[Editor’s Note: The following post from WCI Network partner, The Physician Philosopher is all about one of my favorite subjects, financial advisors! In this post, he gives great advice for finding a good advisor. If you prefer a shortcut, just check out my list of recommended advisors.]
In The Physician Philosopher’s Guide to Personal Finance, one of the chapters is on conflict of interest. Why? Because conflicted financial advice is one of the biggest reasons that physicians make financial mistakes. In the process of writing that chapter, I had the opportunity to hear a WCI podcast episode. In this episode, he interviews Sarah Catherine Gutierrez, a financial advisor, who spells it all out. And it really got me fired up about how to avoid conflicts of interest and what a good financial advisor looks like.
So, today’s post will be about separating the wheat from the chaff. More specifically, here are eight ways that you can tell if a financial advisor has a major conflict of interest. In knowing them, you can seek better financial advice or at least mitigate the conflicts that exist.
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Number 1. They sell commission-based products
It’s pretty regular advice these days that you shouldn’t mix investments and insurance.
Why then would you use a fee-based financial advisor who works for an insurance company? Their job is to sell insurance products and to make money from the commission they get when they sell it to you. That’s called a conflict of interest.
No matter how good of a person they are, it is going to be extremely hard for them not to sell you their products. In fact, this happened to me and it is the reason I can’t get personal disability insurance to this day… and he was the brother of a medical school classmate of mine.
So, the first rule of spotting bad financial advice is when the financial advisor is trying to sell you a product. Often, this will come in the form of a free lunch/dinner/coffee. The follow-up will involve products. Just say no.
Who then should you buy disability/life insurance from? A recommended independent insurance agent that can get you quotes from multiple companies and find what’s best for you.
Number 2. Advisors who operate under an Assets Under Management model
When you pay someone for a service you usually have a very concrete idea of what that service will cost you. For example, before someone replaces your water heater they are going to give you an estimate and tell you what the expected bill is. Right? That’s honest, and that’s fair.
With an Assets Under Management (AUM) model where you pay financial advisors a percentage of your assets each year. You never directly cut them a check. It is swept out of your assets unbeknownst to you every quarter. At 1%, which is the industry standard, that is going to cost you a boatload (A boatload = millions of dollars).
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For example, at 1%, of your $3 million dollar IRA in retirement, a 1% AUM will cost you $30,000 per year. Compound that on 6% interest for thirty years and you’ll begin to get an idea of how big of a number AUM costs you.
A financial advisor working under the AUM model needs to find 50 people who all have $1 Million in assets to manage and charge them 1%/year. After subtracting perhaps 50% out for overhead, that leaves a $250,000 annual salary. If those 50 have $2 Million (or you find 100 with $1 Million), the advisor’s income grows to $500,000, which is more than a lot of doctors make. So, don’t feel bad when you break free from this system.
One of the biggest reasons this rubs me the wrong way is that there is an alternative to this. It’s a really good system that isn’t morally reprehensible. It’s called fee-only flat hourly rate advising where you pay by the hour or for a specifically priced product. More on that in the “take-home” below.
Number 3. The advisor tries to sell you whole life insurance
See number 1 above. Don’t mix insurance and investing. I mention this separately because it gets pitched to physicians all the time. It is shocking how many people fall for this stuff.
If you want to read more on this, WCI has written a bunch of posts on it. I am not going to repeat what he says, but you can trust that it’s a bad idea for the vast majority of people.
For further reading:
What You Need to Know About Whole Life Insurance
6 Reasons Not to Buy Whole Life Insurance for Your Children
How to Dump Your Whole Life Policy
The point is… whole life insurance, which goes by many names (permanent insurance, cash value insurance, cash value policy, etc), is bad for the overwhelming majority of doctors. If someone is mixing investments with insurance, it’s probably whole-life insurance with a new name.
Number 4. A SEP-IRA is brought up without mentioning a Backdoor Roth IRA
If you have a side hustle and you are making 1099 money, a financial advisor may tell you to open up a SEP-IRA – also known as a Simplified Employee Pension – Individual Retirement Account.
This is one of the options you have when you have self-owned (employer) side hustle income. The other is a solo-401K. While a solo-401K takes a little more work to set up, it has one major benefit for a high-income earner that cannot be overlooked.
A solo-401K still allows you to participate in a backdoor Roth IRA. A SEP-IRA does not. Well, that’s not entirely true. You can do it, but you are going to get slammed by the pro-rata rule.
Suggesting a SEP-IRA without discussing this consequence is bad financial advice that an advisor working directly with physicians should know about.
Number 5. Investing over paying down debt
If you ask a financial advisor who is working under the AUM model whether you should hammer away at your debt or invest money, the conflicted advisor is more likely to tell you to invest and “earn more in the market.” After all, historical returns in the market average 10% and your loans are only at 4%!
With an AUM advisor, it would be impossible to tell their motive for the advice. Is it really math? Or is it that investing gives them more assets to manage and increases their take-home pay?
