[Editor’s Note: This is a guest post from Steven Podnos, MD, MBA, CFP®, the principal of Wealth Care LLC which provides fee-only financial planning and asset management to physician families nationwide. He also practices medicine as a Flight Surgeon and Critical Care physician in the US Air Force Reserve. He is a paid advertiser on the site.]
It seems that everyone has a financial “advisor,” even if some of them are now online “robo-advisors”. What everyone is missing is that the advice (if any good) is limited to a portfolio asset allocation.
If the advisor is a robotic online program, you get a varying set of exchange-traded funds that are periodically rebalanced (whether or not that is the most advantageous system is somewhat controversial). If the “advisor” is a stockbroker (regardless of what their nameplate says), then you get a much more expensive asset allocation, often containing “investments” that pay the broker and their employer to be sold. If you have an insurance agent as an “advisor”, then you get sold some variant of whole life insurance regardless of your real needs.
What’s missing from these “advisors” that provide the vast majority of financial services in this country? One word– advice!
Financial advice on investing is perhaps the least valuable function of a true advisor. Here’s what you need to know: save enough, invest in a broadly diversified portfolio with mostly stocks (except for rare circumstances), and stay disciplined. An advisor can help with all of this, but again, that’s the simple stuff.
True financial advice is much more complicated. It involves an assessment of and recommendations for many aspects of your financial lives. Here’s just a few:
Real Financial Advice
1. Asset Protection
Do you have knowledge of how asset protection works in your state? Are your home and other assets titled in the most advantageous way? Are you taking unnecessary risks (sharing a jetski, having your name on an adult child’s car, etc.)? Do you have enough liability insurance?
2. Estate Planning
Do you have any documents? Are they current? Do you understand them? If you are leaving money to your children, is it either controlled or (asset) protected properly in your documents? Do you understand the tax law on portability and other ways to avoid estate taxes? Do you understand gift tax laws while you are alive? Have you thought out whether or not the trustees you pick can do the job?
3. Retirement Planning
How much money do you need to save now in order to retire with the lifestyle you seek? How long do you have to work? What are the risks to not achieving your goals (inflation, health issues, tax changes, investment returns and more), and how can you mitigate them? Are your retirement savings protected from creditors (every state has different rules on some types of retirement accounts)?
4. Tax Planning
Are you optimizing your pretax contributions to retirement plans? And do you have the right types of retirement plan(s)? Are you maximizing allowable deductions? Do you have the right business structure (for example, using an S corporation to reduce Medicare taxes)? Do you understand how your taxes will look in retirement? Should you be considering a Roth IRA, a Roth 401k, and/or Roth conversions?
5. Educational Planning
How much money will you need to provide an education for your children? Are the schools you are considering “worth it”? What financial aid might be available? What are the best methods of saving for educational costs?
6. Insurance Planning
Steven Podnos, MD, MBA, CFP
Do you have enough life insurance? Too much? Is it the right type? What will happen to your policies in the future? Do you have enough disability insurance? Can you financially survive not working for a lifetime? Is there enough to provide for funds after age 65 (when most policies stop paying), and to cover educational expenses for young children? Do you understand the riders on your policy? Have you considered long-term care insurance, with all the pluses and minuses involved in it? How much would it cost? Is your property/casualty insurance appropriate for your holdings? Do you have enough liability coverage (see asset protection)? Do you have optimal health insurance for your needs? Should you have a Health Savings Account? Have you anticipated the possible costs of health care in retirement?
Think about who your “advisor” is (especially if you are your own advisor). Have you covered these topics? If not, why not? If you can’t answer the questions raised in this article, you need help. A low-cost option to get help would be Vanguard’s personal advisory service, which costs about 0.3% a year. Getting personal advice will run about 1% a year with a fee-only financial planner (find these Fiduciaries at Napfa.com) on amounts of around 1 million dollars of assets managed. But blended fees drop in almost all cases towards Vanguards costs as you accumulate wealth. You can also find fee-only hourly planning advice without asset management at the Napfa site and with Google.
What do you think? What would you add to the list of “real” financial advice? Have you tried a fee-only advisor or Vanguard's personal advisory service? What was your experience? Comment below!
What a great and succinct post!
