[Editor’s Note: This post was originally published at ACEPNow and explains what to look for when hiring financial planning and/or investment management services. If you need even more help, check out our recommended advisor list.]
Q. I feel like I need a financial advisor, but they’re so expensive. How can I avoid being ripped off?
A. I have spent many years helping doctors who wish to be their own financial planner and investment manager to write and follow a financial plan. Given the plethora of resources online and in your local library, it is entirely possible to do this yourself. This approach has certain advantages, not the least of which is saving thousands of dollars in advisory fees every year—savings that can be either spent on luxuries or profitably invested toward your financial goals.
Nevertheless, I estimate that 80 percent of doctors want and perhaps even need a good financial advisor and should not feel ashamed of meeting with one. The key is to make sure you are getting good advice at a fair price. Obviously, it can be tricky for someone who needs advice to determine the quality of the recommendations and service, but ensuring a fair price only requires basic math skills and a knowledge of the going rate for this service.
The rule of thumb is that high-quality financial advice costs a four-figure amount per year, ie, between $1,000 and $10,000. If you are paying more than $10,000 per year, you can almost surely get the same (or better) advice and service for less money. If you are paying less than $1,000 per year, you are unlikely to actually be receiving high-quality, personalized advice.
So What Am I Paying For Financial Advice?
Unfortunately, the industry has placed several obstacles in the way of determining what you are actually paying. There are multiple compensation models, and the actual transfer of money to the advisor only rarely involves the obvious writing of a check. Often the method of compensation introduces conflicts of interest into the relationship.
This is most evident when a commissioned salesperson of financial products is masquerading as a financial advisor. If you are not aware of how and how much you are paying your advisor, determine that immediately. If a review of your contract and account does not make this amount obvious, then the next question you should ask your advisor ought to be, “How do I pay you, and how much have I paid you in the last year?” Good advisors are not offended by this question. They know their value and want a good fit with clients willing to pay for that value.
Paying for Financial Planning vs Investment Management
A strong argument can be made to separate out financial planning from investment management and to pay for those two services separately. Investment management is an ongoing service you will need every month for many years that is most appropriately paid for with a flat annual fee or perhaps a reasonable fee based on a percentage of assets under management (AUM) of well under 1 percent per year. Either way, that fee should add up to a four-figure annual amount. If you are paying an AUM fee, do the math (amount of assets managed multiplied by the fee percentage) each year to ensure the fee is still reasonable. Financial planning, on the other hand, is more of an upfront/one-time activity with a fee of a few thousand dollars. You simply do not need a new financial plan each year. Perhaps it needs updating every few years, but there is no reason to pay for financial planning every single year for decades.
Finding Quality Financial Advice
Once you know you are paying a fair price, you can turn your attention to the quality of the advice. You want your advice to come from an experienced fiduciary, fee-only advisor with a commitment to the profession. You want many of their clients to be dealing with the same financial issues you have: If you owe $300,000 in student loans, ask how many of their clients owe $300,000? If you earn $400,000 a year, how many of their clients have similar incomes? If you are a self-employed physician, how many of their clients are self-employed?
You also want your advisor to avoid methods of investment that have been shown in the academic literature to be less effective. These include stock picking, market timing, the use of actively managed mutual funds, and extreme combinations of investments. It is a good sign if your advisor is talking about keeping costs low, using index funds, and being prepared for any possible future outcome because no one can predict the future.
It can be worthwhile to seek out recommendations for advisors. However, rather than turning to colleagues who use an advisor, I would recommend you reach out to financially knowledgeable colleagues who do not use an advisor, as they are more capable of recognizing when an advisor is offering good advice at a fair price. Reputable websites may also provide lists of recommended advisors, but remember to do your own due diligence as well.
You should read the required Securities and Exchange Commission disclosure document, titled “ADV2,” which can be found at www.adviserinfo.sec.gov/IAPD. Sections five, eight, and nine are particularly important. You should read the advisor’s website. You may even consider paying to have a background check done. But at a minimum, do an internet search of the advisor’s name and the firm name combined with terms like “scam,” “arrest,” and “review.” Online reviews may be worth looking at, but remember that they are no more accurate for advisors than they are for doctors and are often just as unfair.