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By the way, this conflict can present itself in multiple ways. Essentially, any money that doesn’t go towards your assets under management is a conflict. Should you pay off your student loans early? What about your mortgage? Should you take social security before age 70?
All of these questions present possible conflicts of interest for the fee-based AUM financial advisor.
Number 6. They recommend an IRA over a 403B/401K
AUM advisors do not typically get paid for “managing” retirement accounts at your employer. So, that 1% AUM does not typically include money in your 401K/403B. It also doesn’t include money in your 457.
Naturally, if you change jobs and ask your AUM advisor whether you should roll your money into your next employer’s 403B/401K or into an IRA… they are going to tell you to put it in the IRA.
Why? Well, because they would manage the IRA and then take 1% from that pile of money, too. It’s conflicted advice. The only time this advice would even be worth considering is if your future employer’s retirement options are terrible (really high expense ratio actively managed funds).
If you change employers and they tell you to roll it into an IRA, you better think twice.
Number 7. You don’t know how they are getting paid (see number 2 above)
This one is short and sweet. If you don’t know how your advisor is getting paid or you think it is free, then please see number 2 above.
Unless an advisor is provided by your employer and you can be sure that they have none of the other conflicts mentioned in this list, you can bet dollars for doughnuts that they are working under an AUM model. I’ve seen AUM rates as high as 2% in scenarios where physicians thought they were getting financial advice for free.
Run for the hills.
Number 8. They prefer actively managed funds over index funds
Whether you should invest in actively managed funds versus passively managed index funds is an academic question. It has been answered.
The answer is that index funds are King. They outperform actively managed funds more than 90% of the time over a 15 year period. So, you better have a really good reason not to invest in passively funded index funds (i.e. you aren’t offered one at work). The data is so solid on them that any advisor who councils otherwise would be pretty foolish to think otherwise.
I realize that this is a controversial topic to some, but if your advisor is putting you into actively managed funds there is a good chance they are loaded funds or funds that provide them a commission.
You’ll see a theme here in that it is likely a conflict of interest for them.
Take-Home: Avoiding Conflicts of Interest?
As I always tell my kids, “If you are going to do something, do it right or don’t do it at all.”
Fortunately, there is a better way when it comes to financial advising! It is called gold-standard financial advising. It involves the four following criteria:
- Fee-only
- Flat-fee
- Fiduciary
- Extensive working with people like you (i.e. doctors)
This is the model of good financial advising and one that I can get behind. For the record, I am such a fan that I am pitching this kind of advising to you if you need it.
Let the official record show that I am not against financial advisors. I am against financial advisors who have a large conflict of interest. If you need one, ask the right advisors..or don’t ask at all.
What do you think? Are AUM financial advisors and advisors working off of commission a terrible idea? Do you have one? What’s your excuse. Leave a comment below.
Very nice blog…I have been recommending to some people that there is no shame in having a very good advisor if it is too overwhelming, or not enough time, or interest to DIY…but this blog is really excellent in being able to define what a very good advisor (or the red flags of a not so good one) is.
In #8, I would further emphasize that loaded funds are typically easily recognized as having “Class A, Class B, or Class C” designation associated with the name of the fund.
Thanks for this blog!
Surprised this article passed any type of review before being published. Haven’t read past #1 yet. Number 1 implies that insurance is the only commission-based product a financial advisor can sell. This is simply not true. Financial advisors can sell commission-based investments as well. Implying that a financial advisor who sells commission-based products therefore works for an insurance company is just false.
Number 1 also states that to avoid a financial advisor who sells commission-based insurance (because commissions are a “conflict of interest”), use a “recommended independent insurance agent”. How exactly does the author of this article think these recommended independent insurance agents are paid?
A fee-based advisor who works for an insurance company was simply an example. I recognize that fee-based advisors can make money from annuities, loaded funds, insurance, etc.
You are right that a fee-based advisor does not have to work for an insurance company, but the distinction between fee-based and fee-only is commissioned based products. Insurance being one of the most prevalent examples, though there are others.
TPP
I still don’t think you’re getting it. A financial advisor that sells commission-based products does not mean they sell life insurance. But that’s exactly what your article says. The first line of Number 1 is about mixing life insurance and investments. What does that have to do with commission-based products?
How do you think the recommended independent insurance agents are paid?
This seems to be a sore spot for you every time it comes up. It’s definitely one of the core tenants of the WCI approach. Do you think that by protesting in the comments here you’re going to change a lot of people’s minds? I might suggest you pick a different, more receptive audience.
Related question: what percentage of your income is insurance commissions?
If you don’t agree then don’t read it, for me, and probably for most readers of this website, we don’t even use a financial advisor, it’s very simple to get some basic financial education by just reading, it’s not rocket science, it’s way easier to educate yourself on personal finance than trying to find a good financial advisor
You are also incorrect on points #2 & #6. Advisors who charge a fee to manage assets do NOT receive 100% of the fee. They only get a percentage. The broker dealer gets a lion’s share and then the platform company gets a piece.
