When you interact with as many doctors about their personal finances as I do, occasionally you notice a theme. When I notice a theme, I write a blog post about it.
There are many doctors out there who want and probably even need a good financial advisor. It might be as much as 80% of doctors. I don't have a problem with that. These docs don't have the interest required to develop the discipline and knowledge required to be successful as do it yourself financial planners and investment managers.
But lately, I've been getting emails and comments from people who clearly do have the interest, discipline, and knowledge to do this themselves. I mean, it isn't rocket science and it certainly isn't medicine. It's just not that complicated. A lot of them just need to sit down with their spouse and an honest financial planner and be told “Dude, your plan is fine. There's no way what I can do for you would be worth what I have to charge you to stay in business.”
Here are three examples, with enough details changed and omitted to protect the innocent:
Two Doc Couple Making $725K
I have read a good portion of your website and listened to your book via Audible (which I plan on re-listening to). I only wish I had stumbled upon your writings earlier! Your writings have inspired me to further financially educate myself – I've either finished or am working on books by Bernstein, DeMuth, Bogle, etc. “Millionaire Next Door” is also a favorite of mine.
I am currently a GI fellow (with $140k Federal debt @6.55%, making payments via IBR since intern year) and have already locked up a contract with a hospital system that files under 501c3. I plan on filing for PSLF, assuming it will save me some money. My partner will be finishing his dermatology residency in 2 years (with ~$220k Federal debt @6.55%, also enrolled in IBR, but we are assuming he will be in private practice, thus negating the opportunity for PSLF).
Given that we are both in high paying specialities, we will try to aggressively pay off his loans within 2 years of him finishing (refinancing the loans once we can demonstrate a higher income), while maximizing our retirement accounts (I have a 403b and 457 — we are not sure what he will have yet) and saving up 20% for a downpayment. This is our short-term plan.
My general question is this: is spite of reading your website/blog/book and the aforementioned books, I remain nervous about managing our future income (between my partner and me, I'm conservatively estimating an income of $725k/yr, but will likely be closer to $800-850k). I am, by nature, risk adverse and fiscally conservative. My greatest fear is mismanaging everything we work so hard to earn – I am really hoping to avoid a mistake that will cost us $20K, $50K, 100K or more. At the same time, I don't want my risk adverse nature to adversely affect investment opportunities. In addition, given our future high income I anticipate being unsure how to minimize our future tax burden. So my first question is a) Would you recommend a financial investment advisor/fiduciary in this circumstance? I have researched the majority of the advisors you have vetted on the WCI website, but I am unsure about how to actually pick one (aside from desiring the lowest fees/%AUM — indeed these add up…I have a hard time rationalizing 1% AUM fee on a given 2MM portfolio = $20K, ouch!)
It's almost comical, isn't it?
- Way less than average student loans with a great plan for taking care of them.
- Way more than average income.
- Way more than average financial knowledge.
- A willingness to continue to learn.
- Solid knowledge of the cost of financial advice.
- Clearly price-sensitive about fees.
Not only does this doc not need a traditional financial advisor, but an honest AUM financial advisor probably doesn't even want her as a client. She'll always be questioning the fees! It's just not a good fit. What does she need? Maybe nothing, but certainly no more than a couple hours with an hourly rate advisor every couple of years and a good CPA to help with the taxes for her first few years of attendinghood. Probably less than $5-10K total in fees over a number of years. What they're probably going to really need down the road is a good estate planning attorney. She's worried about a mistake that'll cost her $100K. The truth is she can probably use $100K a year as firestarters and should still be incredibly financially successful.
Military Doc
Here's another example from a military physician.
I am an active duty internist. I stumbled upon your site a few months ago when I started to get serious about investing, retirement planning, budgeting,etc. I am still very new to the game but have read your book as well as a few others, a couple of audible great courses on money management and the history of investing, and spent hours of blog post reading on your website, PoF Website and Bogleheads. Unfortunately just like many interns I now know “just enough to be dangerous” and am having what you referred to in one of your posts as “analysis paralysis”. I am having difficulty on taking the next step because I do not want to take a wrong step.
I am 32 and married with three kids. I have been maxing out mine and my husband's Roth IRAs (80K total) since residency and have been maxing out my TSP for the last 4 years since completing residency. I had gone through a USAA financial advisor for my ROTH IRA and now realize that they had put me in underperforming overpriced funds (Cornerstone Moderately Aggressive Fund and World growth fund) both through USAA with expense ratios of 1.10% and 1.17% respectively. Knowing what I now know about compound interest I have realized this mistake already has cost me $5-10K.
