I am continually amazed at the lengths to which investors and advisors go to make investing complicated. Now, I don't expect anyone to necessarily agree with my particular way of investing, but it's like people have no idea of what matters and what doesn't when it comes to investing.
For example, I got into a Twitter spat recently. It was with a blogger who focuses on choosing dividend stocks. The spat was over how long it took to learn “how to invest.” He was convinced it was a “lifetime process” that would take “at least 5 years.” I pointed out that the only requirement to invest other people's money is a series 6 exam- for which a typical study regimen would be 3 hours a night for a couple of weeks. Even a “high-level” designation such as the CFP only requires about 200 hours of studying (approximately 2 1/2 weeks of residency) and 3 years of some kind of related experience (which can be 100% in sales of financial products.)
Investing Doesn't Have to Be Complicated!
Needless to say, I thought 5 years was excessive, not to mention a lifetime. Now, I do think a lifetime of “continuing financial education” actually IS required, but that is a relatively easy requirement to meet. Maintaining a good investment plan can be ridiculously easy. If you don't believe me, I suggest you spend a little time with Mike Piper who has a very sophisticated, one-fund portfolio.
Despite the ease with which one can manage their own portfolio, I am often asked for referrals to financial advisors. There are some people that simply do not have the relatively low level of interest required to learn enough to manage their own portfolios or lack the discipline to stick with a good plan. Those people, perhaps 80% of doctors, can be best served by putting them in touch with those who give good advice at a fair price. So I have a pre-vetted list of financial advisors who not only give good advice at a fair price but are sufficiently interested in obtaining new physician clients to advertise on the site.
Adding the Twist
What is incredibly interesting as I go through this vetting process with dozens of advisors over the course of a year is just how much variation there is in the way they do investment management. Almost every advisor I run into acknowledges the merits of a “know-nothing” fixed asset allocation of low-cost, broadly diversified index funds, but they all add on their little twist.
However, it is always a different twist. A few months ago I had three advisor applications to review in a single day.
- This first application actually had a very reasonable investment management strategy, but I had to turn him down as he hadn't advised a single physician in the last year. I thought it would be hard to justify that to my readers.
- The second used low-cost index funds, but added on an options strategy “to control risk,” but when I went to pin him down, he was buying options every month.
- The third used actively managed mutual funds “where it made sense to do so.” That was pretty vague, so while pinning him down, it turned out he believed indexing didn't work with certain asset classes, which of course the SPIVA report card does a pretty good job disputing. It would do an even better job disputing that if it went out 20 or 30 years instead of just 5. But if an advisor wants to use actively managed funds, I like to see them using low-cost ones, since the real story of indexing is about costs, and this advisor wasn't doing that. Another frequent one is some version of tactical asset allocation — where the overall portfolio asset allocation is changed in response to, well, something (it varies quite a bit.)
These twists are actually the usual story, and I always have to decide if the “twist” is enough to disqualify them from my recommendation. I figure if they're mostly doing things the “right” way, that I can live with that. (There are no perfect advisors anyway.) If they're not, then I disqualify them. But why do all these advisors have to try to implement their “edge” anyway?
So, Why Make It Complicated?
Four Reasons Advisors Want “The Edge”
#1 Possibility of Increased Return
The first reason advisors try to always have some little edge is they really think it makes a significant difference. Maybe it does, but I'm confident nowhere near all of the “edges” I've seen do that. Most of them probably just add expense and subtract from returns. Now many, many individual investors also try to add a little edge to their portfolios. Maybe it's an “extra” asset class. Maybe it's a unique way to rebalance. Maybe it's a little tactical asset allocation or market timing or use of individual securities. Advisors are hardly the only ones guilty of this.
#2 Distinguish From Competition
The second reason is that advisors need to find some way to distinguish themselves from the competition. The “edges” do a fine job of doing this. Now nobody can tell what the heck anyone is doing when it comes to portfolio management. This has been studied in medicine, and it turns out that all those little variations generally result in substandard health care. But advisors want to avoid being a commodity because when you become a commodity, it becomes a race to unprofitability as everyone competes on price alone.
#3 Justify Fees
The third reason advisors use these little edges is to justify their fees. If all they were doing is managing a static allocation of index funds, rebalancing it occasionally, and maybe doing a little tax-loss harvesting, then they could be replaced with a robot. Hmmm…come to think of it, this explains a lot about the rise of the roboadvisors. But it turns out that the value-add for a “real” advisor isn't in the “edge” with the investment management, it's in the financial planning and in the “high-touch” aspects of investment management- building around the random investments in some doc's 401(k) and keeping him from selling low with every Brexit and Trump election.