Point #6, you should ALWAYS roll your old 401(k)/403(b) over to an IRA. Investment options are greater. You also have access to it in case of emergency. Finally, if the company that the 401(k) is under, if they ever file bankruptcy, even for protection, your assets are frozen until the bankruptcy is resolved.
You should find something else to do. You only tell YOUR side of the story, much like today’s media. Try doing research before you were another article.
It doesn’t matter who gets the money under AUM model, the truth of the fact is that money is taken out of your hard earned money, you are missing the point.
Disagree on always roll over 401k to IRA, you can access 401k at 55 instead of 59.5 without penalty. But I would roll over if the 401k fee is high, or the investment options are poor.
You should do some research yourself before posting another idiotic comment
You do not have to pay advisor fees. Some people like or want to do it themselves, until the bottom falls out. Everyone is a genius in a bull market. A good advisor comes in when things get ugly and guides you through the downfall. By, the way Hospitalist, you can actually access your funds earlier than 55 in an IRA without paying a penalty. You seem like the individual that wants something for nothing. Pretty funny if you ask me considering how hospitals and doctors gauge you for everything…
Financial advisors are just as vulnerable in market crashes as anybody else. A well educated index investor will beat most advisors on a long run.
Accessing IRA before 59.5 (not 55 as you referred) without penalty can ONLY be done with strings attached.
What makes you think doctors and hospitals gauge me for everything?
https://www.whitecoatinvestor.com/how-to-get-to-your-money-before-age-59-12/
I think he meant gouge.
Better to avoid going to a broker/dealer at all for advice.
And no, you should not ALWAYS roll over your 401(k) to an IRA. The prime example is a high earner doing annual Backdoor Roth IRAs like most of the readers of this blog. Disappointing to see folks like you giving such poor advice out there. Do research before leaving another comment and leave out the ad hominem attacks or you’ll quickly find your IP address here blocked despite how well you provided the perfect illustration of why this article is important.
Don’t forget that a 401k offers unlimited protection for creditors and legal judgement. For example a surgeon from a malpractice law suit.
That’s state specific, but yes, generally true in most states.
The 401(k) protection is for all states. It’s the IRA that is dependent on the state. Wyoming, for example, offers 0 protection for IRA’s, even if it’s a direct rollover from a 401(k).
I just find it completely uneducated when advisors say that everyone should ALWAYS rollover their old 401k. It completely violates ERISA regulation and is uneducated. I like the discussions. What are some of your primary resources for research? Most physicians I know do not have time, generally, to stay up-to-date on this information, let alone blog about it.
I agree.
An even better reason not to routinely rollover 401k is the pro-rata rule with the Backdoor Roth RIA.
Google is your friend. You’d be amazed what can be learned on the internet and in the library from intelligent individuals.
Buy insurance from an insurance agent. Get financial advice from a fee-only advisor. I thought that was pretty clear in this article and my other writings, but I suppose if someone gets into the habit of reading just the first paragraph before firing off a comment, that could easily be missed.
And I’m unsure why you think there is some type of “review process” on a blog. Were you under the impression this was some kind of peer-reviewed journal or some city’s leading newspaper with an editorial staff of 30?
The article states if someone gets a commission, that is a conflict of interest. So how is an insurance agent who gets a commission not fall under the advice of this article?
If there is a way to get an article published on this site without a review, I would sign up for that in a heartbeat.
Do you understand that neither TPP nor I are recommending someone get financial advice from an insurance agent? Do you understand the difference between going to someone to ask “Do I need life insurance, what type, and how much?” and paying them for their advice and then buying a policy from a separate agent who earns a commission on the sale?
Great article! However, I’m curious to know if you have thoughts about or feel the same way of Vanguard Advisor Services that charge AUM of .3%. I can’t decide whether to keep this service or stop it even though I think the fee is reasonable.
Vanguard will give you reasonable basic asset allocation advice, but don’t expect physician specific financial planning advice. Just expect basis investment management and you’ll be happy. But if you’ve got a 7 figure portfolio, for that price you can get the whole package elsewhere.
the age of AUM fees is gone according to ric ferri
its an insane form of compensation
Some of my best performing investments were under the 2 and 20 model. Ignorance is not bliss.
The only good thing about 2 and 20 model is if you are the person selling it and find a few ignorant investors buying it.
It might be dying, but it definitely isn’t gone and won’t be for decades given inertia.
Number 9: works for Northwestern Mutual
Ha! That might be the most accurate of the entire list.
There is some good advice here but I would expand and say if you need an advisor look for a certified financial planner. Also I would elaborate on that and say use an advisor who has a fiduciary duty to their clients.
I disagree with the AUM model as this gives the advisor skin in the game. The more the client makes the more the advisor makes and vice verse.
Last the backdoor Roth should only be recommended when the client is not in a high tax bracket. Failing to recognize the tax benefits of said retirement plans and only focusing on Roth conversions is a conflict of advice.
Agree that CFP is nice (but neither essential nor sufficient by itself) and that a fiduciary duty is mandatory.