I have started drafting my investment plan and am looking at the KISS strategy for things and will probably only have 4 or 5 areas; US stocks and Intl Stocks as a large percentage and then Bonds +/- REIT and Small cap stocks. My biggest problem is I am unsure where the next best step is and am so hesitant after seeing what USAA did to me….
I will most likely do 20 years since I enjoy the job and the pension for an O6 with 20+ years of active service is 60K+ with healthcare for you and your family covered. With signing for the 4 extra years there is a healthy yearly bonus which I plan on investing and now will need to have a taxable account for contributions after maxing out both Roths and TSP yearly.
I have been unable to find any good posts on how to take that next step and am really just looking for some guidance or a swift kick in the backside.
So I gave her a swift kick in the backside. Seriously, this doc has totally got this. She's maxing out Roth IRAs and the TSP, anticipating a pension, and investing even more in a taxable account. She's reading multiple blogs, has read multiple books, and is participating on good forums. We discussed a few very minor questions about asset allocation and where to open accounts and such, but nothing that anyone in their right mind would pay thousands to a financial advisor for. Again, she would likely spend a couple of hours with a good hourly rate planner who would basically confirm to her that she knows what she is doing.
A Doc Who Screwed Up His Taxes
This doctor got a little overzealous with the retirement savings. He maxed out the $18K employee contribution for a 403(b) at one job and a 401(k) at another. Neither employer knew about the other, so nobody stopped him. The IRS hadn't noticed yet, so I gently pointed out the error of his ways. He started the ball rolling on making the changes (reversing the contribution, requesting an updated W-2 from one employer etc.) Then he got worried:
I get a bit nervous and start thinking I need an accountant . . . but I should be able to handle this, right?
This from a doc who's been handling his own finances and doing his own taxes for a decade or more.
Guess what? Accountants screw up on taxes too. It's not a big deal. It's pretty easy to file a 1040X. As I went back through a decade's worth of tax forms for a post I did a few months ago, I found 4 or 5 1040Xs in there. Apparently, I screw things up all the time (although most of them were to maximize my loss on that stupid rental property.) What do they expect when they make the tax code so complicated? The way I see it, I don't have to be perfect, I just have to be honest. If I make an honest mistake, maybe I'll have to pay some penalties and interest (or more likely I'll have to file a 1040X and I'll get an extra refund with interest from the IRS), but nobody is going to throw me in jail. Don't expect perfection from your accountant and certainly don't expect it from yourself.
Be Confident!
Tom MacFarlane MD at the rappel of the Northwest Couloir of the Pfeifferhorn. A terrifying ski run, but an easy ice climb.
Now, there's no sense in being prideful or arrogant. You don't know everything about financial stuff and you never will. But at a certain point, you know enough to manage your own affairs with occasional, minimal input from a professional. A little while later you'll know more about the financial situations of doctors than the majority of those who call themselves “financial advisors.” Hundreds of financial advisors read this blog. Ask yourself why that is! It's not that entertaining. It's because they don't know all this stuff either. Don't be so afraid of making a mistake that you don't do the things that are obviously good things to do like:
- Maximize your income
- Save a big chunk of it
- Max out some retirement accounts
- Invest in some combination of low-cost, broadly-diversified index funds
- Buy some liability, disability, and life insurance
If you need some help, go get some help. I'm lucky that when I have a financial question I can't find the answer to that I know dozens of the good guys in the industry to bounce it off of. If you don't have that luxury, then pay somebody a reasonable price to answer your questions and don't feel a bit badly about it. Hiring a financial advisor isn't an “all or none” thing. Check-ups, second opinions, or a tax strategy session can all be great uses of your time and money. But if you've read half a dozen financial books, most of this blog, and you check in with a financial forum once a week, you don't need a full-service financial advisor.
What do you think? Why do you think we worry we're missing something when we're clearly competent to any rational observer? Why is it so hard for a “mostly do-it-yourselfer” to consume financial advice in small quantities? Why is someone who holds the life of another in his hands worried about losing $20K or screwing up his Backdoor Roth IRA? Comment below!
I agree, I’ve learned by far more from WCI, bogleheads forum and simply “googling” my question than paying a regular fee to an active investor…thanks for the help WCI!