Thank you very much! Steve
Estate planning is probably the area I need to attack next. I have a will and that is currently the extent of it. Have been researching on revocable trusts, which although don’t provide much in terms of asset protection at least avoids probate which can erode a lot of your estate value before giving it to the heirs. Great summary of what needs to be evaluated especially with this audience where I would guess there is a higher rate of self management of assets etc.
Thanks for taking the time to write.
Revocable living trusts provide zero asset protection, and this is a common asset protection mistake made by people thinking otherwise. We often see even attorneys suggesting that their clients move assets from protected “as tenants by the entireties” accounts (great asset protection in some states) into separate revocable trust accounts, with the result being a total loss of asset protection.
And I wrote the article exactly because so much of what people think as financial advice being just an asset allocation.
Would you suggest an irrevocable trust instead of a living revocable trust to get the asset protection? I just hate the term irrevocable because it seems like if something happened I can’t make any changes to it (if I put my home in it, am I allowed to sell it without going through major legal hoops?).
You are right. To form an irrevocable trust, you have to give away all ownership and control. Almost no one wants to do this (understandably). There are some new quirky spousal irrevocable trusts being touted as a way to not totally lose control, but I’m skeptical as they are brand new ideas from a small number of attorneys.
So, irrevocable trusts are a great way to provide asset protection after you are dead, but not so great before.
They work fine before, just like giving the assets away, because putting it in an irrevocable trust IS giving them away!
Hi,
Your asked readers what they thought, so here goes.
Friends, readers, and relatives are always looking for fiduciary fee-only advisers.
Two Questions:
1. What is your (or your firm’s) investment philosophy?
2. Your website statement on the 1.0% AUM fee for investors owning less than a million is confusing.
Your firm’s statement: “1% per year on the first $1 million that we manage for you, with the caveat that our minimum annual fee is $5000 and the maximum fee we will charge on assets under $1 million is $7500 per year.”
As written your portfolio management fee for up to a million in assets is a minimum of $5,000 and a maximum of $7,500 and has nothing to do with 1.0%. Somebody with $300,000 portfolio, for example, will be charged $5000 which is roughly 1.6% AUM. And with a $100,000 portfolio will be charged 5.0% AUM (based on a minimum of $5000). $1,000,000 in assets is less than 1.0% AUM, at .75%.
Is my math correct?
Also, clients have to pay for the investment fees on top of the AUM. Hopefully, you construct portfolios with the passive strategy involving index funds or ETFs which are very low cost. BTW, I am only talking about portfolio management and not other fees for estate planning, etc.
Thanks,
Steve
Thanks for taking the time to write.
I apologize for any confusion about fees.
The $5K minimum is really a planning minimum fee for unlimited access to the firm. It just includes asset management at no additional cost for individuals who don’t have much in the way of assets to manage or want to manage the assets themselves.
The vast majority (90%+) are on a traditional AUM model, and we decided to cap fees on up to one million dollars at 0.75% so that the total cost of investing should be under 1%. We have many physician families with several million dollars paying a blended fee that is similar to Vanguard, but getting the benefit of our firm (fees drop to 0.25% on amounts over 2M).
Steven,
As regards asset protection, where do you come down on the question of LLC versus simply having adequate (umbrella) liability insurance for rental properties? We have two rentals, and I have concluded that the LLC did not add sufficient liability protection to justify the administrative hassle and additional cost of maintaining the LLC over the very modest cost and ease of umbrella insurance. If you disagree, would you please explain why?
Larry
Larry, having liability insurance is always the best first step. And asset protection by an LLC varies by state (so you must get an opinion that is state specific). But in many states, including Florida (my home) the following is true.
First, understand that there are two types of creditors-internal and external. Let’s say you have a rental property-if you are sued by a renter (bad electric wiring, falling down the stairs due to a maintenance issue, etc.), they are an “internal creditor.” If you own the home in your name-they can sue you for any value/equity in the rental house. BUT, they can also be an external creditor-i.e. they can seek to take any other assets you own that are otherwise unprotected.
If you own the rental property inside a multimember LLC (more than one person), then the renter can only be an internal creditor and come after the LLC assets. They can’t come after your personal assets outside the rental property. In addition, even if they win a judgement against the LLC, they are usually limited to what is called a “charging order”. This gives them the right to seize any distributed profits from the LLC but not necessarily to take the property itself. Some cases have been reported where the LLC owner distributes “costs” out to the waiting creditor, but no profits. So owning the property in the LLC prevents the internal creditor from also being an external creditor AND reasonably protects the property itself.