AUM also not my favorite model, unless the client has little in the way of assets! I guess it’s nice that the advisor is incentivized to grow the pile of money, but he’s also incentivized to recommend against paying down debt or even spending!
Why wouldn’t a high tax bracket investor use a Backdoor Roth IRA? I don’t think you understand how it works. There is no tax due in the Backdoor Roth IRA. No tax deduction upon contribution, not tax cost upon conversion. It is different from a classic Roth conversion.
No one is going to care about your money more then you.
If you have an interest in investing then it will likely be your best paying hobby.
If you do not it can be your best paying chore.
Great line.
You better like it. I probably stole it from you or one of your co bloggers.
Keep up the great work you are changing lives!
I just put it into a post that’ll run in a few months. You can claim it as yours then!
This is a fine list but #s 5 and 6 DEFINITELY need to be clarified. They MAY represent a conflict of interest under certain compensation models, but that doesn’t make them bad advice. In fact, they are likely good advice, or can be depending on the situation.
Rolling over a 401k into an IRA when you change jobs can often be the best move, and your options don’t need to be “terrible” for that to be the case. Unless you are in a plan with ultra ultra low-cost options, you’re typically going to pay at least around 0.5% somewhere, which is not considered high, but there is no reason to pay this if you don’t have to; it can mess up the back-door Roth, but there is a limit to the value of that, it just depends on the situation. (Of course, the actual best option is to figure out a way to create a solo401k and get the best of both worlds.)
Regarding advice to invest over paying down debt: there is no one right answer here and this is endlessly debated, but a discussion of this issue without even the mention of sequence of returns risk is woefully incomplete. Higher expected return and reducing, SoRR? Sounds like good advice to me.
These stand out from the others because the others are generally objectively bad pieces of advice.
It’s actually possible for advice to be beneficial to both the advisor and advisee at the same time.
The problem with an IRA rollover for a high earner is it screws up the pro-rata calculation of Backdoor Roth IRAs. So it’s the wrong advice for most readers of this blog. I guess if the 401(k) is REALLY terrible then the lower costs in the IRA might make up for the loss of future Backdoor Roth IRA contributions, but most likely there will be a new 401(k) coming along at the new job (or a solo 401(k)) and you can take the better of the two for those assets.
AUM is NOT having “skin in the game,” it is just a “skin game” (con job). Having skin in the game would mean that they lose money when you do. They still make money no matter how badly the portfolio does because they are leeches off what YOU bring to the table
The amount you pay for a service is usually based on what the service provider brings to the table. Imagine any other business where this AUM model applied.
“Excuse me, waiter, how much is the special of the day?”
-Oh that depends on how much money you have in your wallet. –
Ok a bit unfair comparison. Try this scenario. You set up your asset allocation and strategy for your account of $2 Million for 1%. ($20,000). The next day you win the lottery or sell an invention and have $2
million more. Well now your advisor just doubled HIS/HER compensation for doing nothing but a simple division of putting the new $2 million into the same set up. Wow! $20,000 for virtually no added effort. Phooey. The initial size of my portfolio is entirely my sweat and toil. The value of advice should be based on the advisor’s toil. Not mine.
All comments can be refuted or corrected here. Everyone who understands finance understands that investments own the accumulation side of a financial plan and insurance owns the distribution side of a financial plan.
If an advisor does not combine the two, they’re missing the ball.
Ask your advisor to shop the market for insurance products. If they recommend a term life insurance plan through their firm they represent, they aren’t using an IMO which means they are only looking for benefiting themselves.
Whole Life insurance is a great tool to use building a portfolio for a young individual. It can optimize the personal pension plan, it can replace the bond funds which most advisors will recommend to “diversify” a portfolio, which will take up more and more over time, and can be used for becoming your own personal banker to earn return on your cash withdrawal, while investing it in additional opportunities that can be very lucrative.
There is a significant amount missing in the 401k vs IRA argument. There are multiple factors: fees, investment options, distributions available/necessary, loans, company stock in the plan and how that can be handled, expense ratios if Mutual funds, MRD’s, delivery of services such as ease to access funds and tax withholding required, and proprietary funds.
It amazes me when people talk about how the expense ratio is mutual funds is one of the primary ways to choose a fund. It’s completely uneducated. When you look at the IRR of a funds performance, it’s calculated taking into account the expense ratio. I’d take a Fidelity Magellan fund or Contrafund over an index Large Cap Growth fund or and Discovery Indexed fund any day but their expense ratios are nearly triple.
There was a prior comment about CFP’s. CFP means nothing honestly. It’s a bunch of course work written by bankers. Who do you think that advice benefits most? Banks. If your advisor doesn’t review early debt payoff vs. investing with you, change guys. I’ve never seen paying off a mortgage early outperform even high yielding MM funds over the course of 15-20 years. Simple vs. compounding interest. Each loan is different. The largest value of your investments is the time they have to grow.