If you need financial advice and assistance, do not avoid hiring the help you need just because it costs money and requires a bit of effort. The price is likely well worth paying, and due diligence can be done quickly and easily. Just ensure you get good advice at a fair price to speed you along your way to financial stability.
What do you think is a reasonable way to pay for financial advice? Comment below!
This is a fair and balanced article. There is no “one size fits all” financial planner for everyone-so blanket recommendations are unwise. In general, not using a strict Fiduciary is a bad start-why start with someone whose interest is not aligned with yours-this can be accomplished with most certainty finding a firm through Napfa.org.
Using any brokerage or insurance based “advisor” will generally be a big mistake, even if they tout the “CFP” mark.
Once you’ve done the above-your next choice is to decide if you need intermittent or ongoing help. You can find hourly planners for intermittent help, and both flat fee and AUM advisors for ongoing help. Either should serve you well.
**Snark on**
…or just read WCI and save a bundle… 😉
**Snark off**
I post this link to an article highlighting Ken Fisher who owns a leading AUM style investment firm. I post this not to highlight the crudeness of his remarks but rather to highlight what SOME AUM style managers really want which is to make a living skimming off a small slice of their clients assets each year.
Many AUM style managers don’t Focus on their income more than their clients but some do. So if you are using or considering an AUM style service……Think hard about whether they really are looking out for what’s best for you.
See link here
https://www.washingtonpost.com/business/2019/10/10/these-ceos-broke-rules-secretive-summit-expose-billionaires-crude-sexual-comments/
you can use planvision. 96 dollars for the year.
Should I go to Mexico for fine dental services and Thailand for surgery? Much cheaper and I’ve heard quality is good too?
I bet they do investment management for cheaper too. Good idea.
Cheap perhaps, but good? Lots of cultural differences.
It was mostly tongue in cheek, but it would be a whole lot easier to outsource your financial planning and investment to Mexico than your health care!
There are firms like mine(keshemberg.com) that exist that do a great job at a very reasonable cost. Firms that have low overhead can pass that savings onto clients.
$10,000 a year for financial advice seems huge. If you have a complex business that requires a large and complicated tax return then maybe you would pay your accountants that much. But that would business services, not personal financial advice.
Maybe one could get the annual total that high in a year in which they did comprehensive estate planning and had a lot of things to be done. But that does not happen every year.
Otherwise, this could happen by paying AUM fees for investments. Even Vanguard’s new pure robo investment plan apparently charges 0.15%. A client with 6 and 2/3 million would be $10,000. Of course, one could set an asset allocation, using a financial advisor if necessary, then maintain that for far less. Check in annually with Rick Ferri or Alan Roth to determine whether the allocation should change. If so make the changes yourself and pay no AUM fee.
Sitting on a portfolio of a handful of index funds takes almost no time. If you pay someone 10k for the 3 minutes it takes them to look at your asset allocation and either rebalance or do nothing, you are giving them an hourly rate of $200,000.
Sure they have other expenses. However, these are expenses that you need not pay. Your broker or mutual fund company will send you statements and tax forms at no extra charge.
Setting aside special tax or estate planning needs, annual financial advice should be much less. Most years $zero. In years in which advice is needed- some modest figure under $1,000.
$40,000 to $100,,000 for hip replacement surgery that can be performed in Europe for $12,000? Why? Prices in the U.S. seem huge to me. Oh, and their outcomes are better too with less post surgical infections.
I think you are potentially doing a great disservice to a number of physicians with your dogmatic rejection of ongoing financial advice. Certainly you have a great deal of knowledge as do many of the participants on this site, but you also must realize that there are a great number of colleagues that have neither the Interest time or aptitude to be well-versed in the many different issues of financial planning. As I have stated before on this forum the cost of just investing should be extremely low if not almost free. However adding the emotional discipline to avoid greed and fear in investing as well as having ongoing advice in the many other aspects of personal financial planning and business financial planning is something that is worth paying for. It pains me that the majority of physicians are paying stockbrokers in insurance agents a multiple of what a fee only planner would charge them and yet getting a terrible asset allocation and no other good financial planning advice.