In addition, the LLC ownership usually protects you from other external creditors. Same situation-you own a rental house in your name and are sued as the result of an auto accident. If the judgement there exceeds your liability coverage, they can come after the rental house to satisfy their claim. The liability insurance on the rental house is not accessible at all in this case. But, if the rental house is owned by an LLC, an external creditor is limited at best to the charging order remedy discussed above.
So, I strongly recommend the use of LLCs for rental properties in most states.
Thank you for such a clear and comprehensive response.
I’ve talked to a lot of financial advisors. Many of whom come highly recommended from friends. My conclusion: I have stupid friends.
I’m sure there exists a financial advisor who can/will do the items you mention in this post. I haven’t met that financial advisor. The financial advisors I’ve met, including “fee only”, are selling something. Fee-only advisors sell more and more billable hours, and they use fear to peddle their wares.
There is a role for financial advisors, for those who are too busy to think about their investments. One well-known advisor (whose name I cannot remember) explained that ultimately he charges 1% to console his clients during a market downturn and to keep them from making the mistake of selling low. That’s legitimate, and his honesty about his role was refreshing.
But for those who can manage that discipline on their own, just follow the Scott Adams method (or some variant thereof):
https://www.mattcutts.com/blog/scott-adams-financial-advice/
Thanks Fred. Financial advisors are just like doctors. Some are good and some are not. Some know a lot, some do not.
You have to do some due diligence in the process to find either a good physician or good financial advisor. When I practiced medicine full time I knew exactly who to send my patients to for issues outside of my expertise and who to keep them away from. Same is true for any trusted advisor/practitioner.
I’m in a peer group with eight other fee only planners (nationally). We meet twice a year for three days and exchange calls and emails almost daily. The caliber of knowledge, integrity, and client service mentality is very impressive.
So, I’d suggest you look a little harder and you’ll find a good planner.
Chris Mamula just wrote a post about “stupid friends.” It’s actually all about doctors and even quotes me.
https://www.caniretireyet.com/the-worst-investment-advice-i-ever-heard-everywhere/
Jim, that’s a good article and it echoes the issues from Fred’s email and my reply. Again, I’d compare the process of finding a good planner to that of finding a good physician. Finding a NAPFA registered fee only planner pretty much screens out the conflict of interest and sales issues, and next you need to figure out how they much they are engaged, interested, and knowledgeable. This can be by recommendation-if you value someone’s opinions highly for the right reasons-their use of a planner might be a good sign (and vice versa).
I’d agree that most physicians can learn enough to do it themselves, but very few either want to or end up doing so. I work with a number of prior do it yourselfers that had terrible holes and mistakes in their estate planning, retirement plan design and funding, and asset protection.
It’s like when I was in full time practice-I was a pulmonary/ICU physician. But I referred out all my patients with diabetes to endocrinologists. Sure, I could read all the endocrine literature and do it myself-but I did not want to, and did not ultimately feel like I could do as good a service to my patients.
I’d actually argue you’re better off getting a recommendation for an advisor from a knowledgeable DIY investor rather than one who needs advisory services.
That’s a great post, and it resonates with my experience. And I completely agree with the “alternative advice”. I was fortunate enough to make my mistakes with financial advisors when I was young and poor. As I’ve grown old and affluent the cold calls have increased, but I’ve learned to quickly end the conversation.
In some areas of life, it’s fine to try things out. I’ve gone through a dozen brands of yogurt, and have now settled on Noosa for a delicious yogurt to pack for lunch. I’ve bought a dozen bikes and settled on the handful that I like to ride. I’ve visited ski resorts all over the continent and found the ones I really like. I can do that because the penalty for making the wrong choice is minimal.
But when seeking professional advice you don’t have the opportunity to “try out” dozens. The reality is that there is no, *ZERO*, objective way to pick a financial advisor. Claiming that somebody who had a bad experience didn’t do enough research is a cop-out. There is no research that is sufficient, and the costs of getting in bed with the wrong advisor are significant. What research can I do? Talk to existing clients? As I said, my friends are stupid. Look at Yelp reviews? My stupid friends are a lot smarter than Yelp reviewers (not to mention, Yelp is suspect to begin with). Interview the advisor? That’s a great way to pick someone who talks a good game. Ask to see their actual results? Selection bias.