AUM model is garbage and should be illegal. Personal opinion. Worked at a large broker dealer: I can build the exact model portfolio they would recommend for an investor and help them rebalance without the 1-2% annual fee. Also, mutual funds should not be sold but used to build a passive portfolio by an unsophisticated investor; they basically steal money from their investors and benefit Banks significantly and that’s why CFP’s love them so much. It’s better to value invest in individual companies and a qualify advisor should be able to assist in choosing them. Do that and/or options trading, investing in real estate and/or a personal business.
Your financial advisor should also have his/her insurance licenses and be able to broker with an IMO to provide insurance.
If you’re a physician, and While Life insurance is a great option, have your insurance rep bring back illustrations of 2-3 mutual companies where the IRR should be highest. Don’t let them manipulate you to believe that Dividends are the same thing as IRR. When you have a whole life policy and are behind to use it for cash flow, make sure that the insurance company does non-direct recognition. If not, it’s time for a 1035 exchange of that whole life policy to a carrier that will. I’d be happy to answer questions about that privately as well. I joined the financial industry to make sure people don’t get ripped off like some family members of mine were:
Disagree that insurance products “own the distribution side” although there is often a place for a SPIA on the distribution side. Also disagree with your assertions about whole life insurance as discussed ad nauseum elsewhere on this site. Whole life insurance is rarely a great option.
Advisors with your business model are the subject of this blog, not its target audience.
Insurance products do include annuities and pensions. Generally, depending on the set of 20-30 years, withdrawing from an investment account over 3.5% of the assets increases the likelihood of running out of assets to over 90% likely by the age of 85. For that reason, insurance owns the distribution side of retirement planning. I personally believe both those options are terrible and a balanced real estate and business portfolio is significantly more effective.
Where the target savings for a child is not college savings, what would be your alternative savings that is most appropriate for a minor than an over-funder Whole Life or VUL product? I’m always open to thoughts on the those options. I advise in Utah where 529 doesn’t make much sense because cost of tuition is so low and not a large priority in their financial plans.
I save for my kids in an UGMA account, a 529, and a Roth IRA. I find permanent life insurance for children to be a less than ideal savings strategy and completely unnecessary insurance.
https://www.whitecoatinvestor.com/6-reasons-not-to-buy-life-insurance-for-your-children/
The Utah 529 is perhaps the best 529 in the country and has a reasonably good state tax benefit. My peers here in Utah seem to think college is a major priority, although admittedly school here is relatively cheap compared to other places.
The longer your post – the more full of [it] you are.
Unfortunately Jordan whole life insurance is the reason I got into the white coat investor as my premiums were killing me on a $1 million whole life policy. I had to find a way out of this policy from Northwestern Mutual. Jim Dahle was absolutely right that it was sold as a great investment, but there are other ways to get those benefits without losing money in fees and the stress of required premiums. As a new attending physician I was able to afford the $14,000 premiums a year however I did have lifestyle inflation and also I had kids and bought a big house and then could not keep up with the premiums. I had to borrow against the policy but then the 8% percent interest was killing me and had to go into credit card debt with a 0% APR to pay back the loan on the whole life policy. Luckily with info from The White Coat Investor I have 1035 exchanged this policy into low-cost variable annuity. This freed up 14 K of cash a year which I have paid off the credit card, can now do backdoor roth’s, and have the same amount of life insurance by just doing term. I guess you can argue I should have been sold a cheaper policy, but then it would be like those high expense ratio fees where I wouldn’t really know that I was losing money on fees, etc.
I like jim’s Article on when whole life can be useful, for example having special needs child that would need cash when you pass later down the road, or when you are so rich you have an estate planning problem. For you to say it’s great for a young individual otherwise is not right given better options out there for backdoor roth, maximizing retirement accounts, and paying down debt.
Rikki,
That is exactly why whole life insurance is widely classified as inappropriate. If you hadn’t been oversold, the situation may have ended up differently. I’m glad you were able to exchange out of that policy. VUL’s are great as an alternative to that but can become overwhelming if not funded correctly or as you age and the cost of insurance increases. Great insights and thoughts.
Most of this advice is downright bad. I could pick apart one by one but I really don’t have the time. Aside from the whole life insurance part, most of what the writer is saying is flawed and designed to suggest you place your money with a company like Vanguard that will not assist you with an actual plan or any life events that come up. That is that you pay an advisor for, not just general investment advice.
I’m curious what you do for a living and how you are compensated for doing it. Most of those who don’t like this article feel that way because it implicates their own business model as less than ideal.
One piece of placing assets under Management is that it requires an individual to call before jumping out of the market. There is a psychological benefit that counts pay for. I’m a bigger fan of fee based planning instead and a retainer fee to meet with me anytime. That allows me to recommend the appropriate person regardless of the platform. I have a client that I’d recommend Fidelity but others who should use Schwab.
What someone does for a living, or how they get compensated, in no way affects the validity of their argument… I for one am not an advisor, I do not give finanical advice, and I am not licensed to give financial advice, but I disagree with most of what is written in this article.
Sure it does, as Upton Sinclair explained.
I disagree with most of your article.
Paying a Financial Advisor a fee to manage your assets is by far and large best way to go.
Obviously the Advisor must service the crap out of you in all aspects to deserve annualized commission.