#4 To Appear Active
Finally, the edge satisfies the demand of advisors, clients, and individual investors to tinker with their portfolios. We all have this idea that we can add value to our portfolio somehow if we just learn enough and work hard enough. We WANT to be active, even when we know the right thing to do is to invest our time actively and our money passively. If you really want to add work and want to add value with it, look to invest in real estate, websites, and other small businesses.
Rappelling, Zion National Park
What Really Matters With Investing
It seems a good time to review what really matters when it comes to investing.
- Setting appropriate and important goals
- Earning more money
- Saving a higher percentage of earned money
- Taking an appropriate amount of risk (i.e. a reasonable asset allocation)
- Setting up a reasonable investment plan
- Sticking with the investment plan
- Minimizing taxes and fees
If this list ends at # 7, all of those “edges” start way down on the list of importance at # 20. That stuff just doesn't matter much in comparison. It certainly doesn't matter enough to pay much for. If you're interviewing a potential advisor, walk away if he spends the whole time trying to sell you on his idea of an edge instead of basic nuts and bolts financial planning and investment management. If you're functioning as your own advisor, focus your time and effort on what matters and quit looking for an edge yourself.
What do you think? How long do you think it takes to learn to invest? Why do we try to be unique and edgy? Why does every advisor have their own version of “the best way to invest?” What do you think matters most in investing? Comment below!
I love your fourth point – the almost insatiable desire to tinker. It must be a common human trait to want to fiddle with things instead of leaving well enough alone. I struggle with it. Advisors with an “edge” play into that notion.
Hi Jim,
I had the friendly conversation with you on Twitter. You claimed that you can teach someone to invest in an hour ( the time you learn how to use a lawn mower). This is not possible – hence I told you it made you sound like a snake-oil salesperson.
The biggest reason for my objection is the behavior one. You can have all the theoretical knowledge in the world, but that won’t protect you from yourself. This means that few people stick to their investments through thick or thin and do not tinker. Many investors sell when prices were low, and others have been trying to pick a top for years. Hence, you need actual experience investing actual money throughout multiple cycles of bear markets and bull markets. I said 15 years initially, but I would say at least 5 is a minimum.
The other reason is, I know that it took you years to get to where you are today. I also know you personally spend hundreds of hours to get to where you are today. You probably spent a lot of time reading research, before you could select the 15 – 20 asset classes in your portfolio. I also assume you spent a great deal of time picking individual loans for your P2P portfolio. I know you spent a lot of time on your portfolio, because your selection of index funds today is different than your mutual fund selection from a decade ago.
As for your comment about advisers – I admit I am not knowledgeable about them. I know most advisers are essentially salespeople, whose training revolts around selling some sort of mutual fund of the month. Of course, if you were to select an adviser, would you trust your money to someone who just completed a 5 week course, or would you trust them to someone who has spent years advising clients?
So yes, I disagree with you. And yes, you need at least 5 years to be a decent investor. Investing is like any other profession – you need several years to learn. It is not possible to become a good accountant in less than 5 years. But since you blocked me on Twitter, I blocked you as well.
Good luck in your investing journey!
Dividend Growth Investor
You dont even need to pay attention to be a good investor, and in fact those are some of the best, ie, the research showing those that forgot or were dead were doing the best.
If all people did was just throw it into a target date or broad market index and dont mess with it, they will be a good investor. You’re a dividend guy so your definitions of investing are very different and specific. You pride yourself on finding solid companies, watching them and their dividends grow, etc….
All thats really required are the main points above. This has been the whole point and proof in the pudding in the passive movement. You may not like it since it counters your personal opinion, but the proof is there. No one “needs” to do anything other than consistently contribute and never think about their simple index portfolio, which many on this very website do.
Kind of reminds me of the whole life agents who come on the site. I block their IP address from commenting and they start sending me emails. It’s like a moth to a flame.
Your assumptions about the amount of time I spend on my portfolio are way off. I haven’t picked P2P loans individually in years. My selection of index funds changes only due to changing options in my available accounts. Until this last month, we’ve basically been following the same written investment plan since 2005.
[Comment whose primary purpose was trolling removed and commenter’s IP blocked, just like on Twitter. Please don’t start sending me emails.]
The number of years of investing experience does not matte–as there is no way to predict how long a bull or bear market will last. Anyone who thinks they can time is market is kidding themselves.
What matters is automated dollar cost averaging in low-cost index funds.
It is pretty simple.