And yes this is true of other professionals as well. Doctors? I’m not 100% happy with mine. I’m not even 70% happy with him. So what do I do? Keep trying new doctors? That’s simply not feasible; I visit my doctor once per year at most and it takes several visits to get a good feel for a doctor. So the reality is that if a doctor isn’t simply *BAD*, there’s not a whole lot of options.
The one bit of good financial advice I’ve gotten from a friend/relative was from my dad. When I graduated from college (late 90s) he essentially told me the same thing that is in the Scott Adams advice. Pay off debt, max out tax advantaged savings vehicles, open a Vanguard account, and save in index funds. Dad is now long gone, but his free advice was better than any financial advisor I’ve talked with since.
I disagree with not being able to evaluate/try out/screen many, many different professional advisors. That’s because my take on screening is often as simple as a single question or comment that someone makes. The harder part is having clearly defined guidelines where someone will not be considered acceptable.
Some simple examples:
– offering investment advice before asking me a single question about my goals, lifestyle, anything. Gone.
– offering products tied with lucrative commissions. Gone.
– offering products that are clearly inappropriate or illegal. Gone.
You can easily screen dozens of financial advisors with just these three examples. It doesn’t take years in a relationship to learn those kinds of things about someone. And while your friends and associates might indeed be making poor recommendations, it’s naive to expect recommendations for people that you’d like without having similar philosophies, personalties, what have you. The best I expect from any trusted recommendation is that person did a reasonable good job at least once. Maybe they’ll be do the same for me. No more than that.
Chris, you can eliminate questions 2 and 3 by just sticking to fee only planners!
Steven
Have you considered an hourly-based fee rather than %AUM? A fixed fee can be hourly based if it is set based upon estimated hours after an initial interview (then adjusted annually). What do you believe are the pros and cons of hourly-based vs %AUM?
John, I used to do hourly planning and found it a little frustrating. Usually, there is a lack of follow up due to the sense of having a “meter running”. Or, I might get multiple small follow up questions or issues that might just take a few minutes. I wouldn’t bill on this but the advice might be worth a great deal.
So we do have a “quickstart” model for very young families on a case by case basis that runs about $1500 (we figure these plans take about six hours of our time)-with a separate charge for asset management if desired. I usually have one of my CFP daughter employees do most of the plan with my input.
Thanks Steven
I fully agree with your assessment of the frustration with hourly fees. But why not a fixed fee based upon estimated hours that is set after an initial interview? In other words, use the logical “quickstart” model for all clients. A $3million client might be very complex or relatively simple; why should they both be charged the same? Subsequent years might be much simpler than the initial year, yet the fee under %AUM is likely to increase.
John, there are many ways that fee only advisors are paid. They each have pluses and minuses and each of us has to pick something that works for us in general. Your suggestion is a good one, and there are some fee only planners that do this. There are others that charge on net worth, rather than on AUM, since advice is based on all the aspects of a family’s financial life (their real estate is not AUM but needs guidance at times). My model ignores net worth and only charges on AUM-which is a definite disadvantage for me when the family I work with has a large amount of assets not invested with me (quite common). But, the model works for me so far.
I look at fees like this-three potential benefits to the client-any one of which makes it worth it:
1) Will I possibly invest wisely enough to capture a return that covers my fee (this was certainly the case in 2006-9)
2) Will I prevent non investment mistakes that would cost more than my fee (such as estate planning errors, buying the wrong insurance, asset protection issues)?
3) Is it just “worth it” to pay to have someone else worry about investments/tax issues/estate issues/insurance issues/asset protection issues, etc.
There is a writer who addresses financial planning named Nick Murray. He urges us to build a good ark for our clients. But we should also recognize that not everyone needs to be on the ark and some don’t belong there. I like that!
Steven, your list makes very good sense. I agree that some people can handle DIY fine, but many others need the services of a financial advisor for the reasons that you mention. However, it seems to me that a fee keyed to benefit received (or potential benefit) makes no more sense than a doctor charging affluent patients a percent of net worth for a life saving procedure.