More so, the Advisor must also continually rebalance your portfolio. Whether your Advisor puts you in Open end funds, ETF’s, bonds, he or she must be very active in what they do. Just to be clear, when I say “active,” I mean regular communication which includes update on performance, taking profit or loss when market conditions justify.
Unless you are following the markets on a daily basis and have the time to monitor your portfolio, you are doing yourself a disservice in paying transactional fees to an Advisor.
Rule of thumb, you get what you pay for.
This assumes that making changes to your portfolio on a daily basis due to market conditions would result in better outcomes. I’m pretty sure you’re barking up the wrong tree here. Most people here feel “you pay for what you get” only holds true if you’re talking about the extent to which fees/ERs chew into your returns, i.e. the more you pay, the less you get after 30 years of compounding.
What if your advisor had something like this on their disclosure form? Would that bother you?
Disclosure events include certain criminal charges and convictions, formal investigations and disciplinary actions initiated by regulators, customer disputes and arbitrations, and financial disclosures such as bankruptcies and unpaid judgments or liens.
Are there events disclosed about this Investment Adviser Representative? Yes
The following types of events are disclosed about this Investment Adviser Representative:
Type Count
Criminal 1
Customer Dispute 2
Financial 1
Jon, you’re the subject of this blog, not its target audience.
Brutal. People screw up. It’s always worth getting multiple opinions on financial plans. Try not to talk badly about your competitors. It looks petty.
I’ve read A LOT of ADV2s. Occasionally I see one with one reportable event. I don’t recall ever seeing one with four events. Just like seeing a 40 year old internist with four malpractice settlements is a red flag, so is four reportable events on an ADV2. People screw up but at a certain point, a track record is a track record.
I think a little background on someone lends a lot of perspective to their comments and how much credence should be given to them.
A broker with four disclosable events is not my competitor. I’m not a broker, nor even a financial advisor and as far as I can tell, this broker doesn’t have a financial blog. What business do you think I’m in?
I’m always amazed to see folks like you guys reading my blog. I mean, either you should think “This guy is full of it, I’m not wasting my time here” or you should change your business model. I have actually had a handful of financial professionals email me 6 months after one of these blog comment exchanges and say, “I’m now out on my own and I’m becoming a real financial advisor. You were right.” Hopefully you guys will be one of those.
You’re right. Four events is pretty ridiculous. I wonder the situation because normally they would just be barred from any future license.
I assumed you were a fee based advisor but may have misinterpreted. I love reading any and all article I can about my industry and yours came up on my Google recommended list. Great article; there are some areas I do disagree with regarding how individuals have their plans set up but I agree on the premise of how advisors recommend AUM and they’re compensation.
I would add that you did not touch on one of the most basic points for why the AUM model is garbage: it usually underperformers and over diversifies. This is especially true with discount brokers like Fidelity Investments, Vanguard, Schwab, etc.
Sorry for calling you petty. I do have ad hominem and sunk below my standards there. Keep writing!
No, I’m a physician and a blogger.
But I think your comment explains where a lot of the traffic in this comments section came from!
I appreciate your blog. It looks like you do a lot of research and are out to protect others in your field from being taken advantage of. Do you normally have this much volume.
Yes, 275,000 people come by this site every month.
Considering you mention “4” disclosures, and make it sound like shady, allow me to explain;
Criminal; 35 years ago when I was 18 years old, at a graduation party, I was assaulted by a police officer. The charges were dropped. The officer was reprimanded and charges were dropped. I took the necessary steps to get it expunged from my record. 25 years ago when I passed my series 7 exam and began my career as a Financial Advisor, I found out the charges never got expunged.
2 customer disputes;
First dispute was from a client I inherited from another advisor who left the industry. Client purchased Collateralized Mortgaged Obligations from the former FA. When I changed firms, the client I inherited took his assets with me. He complained to my former employer about the advisor who sold him the CMO’s. Client had unrealized loss and my former manager tagged me as the FA who sold him the CMO’s. My former employer settled with my client.
2nd dispute was from a former client of mine who placed an unsolicited purchase of Puerto Rico bonds. Bonds ended up defaulting. Client made a complaint. Complaint was dismissed. No wrongdoing on my end.
Financial. Divorce parlayed with the market crash in ’08.
If I’m guilty of anything, it’s wasting my time on the blog of a Doctor who has little knowledge of product.
Stick to medicine!
Okay, now that we’ve moved past the disclosures should we move on to the rest?
Would you care to share with the readers how you get paid, or would you like me to do it for you?
Would you like to explain to them why neither you, nor your firm, has an ADV2 on file with the SEC, or would you like me to do so?
Would you like to explain to them why your employer condones the sale of CMOs to clients, and why you would work for a firm that does?
You’re a broker masquerading as a financial advisor. You’re a broker with multiple disclosure events including the admitted inability to pass through the last major bear market without a major financial event.
I’d love to stick to medicine, but as long as people like you are out there masquerading as advisors, there’s a need for me to point that fact out to my peers.