Marvelous! My bread and butter calls are just like the ones you posted above. One of my most used lines is that you don’t need a financial advisor, as Jim says, “You’ve got this.” Some might need an hour or two to confirm they are doing the right thing. The real work for a financial advisor, with a passive index fund philosophy, is getting the client out of the less than optimal program he or she is currently in. That can be time consuming. Someone that comes in with a Vanguard total stock index fund has already won the game. I often think of it like putting in a central line. The first time you learn to do it (or a Roth IRA), it is hard, but the next time it gets easier. After two years, it becomes like riding a bike. The cynic in me believes that the industry wants to make it appear complicated for a self serving reason. It is funny you use the word complicated. When I attended Warren Buffett’s Berkshire Hathaway meeting, he kept telling the questioners “It’s just not that complicated. Just gradually put your money into a low cost index fund and forget about it.”
For many doctors the trick is to be confident, but not over-confident. A lot of doctors are smart and confident and capable in other areas. They assume all those traits will help them out when it comes to money management. They want “above average” returns and they want them now. Although these are great examples, most doctors I know err on the other end of the spectrum.
Lots of overconfidence out there without a doubt. Not sure which is the bigger issue.
They both cost money. One is fast and very obvious. The other is insidious and may never hint to its true cost. Different lessons from both.
For some people, hand holding even early on is helpful, but then go out there with confidence. These docs got it but it is good that they reached out. If you are unsure, there is never harm in asking the community for some help.
I see two problems with docs that I know. Overconfidence which leads to get rich quick short term trading. The other end of the spectrum is the total lack of interest group who keep putting off starting a 401k or doing anything with the money in it.
Yes, be confident… as long as that confidence doesn’t drift into picking tons of individual stocks or lord forbid day-trading. I’ve seen that happen with a friend when confidence turns into “I’m smarter than everybody else”
Hi,
First time posting. I am completing a residency in endodontics in June. I read your book in dental school and have recently started enjoying your newsletter, podcasts, and forum. Thanks so much for all the material! It is quite a valuable resource, and of course, we have not learned a shred of these important topics in schooling.
I was wondering if anyone could point me in the direction of resources for learning about taxes for beginners. I admit that for the past few years I have been filing with TurboTax as our taxes have been pretty simple, but recognize that things will start getting more complicated and nuanced as I progress to private practice, and eventually ownership. I appreciate any and all suggestions! Thank you.
https://www.whitecoatinvestor.com/best-financial-books-for-doctors/
I’ve got a whole section on tax books there.
Endo,
Can I suggest just taking a crack at your taxes with Turbo Tax? It is an incredibly user friendly program. I think you’ll realize pretty quickly that simple tax returns for early career docs are just not that hard.
Congrats on hitting 5000. Darn it, I wasn’t the one. :O)
F.E.A.R – False Evidence Appearing Real – that is what keeps is up at night. That is what has us question way too many situations. I can understand many people not feeling confident about handling their own affairs, but Drs, it baffles me. Over and over, you’ve have to be at the top of your game. For many, making life and death decisions. For others, at least whether or not you keep the toenail. Finances just isn’t nearly as complicated. And even if you made a mistake or two, you almost always have the income to overcome it.
cd :O)
Not to mention that as long as your mistakes cost less than financial advice, you still come out ahead. Given the relatively high cost of advice, that isn’t an insignificant barrier.
This is assuming the advice has no value aside from mistake avoidance. I’m sure that’s happens. But what if experienced advisors added additional value like time savings and value add advice (beyond mistake avoidance). The good ones aren’t cheap though. And every physician certainly is intelligent enough to learn what’s necessary to do it themselves – and save a lot of fees. My point is mistake avoidances is only one piece of the puzzle for most physicians we encounter.
Bear in mind the physicians you encounter are a very different set of physicians than the ones writing me that I cited in this post. Selection bias. You see the ones who probably shouldn’t be doing it themselves.
I have about half my finances managed at considerable expense and the other half I do following
“The Independant Adviser for Vanguard funds” Only costs about $259.00 per year and has great advise.
My outcomes for both halves are exactly the same at considerably less money.
I am 5 years from retirement and the important piece for me w the advisor is estate and financial management in retirement. After 30 years on growing my wealth I am overwhelmed with the piece of how to wind it down without using the principle.
Glad you like Dan’s newsletter.
If you’d like to learn more about how to spend your nest egg I’d recommend Wade Pfau’s excellent book on the topic. Not sure why you wish to never spend principle though. Is there some particular reason you wish to leave a lot of money behind? Most retirement strategies involve spending both principle and interest, although on average a 4% withdrawal rate causes you to die with 2.9X what you retired with.