There are no conflicts of interest in medicine…other than compensation being based entirely on seeing as many patients as possible, and being compensated more for procedures. It’s always funny when I inform physicians of this. I then ask “So do you work solely to maximize revenue, or are you guided by ethics to do what is right for the patient.” Very interesting how the control of the conversation shifts. 95% of advisors can/will screw you over intentionally or semi-intentionally. But, for the good 5%, they are entrepreneurs who are motivated to build businesses that serve others, often just as well or better than the top physicians treat their patients. Again, insurance companies control most physicians’ careers, while these advisors can deliver solutions without similar restrictions. So, you are always welcome to bash advisors. But some of us will speak the truth regardless of how it pays us.
Everything financial is about your life goals. A robot advisor or a focus just on investments is looking at a tree and missing the forest.
saw my friends 3m portfolio with a fee based fiduciary advisor and 21k yearly aum fee
American Funds and hi expense funds and 12% in CASH
DO YOUR INVESTING YOURSELF-hire someone if need be to handle estate planning, ret plans, etc
Ken, your friend does not seem well served. But not everyone can do a good job of managing their own financial lives. Big mistakes in areas outside of just investments can cost a great deal.
I wonder if your friend has a fee only advisor-the American and other high cost funds suggest not.
Ken, this is not a binary choice — DIY or pay AUM fees. Some find investing a disagreeable or intimidating task and would prefer to pay others to do it. For these people, hiring an investment advisor absolutely makes sense. Passive DIY investing is not rocket science, and does not take a great deal of time once one learns the basics. Such investing is, of course, not difficult or time consuming for the advisor either. Therefore, the obvious third choice is to pay a reasonable fee for such service, such as hourly-based fixed fee. It might well have made sense for your friend to pay a 5k fee for competent advisory services, depending on circumstances.
So, I’d totally agree that paying for an asset allocation should be really inexpensive-you can get a decent product at Schwab for close to nothing or at Vanguard for 0.3%. The thrust of my article is that a good financial planner should be doing so much more for their fee.
I agree that a good FA can add much value apart from asset management; and perhaps adds little value for asset management. But then what possible rationale is there for charging a %AUM fee? A quote from a Forbes article:
“In olden times, a money manager could justify a 1% annual fee just for the work of assembling a portfolio. Why, with clever timing or security selection the manager could earn back the fee. So went the implicit sales pitch.”
Those days are gone. The argument today seems to be that the high fees generated by %AUM is justified by the high value of a broad range of services. CPAs, attorneys, and doctors charge high fees for high value services, but such fees are not tied to an artificial standard that is, at best, only remotely related to that fee.
“Fee-based” is not “fee-only” and it is certainly not “fiduciary.”
Great point. Fee based means they charge whatever method pays the best for any particular client. Even many “advisors” that call themselves fee only are not. Best to ask them to sign a Fiduciary oath or see if they belong to NAPFA.
My mistake. He pays .65%. Everyone needs to read bogle and malkiel and diy with stock and bond investing
A three fund portfolio can do the trick
My first read random walk told me to index, end of story
If you show someone how fees affect wealth creation as bogle does it would shake them up to get started doing it on their own
Of course you need a cpa and a firm fir ret plan administration and lawyer for your estate planning
Agreed if you want an advisor a fixed fee as you would pay your cpa
0.65% isn’t a terrible AUM fee if you’re getting good advice and service for it (and that’s all you’re paying, which probably isn’t the case if you’re in American Funds.)
Again, if all you need is an asset allocation, your suggestions are just fine. But there is a whole lot more to being well set up financially than just your asset allocation. The rest of the stuff is what a good planner will do for you.
WCI can appreciate this comment because he is both, as can any successful physician who has to generate his own clientele in practice. A goal of business is to establish a competitive advantage and maintain it. If you do not respect advisors who are savvy enough to accomplish this, you don’t understand business…and would like be better off with someone in the 5%. However, I prefer not to work with clients who don’t respect what I do. Another perk of running my own business…I can choose who deserves my time. And my time is incredibly valuable. If personal finance has turned from a hobby to an obsession for you, it would be healthier to work with someone who treats it as a profession, so you can trade your money for time.
If you lack a good deal of financial k owledge how can you possibly know if your advisor is doing a good job
With y friends portfolio he had a vanguard fund in investor shares and it had considerable assets
12% cash and hi fee funds are all red flags
My friend had no clue