I think readers can decide who they prefer to get their financial information from.
Hey Doc, if you read my comment thoroughly, you’d clearly see I left that firm and wasn’t the advisor who sold the Collateralized Mortgage Obligation.
Furthermore, all CMO’s are not the same. Most are backed by a Government Agency. Of course you don’t know that because you are too busy as a failed Doctor masquerading a blog on finance in which you have no series 7 security license..
Last I checked, bloggers don’t need a security license.
Not sure why you think I’m a failed doctor. My record is sparkly clean, unlike yours. Thanks for stopping by though. Hope to see you become a real financial advisor soon.
The house in Malibu, second place in Playa del Rey, $90K Bentley convertible and only $41K in qualified funds looked pretty lousy on the bankruptcy filing. Something about all hat and no cattle.
Paying financial advisors for investments can cost investors millions on a long run, most of the so called financial experts can not beat the index, nobody can predict the market but everybody should know what they are paying in fees.
Who ever wrote this article is wrong about a few things.
When I take a client out to lunch is is not signifying that I am going to sell him a product.
Are you a fee-based advisor? If so, what percentage of your ongoing clients have purchased a product from you?
So why do Prudential-employed (or are you the broker at JP Morgan?) “financial advisors” like you take clients out to lunch?
I am a physician who pays a 0.5% fee for management of my portfolio. I don’t enjoy investing. I am reactionary to market corrections. I realize I will end up paying a ton of money in the long run for my advisory fees, but other than the 0.5% annual fee on managing assets, my advisor checks all of the boxes for a “good“ financial advisor.
Am I still a sucker for paying this money? I worry that if I didn’t Have an advisor I would enjoy my family less by perseverating on my finances and would also run the risk of making a stupid decision by reacting to market corrections and or thinking I can pick an individual stock.
Thanks!
Why would a 0.5% fee be a bad thing? That’s less than 99%+ of AUM charging advisors. I’m glad you’ve found something that works for you. Congratulations on your success.
When you say index funds are better than paying a advisor to manage funds shows wrong.
First each client is different and they have their own personal benchmark and rate of return/risk tolerance.
With index funds you can make and lose as much of the market and clients make emotional decisions
Are you saying that actively managed funds have a better track record of beating their respective index funds?
I’d love to see the proof on that. Even if you can find one or two funds, the odds that you pick it for your client and that it continually outperforms the index over a long period (say, 15-30 years) is quite small. Like less than 5-10% chance of getting it right.
TPP
That might be one of the dumbest arguments I’ve ever heard against index funds. The data on this topic is quite clear. Good advice includes placing clients into a portfolio of low cost index funds and assisting them in staying the course with their appropriate plan. If you’re paying someone to pick active mutual fund managers, you’re almost surely doing it wrong.
Achieving market returns IS the goal of a passive investor, so of course you can “make and lose as much” as the market. That’s exactly how an index fund works.
https://www.whitecoatinvestor.com/people-still-believe-in-active-management/
Some good points here. I’d just highlight that an advisor serving 50 clients with $1 million each, even if charging 1%, is likely taking home far less than the $500k in pre-tax income referenced here. Especially if they are providing true financial planning, they will at the very least have significant technology costs. For most advisors, it’s not quite as easy and “passive” as that passage would imply.
Completely agree, Tom. I should have spelled that out better as the way it is currently worded makes it sound like the margin is 100%. That’s not a fair characterization.
I still stand by the fact that advice should be had at a reasonable cost, and that people should not feel bad about dumping an advisor under an AUM model (or any other) if they can find the same quality of advice somewhere else for a lower cost.
TPP
Yep, definitely agree that generally clients are too slow to leave sub-par advisors and that client retention in the wealth management industry is higher than it should be!
Yes, you are correct. Probably should have put an editor’s note on that. I think ~ 50% overhead is typical. But the point stands- it’s easier to make a lot of money as a financial advisor than as a doctor and with far fewer “patients.”
This is sad reading through this. I don’t like how the author disparages financial advisors at all. The truth is be careful with anything that leaves you with massive exposures…this includes index funds. It doesn’t matter how much you could make if you lose it all. Get a conservative advisor, preferably a fiduciary, and whatever their fee model let them guide you to protect your investments. The worst thing you can do is call for the what if game and start looking at potential money you could be making if you just timed everything perfectly.
I don’t think the author is really disparaging all financial advisers, just the ones that might be AUM or commissioned salesmen given the incentive in these models to not be a fiduciary. If their fee model is AUM, then an adviser makes nothing recommending employer or solo 401k’s to do backdoor roths, while commissioned salesmen like my previous financial adviser will screw you into buying whole life insurance, annuities, term 80 life insurance convertible to whole life, disability insurance with non-own occupation definition of disability, and expensive 529 plans.
As you can tell I’m a little bitter as I lost more than 50K in just the whole life portion of my financial “advisers” planning- I can’t even begin to calculate the other financial costs to me of the rest of the “plan.”