High income do-it-yourselfers can very easily get a valuable 2nd opinion when needed once they accumulate enough at Vanguard. Once you are a Voyager Select ($500K-$1M) you can talk to a CFP any time you want without paying a fee.
Are they more useful than Fidelity’s? All Fidelity’s free consultation told me was that they could manage my assets for an AUM fee.
For the just out of training DIY crowd that WCI highlighted, there’s a steep learning curve with perhaps a one year lag between accumulating the knowledge to manage your portfolio and developing the confidence to act on your knowledge. This is where it helps to remember the advice of the grizzled contrarian attending in residency: “Don’t just do something, stand there!”
I made the mistake of getting romanced by the roboadvisor phenomenon, moving assets from an ethical if expensive Merrill Lynch advisor to Betterment, then becoming disillusioned when Betterment unexpectedly increased their fees, and ultimately moving everything to Vanguard to do it on my own. Eating those moving costs were a rookie mistake, but far less than the cost of maintaining the status quo.
My version of “just stand there” for the fresh out of training crowd: keep saving and investing, but toss everything into VTSAX or a comparable total market index fund with an extremely low expense ratio, and spend the next year reading 6-8 books on investing before making any commitments. Since VTSAX will inevitably serve as a cornerstone of your investing plan, and is tax-efficient in both taxable and tax-deferred spaces, you’ll be ten moves ahead of the game when you are ready to strike out on your own.
Once you’ve read the holy trinity of doc investing books (White Coat Investor, Bernstein’s Four Pillars of Investing, and Bogleheads Guide to Investing) let your brain marinate for a year. At a year’s time, you’ll be ready to design and manage your own simple portfolio.
I’m honored to be part of the holy trinity with such illustrious peers.
Crispy Doc, that is truly excellent advice. Very well said. It can sometimes take awhile for the brain to digest all of the information. The only think I would add is to get the books on audio. It is an efficient way to read (listen) them for the time strapped physician. I have seen people do the VTSAX in a regular taxable and not have time to do anything else. Those people are sitting pretty. Although they missed out on some tax favorable products, they are not disappointed with their result. Jim, next time I would narrate the book yourself. I love it when the author is the narrator. There is a passion that comes through that no narrator can emulate.
Thought about it. Maybe next time. It’ll be easier now that I have high quality audio equipment which I didn’t have before.
I’m still snickering at the idea of using Benjamins to start a fire….
Most docs could be taught the key points of personal finance in one day, perhaps two. Annually, most could spend one day reviewing their situation and making any appropriate adjustments. A doc with a $500k portfolio paying a 1% AUM fee (which is fairly low for many advisers) could literally pocket than $5k (after taxes) in one day’s work. Not many docs are earning $5k after taxes for a typical day’s work.
WCI, your article is excellent; perfect advice for the regular participants in this blog.
My concern is for all those who do not participate in this blog, or otherwise obtain the basic skills. Consider only doctors. Every doctor has the ability to do an excellent job of mastering everything necessary to DIY. Most if not all doctors have the temperament to deal with personal investments involving large sums. I assume you agree. Now, what do you think is the percentage of doctors who are actually willing to learn the basics and DIY? I assume that your estimate will be well under 50%. Now why do you suppose that is?
I assume the unwilling docs do not find this stuff fun or interesting. They would much rather spend their time in other ways, and leave the financial planning to those who know more than they do. They do not like the stress of making financial decisions based on minimal knowledge; as you note above, the stress factor affects even the most knowledgeable. In these cases I find the decision to use a financial advisor perfectly understandable and acceptable. I would recommend that all such HNW docs do hire a financial advisor.
The only problem with hiring a FA is the fee. This blog continually discusses how simple DIY is and how a doc can learn all they need to know in their spare time. That is mostly true, and therefore how much should a FA charge for performing these simple and basic services? Obviously not high fees. Not as high as fees charged by CPAs and Attorneys who have much greater specialized training; yet, FAs typically charge %AUM fees that are several times higher than CPA and Attorney fees, when considered in terms of hours spent. The answer to all of this is not to avoid hiring a FA and DIY, it is to insist upon reasonable hourly-based FA fees.
Yes, you want the fees as low as possible for high quality advice, but high enough that the advisor stays in business. Been preaching that for years.
“but high enough that the advisor stays in business”
Not sure I understand what you mean, but I assume an hourly fee or hourly-based flat fee charged at $200/hr should be high enough?
