs.
That’s the first time I’ve heard that. Tell me what Sen. Clinton did in that regard.
From the research I did over the weekend, it looks like she has some sound-bites back around 2004, but Michael Enzi, (R) Wyoming actually introduced the legislation. See https://www.gpo.gov/fdsys/pkg/BILLS-109s418enr/pdf/BILLS-109s418enr.pdf
https://www.govtrack.us/congress/bills/109/s418
First Command was pretty bad. The SEC and FINRA both smacked them down. http://www.finra.org/investors/alerts/systematic-investment-plans
https://www.sec.gov/news/press/2004-170.htm
One of the best things I ever did financially was go to one of those USPA/IRA dinners as a single second lieutenant, and subsequently sign up for the front loaded fund. That got me committed to putting the max in my IRA, and getting interested in investing generally. I’ve paid myself first ever since.
Not long after signing up though, I asked my advisor if there wasn’t a better yielding savings account than the one they had proposed, and he brushed off my inquiry by handing me a Fidelity brochure. Big mistake…
Needless to say I’m no longer in that loaded fund, but they did give me some good habits that have served well.
Here is the problem with the second opinion…..
The second guy could be the guy giving bad advice.
So if you trust your guy and you go see someone with a conflict of interest, you are screwed.
Here is my problem, I just don’t know enough to know who is telling me good advice or terrible advice.
So the second opinion is pointless.
I trust my guy and I think the second opinion sounds like a good idea but am I going to trust a guy I don’t know more than I trust a guy that I have been using for 20 years?
John, it seems to me you are not being entirely consistent. I get that you trust your guy, but I assume you are on WCI, at least in part, to learn better ways to manage your money? If so, then you are in fact getting a second opinion. Do you leave your investments on autopilot with your advisor, or do you kick around ideas with him? Even if you just learn enough from WCI or others to ask good questions during the conversation you are still going to get better service from your guy.
I disagree. If the second advisor is saying something totally different, you know you have a problem and maybe need a 3rd and 4th opinion. Eventually, as you become more educated about it, you’ll recognize the truth. If the second person is just nit-picking around the edges, then you’re probably okay.
I’m a DIY and would never think of an “adviser”. There are so many free good sources of free financial information available (radio, TV, online, press) that render a paid “adviser” superfluous (to me). I once had a cold call from a financial “adviser” that when I told him how I had done, ask ME how I’d done it. As the WCI says, you have a second job. I learned the art of personal financial management years ago and have made more investing then I had practicing medicine. If one feels the need to seek advice, pay fee-for-service, like a lawyer.
Great article! I would encourage the motivated reader to be her own second opinion. For example, open your statement and google one of the mutual fund symbols you have. Does it have a load? If so, your job is done and you need to DIY or find someone else. Is the expense ratio greater than 1.5 percent? Time to DIY or find another advisor. Is your AUM fee 1 percent, AND your portfolio has an expense ratio of 1 percent or higher?The vast majority of accounts I review have the above characteristics, making the decision to change an investment program fairly straightforward. Alternatively, post the symbol of your largest holdings to this thread, and the WCI community can comment for you. In my view, an honest advisor can look at your statement and know right away if it is a reasonable plan. It is similar to an emergency room doc evaluating chest pain in the ER. A good story, elevated troponin, risk factors, and a characteristic EKG provides the answer in a relatively short time.
I don’t know about that last line. I can diagnose a bad financial plan in 30 seconds looking at it but it may take several hours to sort out chest pain, and even then you may still need a stress test.
John your advisor may be great. The first question is he a fiduciary? Does he work for Merrill Lynch or another brokerage? Is he selling you insurance products? Does he charge an AUM fee? If so what is it. How is he compensated? These are the basic questions to ask yourself. If the answer is yes to any of these or a high AUM fee then you need a second opinion.
Goof. The answer to is he a fiduciary should be yes.
I pay him monthly and he is not in bed with any brokerage company or insurance company.
I have been DIY for several years, and used a fee-only advisor last year to make sure we were on the right track and do some financial planning for us. It was very reassuring and helpful. In essence, she was a second opinion for my own work. I plan to do this about every 5 years.
Agree, this is the ideal way to go; a second opinion on DIY. I find the blog appropriate though for those who choose to engage a financial advisor, especially the part about the second advisor giving you their best ideas.
My personal favorite on this particular blog was to post, made me laugh because of the caveat. A poor plan/ financial thought process on WCI will get unceremoniously taken apart. Most have appear to have forgotten your MS1 class on a. learning to write cursive in a way only decipherable by The Rosetta Stone and b. bedside manners class :D.
When getting advice, follow the money. How is the advisor being paid? This will give you an idea of how that advisor will be affected by bias towards getting paid. Weigh that with the advice.