I have seen some tremendous financial mistakes as well as many potential tremendous financial mistakes that would cost a lifetime of fees. There are different options and choices that are appropriate for different people. Intermittent fee only planning is fine for some but not a good option for others. The continued disparagement of a relationship with a trusted advisor is disturbing.
Not sure what you’re talking about. I quote directly from the article:
“Nevertheless, I estimate that 80 percent of doctors want and perhaps even need a good financial advisor and should not feel ashamed of meeting with one. The key is to make sure you are getting good advice at a fair price. Obviously, it can be tricky for someone who needs advice to determine the quality of the recommendations and service, but ensuring a fair price only requires basic math skills and a knowledge of the going rate for this service.
The rule of thumb is that high-quality financial advice costs a four-figure amount per year, ie, between $1,000 and $10,000. If you are paying more than $10,000 per year, you can almost surely get the same (or better) advice and service for less money….
A strong argument can be made to separate out financial planning from investment management and to pay for those two services separately. Investment management is an ongoing service you will need every month for many years that is most appropriately paid for with a flat annual fee or perhaps a reasonable fee based on a percentage of assets under management (AUM) of well under 1 percent per year. Either way, that fee should add up to a four-figure annual amount.”
That doesn’t sound like a dogmatic rejection of ongoing financial advice. You must be reading something between the lines that is simply not there. Are you sure you read the same article I wrote?
Why would I have a list of recommended investment managers if I didn’t think any of my readers should use that service?
Jim I was responding to Afan’s post immediately before mine. However, his comments are repeated by others in the forum, which is their right. I agree with your comments and attitude and your curated list of approved advisors is a real service to physicians.
I’ve been a physician for over 35 years and know “whats out there” both in terms of physician management of their financial lives as well as what the financial services industry has to offer.
I think that 99% of physicians would benefit greatly from at least intermittent consultations with a fee only CFP trained advisor. I find the hourly/intermittent model somewhat unsatisfying on both ends, but it works for some. As to AUM vs flat fee-I see “tiered” flat fee as just another method of AUM billing.
It would be easier to see that if you hit “reply” immediately beneath his comment rather than just leaving your own stand alone comment which appears to be responding to the post itself and starts a new string of comments.
Got it-will do so in the future Thanks
More dogma:
Hourly fee for service is a fundamentally better model for the client, although worse for the advisor. This advice is like hiring a lawyer or buying food or gasoline. You buy and pay for it when you need it. If the car is full, your refrigerator is stocked, or you have no legal issues right now then you get nothing and pay nothing. It would be foolish to pay someone a large amount of money on the chance that you might need their advice. If you need advice then buy what you need and pay for it. Pay nothing the rest of the time.
I agree that investment management should be nearly free. At most, the price should be about the difference between the expense ratios of a handful of underlying index funds and the expense ratio of a balanced fund. For the size portfolios that many doctors may end up with, even that difference becomes hard to justify in dollar terms.
At $10,000/year and say $300/hour, one is talking about 33 hours of advice EVERY YEAR! How many people need that? I can accept that someone might have a complicated series of issues arise one year and, just maybe, need that much help. But someone who has that much need every year should rethink how they run their life.
If you hire someone to run your business, then of course you pay them for that work. This might be a salary or an hourly rate, but first you would determine how much ongoing work your business needed done. Again, it would be crazy to pay year in year out on the chance that you might need something done.
Paying an AUM fee is paying for asset management. There is no reason the need for advice would scale with the size of the portfolio. Even the wealth of the client may not scale with the size of the portfolio the advisor can manage since many assets might be in retirement or deferred compensation plans or ownership interest in a practice.