What’s the industry standard when it comes to how financial advisors and insurance salesmen make money? Isn’t commission standard. Like trying to find a dealership that has car salespeople who don’t make commission, it seems very rare. I feel like calling up advisors and asking for flat fee-based service would be tough. My experience is fairly limited, any advise is welcome.
Edit: Read this article quickly before seeing patients and should have looked twice, there’s a link in the article that discusses how to find a good advisor based on those principles, thanks. I still wonder what’s industry standard.
Both fee-based (commission) and fee-only (particularly an AUM fee of 1%) that they could be called “industry standard.” That doesn’t mean it’s what you should pay for advice though.
Thank you and thanks for doing what you do. WCI has been my springboard to untangling the vast world of personal finance and it has done it well.
I’d be happy to share my model with you:
.5% Net worth charge for initial financial plan. Annual retainer charge for advice and updates as needed of .1% investable assets. Fees are charged at the end of each year annually. That way my clients can earn their ROI FIRST and then pay me.
I have broker contracts through IMO’s (insurance marketing organizations) who pay me a commission but shop, on average 40-100 insurance carrier for whole life, variable life, term life and disability insurances. The most important asset to anyone financial plan, especially getting started, is their life and income so I do cover those first based on human life value, not needs based, for family providers.
I wish a fee based insurance model existed but, unfortunately, it does not.
Wow, this article really brought the financial salespeople out in droves to comment. I guess it hit a nerve. Methinks they doth protest too much.
I fall into the camp of still being bitter about the “advisor” who sold me on whole life years ago, before I knew better, and the one I almost went to afterwards, before I figured out what a predator he was.
Fortunately, that experience brought me here years ago and I took charge of my own finances. I also hired a fee-only advisor a few years ago to do a check up, help me with asset allocation, etc and am glad I did. It was money well spent, from someone with no conflicts of interest, and I have since recommended her to many friends. The experiences could not have been more different.
Now that more people are realizing that investing really is not rocket surgery, I believe that the financial advisory industry is feeling threatened. So, some advisors feel the need to convey inaccuracies and try to confuse the facts. I mean, someone actually had the gaul to say that whole life is a good option for many young adults earlier in these comments? Really?? Sorry, but we know better than that…I mean, let’s call a spade a spade – for most young people that are sold whole life, it is a SCAM.
At the risk of sounding like a conspiracy theorist, personally, I would not be surprised if this was an organized attack by the financial advisory industry (not too different from tobacco or gun industry) to try to discredit facts by confusing, and often false, rhetoric. Just my 2 cents…
I’d be happy to show models where whole life insurance does make sense for young individuals. Not always, but a lot of the time. It’s almost only if used as a partner of an overall plan with investment vehicles like Roth, 401k, real estate, etc but it should never make up over 25% of your overall annual savings. I’ve never seen or recommended someone’s life insurance be completely whole life. Usually a combination of term and WL or VUL is appropriate but everything is completely based on individual needs and risk tolerance.
I find situations where anyone should buy a permanent life insurance product to be very rare. More discussion here:
https://www.whitecoatinvestor.com/appropriate-uses-of-permanent-life-insurance/
Hey man, sounds like you bounced back from Whole Life like I did! I started a thread Appropriate Whole Life Dump of the Week put your story down man!
Also good to hear you were able to trust a fee only adviser after being screwed. So far I’m still bitter about advisers and will DIY’ing my finances till I keel over.
I consider Jim Dahle my financial adviser.
I wouldn’t do that if I were you. Either hire a good one or learn enough to be your own financial advisor from folks like Jim Dahle.
the goal of wall street is to dumb down the public making them think investing is something the average intelligent investor cannot manage
and they will continue to develop products to siphon more $$$ out of your pocket
you can do perfectly fine with THE THREE FUND BOGLEHEAD PORTFOLIO
I completely agree with you, Kenneth Tobin. There are many advisors who are coaches and there almost like a health coach for your finances; they motivate, educate and help with adjusting to changes in life and goals.
Many of them are great advisors but just have a bad business model which charges you more, makes them less money and makes the banks and mutual fund companies large margins of revenue. There is a reason that the CFP model was written and built by Banks for their financial advisors. Sometimes it’s worth hiring a second financial advisor on retainer for a flat fee to give advice ONLY on recommendations that you receive.
Man…the claws really came out on this one! Great article, and very funny read through the comments. Had to be some kind of robo flag on the “financial guys” inbox streams for so many to come out of the woodwork. Had a good laugh all the way through the comments. (Long term reader.) Keep doing what you do Docs! Love your blog(s).
Yes, it turns out it went out on an advisor-focused email, which does explain a lot. I’ve written similar posts in the past with a lot fewer comments from financial folks (I’m not sure I can call all of them advisors.)
Ric Ferri is one of those advisors who will review your portfolio for a flat fee of $500
Many advisors will do a review or second opinion for free or at an hourly rate.
FREE? any names you can suggest
I’d start with some of these.
https://www.whitecoatinvestor.com/financial-advisors/
like your doctor, lawyer, cpa , your advisor should be paid FEE FOR SERVICE-basic common sense