I often refer to PoF’s website for a second opinion of this website…just kidding.
But seriously, why would people not get a second opinion. It is easy to do and will provide some relief that you are making the right choice and spending your money wisely.
LOL!
I feel I know more about my unique financial situation after 30 years (single, no dependents, physician, chronic illness) than would most “advisors”, and don’t find the need for “no skink’n second opinions” (loosely liberated from, “Sierra Madre”). Proof: my results. Besides, I’m too frugal (cheap?).
I am a retired attorney and CPA. I have no financial interest in these matters. Following are the rules all doctors and high net worth individuals should follow, IMO.
1. DIY is right for some; however, a substantial majority are simply unwilling or unable to DIY, and these people should hire a financial advisor.
2. Fee only, yes, but as or more importantly, never pay a fee based upon percentage of assets under management; such fees are excessive and often exorbitant. Instead find an advisor who charges a flat fee, and who can provide a satisfactory explanation of the basis for that fee (e.g., hours involved).
3. Do not be misled by those claiming that “everyone” charges % of AUM fees, so you really have not choice. Most do charge % AUM, but there are many flat fee advisors out there, including some who advertise on this blog.
4. By all means, do your due diligence in selecting a flat fee advisor and do obtain a second opinion.
There are more and more offering a fee not based on AUM all the time, but they’re still a tiny minority of fee-only advisors. I do allow fee-only, fiduciary, AUM-charging advisors to advertise here, but I’m pretty clear that I prefer a flat annual fee for investment management and hourly rates for financial planning. But in the end, you just need to calculate the fee and the total fee is what matters. So if you have $1M and are paying 0.75%, that’s $7500 a year. If you’re paying someone $5,000 a year for investment management and $2,500 in financial planning fees, that’s the same thing. So all the AUM fee requires is that you do a little additional math and make the comparison.
https://www.whitecoatinvestor.com/my-two-least-favorite-ways-to-pay-for-advice/
I agree, but, whether investment management or financial planning, all fees should be based upon the hours spent, charged out at an appropriate rate. Understandably, hourly fees that itemize each hour spent, can strain the advisor/client relationship, so flat fees are preferable. However it is essential for the client to understand the basis for flat fees, including broad estimates of underlying hours. Needless to say, fees in the later years, after the basic planning has been established, should involve substantially fewer hours and corresponding fee reductions.
I don’t think it is unreasonable to be billed per hour. I have a CPA prepare my tax returns and get invoiced for the service. I also consult with him a couple of times a year. He’ll charge me on time spent with him, as well as any time he spent reviewing numbers and running projections. I expect all professionals to work this way. Flat fee is not the answer.
As most people know, emotion/behavior plays a major role in financial planning. Emotion/behavior also plays a large role in fees. % AUM fees are the easiest for a client to accept in this context, because they are virtually invisible, and 1% seems small, though in fact it may be exorbitant.
Logically, the best fee method is hourly fees, as you suggest. Unfortunately, this method is also the worst on the emotion/behavior scale. “You charged my an hour for doing that….!” By far the best compromise is the annual flat fee, provided there is accountability for the fee based upon a realistic estimate of hours spent.
I think you can make an excellent argument for a flat annual fee particularly for investment management. Just because one advisor is more efficient than another he shouldn’t be penalized for completing the same amount of work. Slow surgeons and fast surgeons get paid the same amount for the same job.
Really there are pluses and minuses for all three – flat fee, hourly, and AUM. The bottom line is you need to do the math and compare the fee you’re paying to the value you’re getting. I prefer flat fee for investment management and hourly for financial planning, but those are exactly that- preferences.
Mostly I’m trying to get people to quit mistaking commissioned salesmen for advisors and to get them to actually do the math on their AUM fees. (Let’s see, I’ve got $1.5M and I’m paying 1%, that’s $15K! That’s too much when these other guys will do it for $5K per year.) But if someone is paying $8K a year in AUM fees vs someone else paying $8K a year as a flat fee, I’m not going to get in a hissy fit argument about it. Either is fine. That client just needs to understand that next year the AUM is likely more than $8K so he needs to do the math again and compare it to the value he’s getting again.
I agree the invisibility is a problem, but an annual retainer can also be invisibly subtracted from the account.
There are good flat fees and bad flat fees. The bad flat fees are nothing more than a discount on (exorbitant) %AUM fees charged annually. These fees may well also be exorbitant.
The good flat fees are based upon estimated hours and are revised annually. Often in the years after the initial planning, the fees will be reduced. The fee and underlying rationale are communicated to the client each year. I see no reason that good flat fees cannot be applied to financial planning as well as investment management, since both are based upon actual estimated hours.