When advisors are paid for asset management that is what they focus on and that is how they compete for clients. There is no reason to expect that someone who can manage investments is good at the non investment part of financial planning. That is why Vanguard has CFP’s for financial planning and portfolio managers to run the funds. What do the portfolio managers know about Social Security claiming strategies or malpractice insurance? Why would I expect them to know anything?
Thanks afan-but I’d argue your advise is good for some but not all. Those that use hourly planning either generally don’t call for questions or help between “visits” as the hourly model doesn’t really fit with quick questions, etc. I am asked “quick questions” (which are often anything but quick) several times daily. There is a value to access-I’d suggest it is comparable to concierge medicine-which is growing rapidly for perhaps the same reason.
10:28 am – I’ll hit reply in the future
2:40 pm – Doesn’t hit reply
😀
When advisors are paid for advice then that is what they focus on. They build reputations for the quality of their advice and people come to them for that. They have to stay on top of the financial planning field inorder to maintain reputations as experts. Those financial planning topics cover a wide range of things that have nothing to do with investing.
Even with the high exclusion currently, there are people who have to consider Roth converions to avoid having their assets subject to estate taxes. They may need an attorney or knowledge accountant to help with that. They do not need a portfolio manager.
Putting financial and investment advice together is a good way to get, at best, one of those tasks done well, perhaps neither.
For most advisors a straight hourly fee for service arrangement is unappealing. There is no steady income flow. It all depends on a constant stream of clients. Since very few will need dozens of hours of advice in a year and nearly none will need that every year, much of the advisor’s time has to be spent getting new business.
It is the same for lawyers. Those who can nab a few large businesses as clients can count on a constant stream or work without having to pound the pavement bringing in business. The difference is that lawyers don’t have a way to charge a lot of money for doing almost nothing.
For the advisor the secret to success is to collect AUM fees while not having to spend much time at all on each client. There are only so many clients to whom an advisor can devote 33 hours a year. But if they can collect $10,000 from each client while doing less than an hour a year of work then they are on their way to a profitable business.
It is not so much a matter of the client having a lot or a little knowledge. Once some decisions have been made the client may not need any ongoing advice at all. Even if they don’t have time or inclination to learn about financial planning, 99.999% of the time they don’t need such knowledge.
Go about their business, save money and pay taxes according to a plan. Perhaps a plan an advisor provided them, perhaps one the client created on their own. No need to revise the plan for an hour three times a month.
Nothing else to do, so nothing else to pay for.
$10,000 is a lot of money. 33 hours a year is a lot of advice. An advisor who works 48 weeks a year, 40 hours a week providing advice with managing their practice, continuing education and vacations coming out of the 4 weeks or greater than 40 hours could have 58 clients total. But of course, the advisor has no intention of providing anything approaching 33 hour/year for each client. Maybe 10% of that amount. Preferably less. Which will be all the clients need.
So the challenge is to get a large number of clients to pay for much more advice than they need, then not use it.
If you are looking for Financial Adviser to find the right investments or Investment Managers that beat the low cost index funds, you are wasting your time and money.
It is statistically established that 95% of active investing managers do not have the capability to beat the S&P 500.
For estate planning it makes more sense to get with the lawyers who specialized in Finance!
For estate planning one needs lawyers who are expert in estates and trusts. But you don’t need them every year. It would be crazy to pay a lawyer thousands of dollars a year on the chance that you might have a legal question.
If you are settling an estate or just sold a business then you may need an enrolled agent or accountant to sort out these nonrecurring tax issues. But you don’t need that every year.
If you refuse to do your taxes yourself you can hire highly qualified people to do them for you for way under $1,000. No need to pay anything approaching $10,000 unless you are running a fairly big business.
If someone needs 33 hours a year of advice, year after year, for personal finance I would love to know what for.
AFAN, your comments are well written and spot on. This is a great time to be a DIY investor. Paying a planner 1-2% is joke. Also in response to your other comments, I’ve used the same tax accountant for 25 years , and I currently pay $300-400 depending on my return. I had a trust attorney do our original trust and had it updated 20 years later after we moved out of state. Total for both about $6K. (original cost, not inflation adjusted but you get the point). I’m aware some people have more complicated financial matters but I would say my situation is probably more typical.