Hi –
RE: “This doctor got a little overzealous with the retirement savings. He maxed out the $18K employee contribution for a 403(b) at one job and a 401(k) at another.”
I thought one COULD have multiple max contributions from DIFFERENT employers
https://www.whitecoatinvestor.com/multiple-401k-rules/
One $18K employee contribution total no matter how many 401(k)s. But each 401(k) at an unrelated employer has a $54K limit for employee + employer contributions.
The Broker makes money, the Firm makes money; 2 out of 3 ain’t bad
Brokers make millionaires out of multi millionaires
Diversification is a protection against ignorance
Once you READ RANDOM WALK DOWN WALL STREET YOU WILL UNDERSTAND FULLY THE GAME
DIY for all is not difficult to accomplish
Just use a financial calculator and see how a 2% fee difference(active vs passive) over 40-50years affects your wealth at the end; 8% vs 6% 1000/monthly contribution
YOU HAVE LOST at least 50%
I’m curious how you know the Doc writing in “Two Doc Couple” is a woman. It seems to me it could just as easily be from a man.
Who are you asking? Me? I can’t remember if it was a woman or a man. Perhaps it was a man and I deliberately changed the text to obscure that fact to provide some privacy (I probably changed the dollar amounts and specialties too) and then used “her” down below. Or perhaps it was a woman and I didn’t change anything. I’m sure I knew when I wrote this post months ago, but can no longer remember which it was. Why does it matter?
Precision, I guess would be my only answer. Nowhere does your correspondent allude to his or her own gender other than by stating that he/she has a male “partner.” I simply found it amusing that you then identified your correspondent as a female. My comment was not meant to be offensive!
Knowledge is not power, as we say. Applied knowledge is power. Wonderful article to support applied knowledge.
WCI, the fact that you receive so many seemingly straightforward questions like this is a testament to what a valuable service you are providing to our profession. It cannot be understated. For the sake of all our fellow docs out there, I hope you continue to receive these kind of emails as your readership grows. Thank you!
Most big-firm financial advisors are managing client fear initiated by their own industry’s advertising.
It’s always interesting to hear how the typical FA or CFP structures their own personal finances and approaches to debt, investments and savings. None that I’ve interviewed are remotely close to WCI’s recommendations which are being used by a decent chunk of high-income earners. One of the biggest things I like about WCI is he consistently follows his own recommendations across many years at different income levels.
The irony of taking advice from someone earning far less money who doesn’t follow their own recommendations borders on comical. In all fairness, they are trained in a set of financial and professional skills that don’t equate to providing diverse personal financial advice on anything outside of managing investments. If they truly stated the actual simplicity (like WCI endlessly points out), why would you pay them for advice at all?
Have I met an FA who saves 20-30% of their income, holds only mortgage debt, maxes out tax-preferred accounts and invests primarily in a broad group of index funds? Nope.
Kind words, but I could certainly introduce you to some advisors who meet the requirements of that last paragraph.
Nearing retirement and looking for advice on pension maximization, social security planning and de accumulation. Thinking of using a FA. Can I really find an advisor who charges an hourly rate?
Yes. Check out this list: https://www.whitecoatinvestor.com/financial-advisors/
Not all the advisors on the list work for an hourly rate, but some do.
DO IT YOURSELF!!!!!!!!!!! With vanguard FREE consultation with CFP
First time poster. Thanks for all the great insight WCI!
About 2 years out of training, and have been financially educating myself through residency and beyond. I agree with you that being motivated, educated, and confident helps in setting yourself up for a sound financial plan.
However, I think that having a CFP or advisor (fee only) who aligns with your goals is a reasonable insurance to have. So that’s what I’m doing this following year. I say $3000/annually to have someone I can call/email/meet up to discuss my decisions and bounce ideas off of is a small price to pay, and definitely gives me some sound of mind. As much as I’d love to post financial questions in a forum, google things, etc., I like the fact that I have a person with formal training.
Does this sound reasonable?
Thanks.
$3000 a year is certainly a fair price for financial advice. It’s expensive stuff, but if you can keep the price to a 4 figure amount, you’re probably not overpaying.
How does one find a CFP that will take a three-figure payment for an hour or three of reviewing your situation and telling you you’re on the right track? They’re few and far between in the forest of commission based and AUM based advisors.
You can try Ryan Inman or Sarah Catherine Gutierrez to name two. Peruse the list here for a few more:
https://www.whitecoatinvestor.com/financial-advisors/