If u r not educated on personal; finance how on earth would one know if there advisor is acting as a fiduciary unless you make them sign a document stating so which hopefully will be LAW some day
It’s a big issue. I mean almost every one is calling them fiduciary these days whether they are or not.
I typically get 2 opinions/bids/proposals for anything under $5K and 3-5 for anything above. The latter depends on how similar the 2nd and 3rd opinions are to the 1st one. The spread in pricing and services offered is remarkably consistent regardless of whether it’s financial advice, putting on a new roof or contracting a software developer. Much of the pricing you hear isn’t based on value, skill, costs or actual services being provided – it reflects the advisor’s interest (hunger), availability and backlog of business.
In any completely new area, I’m *far* better informed after two meetings. That makes the 3rd (and often final round of Q&A much more efficient). It’s pretty rare to hear something novel after 2-3 meetings with reasonably competent people. The couple of times it has happened (across the board between personal and business gigs), I realized how completely *incompetent* the first two candidates really were. Surprise, surprise and an excellent lesson for future hires.
On the payment side, the price swing is usually 2:1 and often 3:1. The same roofing job bid at $15K ends up being purchased for $7K. $80K software bid delivered for $45K from another contractor. $2,500 to paint the house instead of $6,000, Over and over in a myriad of different areas. I can’t imagine why someone wouldn’t vet potential new financial advisors every 3-5 years along with telling their current advisor that it’s happening. Many professionals get complacent with long-term clients and put most of their effort into attracting and retaining new clients. That’s how you want to be viewed for best results.
My preferred professionals by far are those who know they are high priced compared to the market and take a minute to explain exactly why they charge more. We do ABC instead of XYZ because of blah, blah. It costs more than XYZ and here why we think it’s worth it. Sometimes I agree, sometimes I don’t, but I always leave with a tremendous amount of respect and often recommend their services to other people.
That, is an incredibly awesome comment. I especially liked this part:
Thanks, Doc!
Excellent comment, but how does your approach apply to financial advisor fees? The vast majority of financial advisors strictly adhere to the industry standard fee structure, percentage of assets under management. Such % AUM fees for high net worth individuals are exorbitant, and any adjustments from the accepted base fee will still be exorbitant.
Fixed pricing is largely true for financial advisors working at large firms, but flexible pricing is definitely available for individual CFPs and small boutique firms. No idea what percentage of advisors is represented by the former group vs the latter group, but the idea of getting comparative pricing and from other firms is still solid.
It’s worth mentioning the large firms usually have far more turnover which makes it more likely you’re hiring the company rather than an individual financial advisor. The financial advisor someone enjoys today will probably retire before them (average FA is 50-55 YO).
I just saw a couple of stats saying 1/2 of financial advisors will retire within 15 years and only 5% are younger than 30. With the growth of robo-advisors and lack of interest in providing financial services from Millennials, we might all be DIY investors within a decade or two.
Interesting stats. Here is a quote from a recent Forbes article:
“The firm boasts that its hourly-only approach “makes us truly unique among financial planners.” That’s an overstatement, but not much of one. I’ve been collecting names of planners who primarily bill by the hour, and they are a tiny subset of the country’s 310,000 personal financial advisors.”
The simple math is that replacing the %AUM fee with an hourly-based fee would reduce the total US revenues available to these 310,000 advisors by one-half or more. Think what that would do to the decline in number of advisors.
WCI, perhaps you could post some actual anonymous doctor portfolios on a regular basis, and we could dissect them M and M style. I think it would be a great teaching tool.
Sure. Send me yours and we’ll do it. 🙂
Actually this sort of thing goes on over on the forum all the time.
Some times it comes down to conflicts of interest. Is the heart surgeon that is recommending triple bypass acting as a fiduciary? Putting YOUR interests ahead of there own? Hardly. When Dr. Dean Ornish has proven one can reverse heart disease by diet and exercise. Why doesn’t your doc tell you about that? Cause there ain’t no money in it! Does your doc disclose that they own shares in the same drugs they are peddling? I doubt it. Do they disclose they are getting perks from big pharma? You can practice medicine on yourself or go to a pro. Same applies to finance, taxes, or law. Foolish on all counts to go it alone. And yes, you can always find a cheaper advisor. You can even find a smarter one. I doubt you will find one that is cheaper AND smarter. My advisor kept me from making some very stupid mistakes over the years that would have cost my 10 times the fee I have paid her over the years. One thing a computer or software can’t do. Protect you from your own emotions. We still need a human for that
Actually, they do disclose all perks they get from Big Pharma. https://www.cms.gov/OpenPayments
It’s a little late to just do “diet and exercise” by the time you need a CABG.