The best financial advice I ever got was “fire your financial advisor.” I did and immediately saved the 1% of assets (and trading costs) I was paying him every year to churn my portfolio. My only advisor since then has been John Bogle, founder of Vanguard Investments. The clear, simple, irrefutable advice he gives in The Little Book of Common Sense Investing is all you need: invest in low-cost, tax-efficient, broadly diversified index funds and you’ll beat the vast majority of professional money managers year in and year out.
Michael Hennessy – same here. I fired my financial adviser (0.5-1% fee every year for more or less S&P performance), read Bogle’s Little Book and saw the light. I’m 99% invested in passive index funds, and manage my portfolio. However, I have a strong partner – Fidelity. I’m surprised nobody else mentioned them. I meet with my Fidelity financial adviser twice a year to review my portfolio, hear his advice and adjust my holdings. He helped me balance my portfolio, switch from TIPs to tax-efficient individual MUNI bonds, and replace a few funds by more efficient alternatives (not necessarily by Fidelity). The most surprising aspect of our relationship is the cost – exactly $0. Am I paying too little? I don’t think so – I’m getting excellent and unbiased financial advice. Just wondered if other people had a similar experience or my guy is unique.
To be fair, the point of an advisor isn’t to beat the market. If your advisor possessed that ability they’d be running a hedge fund at 2 and 20. If you’re expecting that sort of thing from an advisor, you’re always going to be disappointed. I expect an advisor to draw up a reasonable financial plan and help me stick with it while achieving the returns the market will provide.
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Seriously, no one on this site would pay 2 and 20, no matter how well they performed. Bogle would have just said it was nothing but lady luck.
I’d pay 2 and 20 if I came out ahead after paying the fees. But the higher the fees, the less likely coming out ahead becomes, even if the advisor is skilled.
Hi,
I’m in NYC. I think I need to meet with a financial planner just to get a framework and to get started down a path. I would prefer a one stop shop with someone who is honest, smart, thoughtful, and with an extensive knowledge base like White Coat Investor.
I need investment advice, tax advice (for example, from reading on your site, I learned maybe it was a bad idea to have formed an S-corp for my side work), things like if I should do a Mega Backdoor Roth IRA, organize my hodge podge of stocks, and just optimize everything I possibly can in my situation.
Terrified of being ripped off, getting wrong information, or just getting someone mediocre who is not worth the money (this has been my experience with many accountants)……also been going for years and years feeling uneasy that I have to organize and optimize my finances.
From White Coat Investor’s list, has anyone tried Samalin Investment Counsel (Westchester, Manhattan, and Long Island) or Enlight Financial (based in NJ)? ANy other recommendations in the NYC area?
Thanks!
If you absolutely must have someone local, you’re severely limiting your options. You’re basically saying that “local” is more important than something else on your list. I don’t think that’s wise.
That said, if they’re on my list, I think they’re a good advisor and I stand behind the recommendation. If you use someone on my list and you feel they shouldn’t be on it, please let me know about your experience.
You are right; it just seems easier to meet with accountants and financial planners in person, especially given all the paperwork involved.
I know you stand by everyone on your list, but I was hoping maybe some people would post their personal experiences with the ones that I mentioned that are more local to me.
If you think there is an outstanding one-stop shop person in another state, I would also be happy to entertain that option and hear people’s experience with them.
I’d try asking on the forum. You know only a dozen people follow any given blog post. Posting questions here is mostly posting them just for me.
How do I post on the forum? I went on there and clicked around but could not figure out how to post.
Sorry and thanks.
Sign-up using link at upper right.
You are right; it just seems easier to meet with accountants and financial planners in person, especially given all the paperwork involved.
I know you stand by everyone on your list, but I was hoping maybe some people would post their personal experiences with the ones that I mentioned that are more local to me.
If you think there is an outstanding one-stop shop person in another state, I would also be happy to entertain that option and hear people’s experience with them.