Although I mostly disagree with DGI, s/he does have a valid point. In financial matters–much like in medicine–real learning occurs “on the job.” Its easy to read the WCI book and “know” how to be a good, simple, effective investor. But doing so in real life is more challenging. It surely doesn’t take 5 years; but I think the “see one, do one, teach one” adage applies. Its hard to know how you’ll respond to the first bear market you face as an investor or if you can resist buying up a hot stock tip from a colleague. But live through each of these experiences (mistakes) once and you’ll have it down pat.
I had the written investing plan I have been following for the last 12 years within a year of starting investing. And that was a year when I was a busy resident. If you can’t learn “how to invest” in a few months, you’re reading the wrong books.
Agreed, I “learned how to invest” in 1 month at the tail end of training. Read WCI’s book, read most of the posts on WCI’s blog (an easier endeavor at that time since it was earlier on in the blog’s life), and picked up most of the basics.
The idea that learning investing would take more than hour if it were not theoretically possible (and frankly not a bad idea) to put every dollar of your retirement funds into a Vanguard targeted retirement fund.
Are there issues? Absolutely.
Would you get rich quick on stock trading? Definitely not.
Would be outperform most active management and probably end up with a reasonable 5-7% rate? Almost certainly.
Sure, I’ve spent a lifetime “learning” how to invest. But it’s not necessary, not even to work at top investment banks on Wall Street.
I was hired to work as a trader at an investment bank after college. I majored in finance, but many of my co-workers who were hired with me majored in English, politics, art history, etc. Kind of like Michael Lewis in Liar’s Poker. Some may have taken few, if any, economics or finance classes in college. So this major investment bank takes all the new college graduates from around the world to train them about the basics of finance and investing so that they can sell and trade financial products and be “ready to work” when they start their jobs in New York, London, Hong Kong, etc.
How long was this course? 6 weeks.
At the end of the 6 weeks, we are expected to take and pass the Series 7 exam, a 260 question test required in order for you to be a registered stockbroker. Then we start working, selling and trading financial securities to companies and hedge funds who are seeking that “edge”.
Everything is a sales job. All investment advisors, insurance brokers, even physicians, we are all selling. Selling ourselves, selling our knowlege, selling how we stand out from the crowd.
As a physician, I am glad I don’t have to come up with a unique twist to my approach to evidence-based medicine. I glad I don’t have to sell to every patient that walks through the door to get them to buy.
I though you framed it best a few posts back. Start managing your money when you are young. Even if you make a few mistakes early, your loss won’t be too significant. It will be way cheaper than spending almost a million dollars in fees over your lifetime to have someone else watch it for you.
The best advisors are there to prevent you from making rash emotional decisions with your investments. That is the value that they add. They have seen a bear market and can walk you through the process. They keep you invested despite your overwhelming urge to cash out. They know your risk tolerance and keep you on your plan. They don’t need to add anything extra. They just need to keep me on the plan. If you don’t trust yourself to keep calm the next time it looks like the world is going to end, then a good advisor will be worth the price.
I think a year or two to learn is a fair assessment. Though I agree with WCI that all it really takes is a few afternoons to actually learn the critical bits to be a successful passive investor, it takes a few years to learn by experience to rid yourself of the innate tendencies toward tinkering etc. The first year or two I invested I was all in on a 4 fund portfolio, but every new book or article or Bogleheads post made me want to shift my AA, pick a slightly more diversified international index to track, change to only using G fund for bonds, etc. There’s still a learning period of tinkering even within new investors committed to passive investing until you settle into what ultimately ends up being “your strategy.” Thanks for the good works WCI!
That’s probably true. But since the tinkering probably didn’t do a lot of good and may have even done harm, it can probably be safely ignored!
Oh I definitely agree with that. There was likely nothing gained in any of that, but a new and unconfident investor like me sees things like Global Ex US VS global ex us IMI and thinks they need to change because they maybe weren’t aware of a slightly more diversified index being available, which bond index is really preferable, etc. Learning how to get into a simple 3 fund portfolio takes an afternoon, no doubt about it. But getting comfortable with your AA, say having 30% international vs 20%, international with or without small caps, total us bond or total world bond for your bond allocation, etc can be a frustrating thing for a new investor to finally settle on and take some time since there is no clear cut right answer in the way that passive beats active.
Absolutely agree. I had the basics down just fine when I started, but the more I read from additional sources (Merriman, for example) the more I wanted to adjust my plan, and slightly did.
It took a year or so from that point to realize that my original plan had been fine for me. I’m glad I did the additional research and reading though. It made me more comfortable in knowing that I got the “tinkering” out of the way early, and knowing that my plan is sound. Now I don’t even think about making changes.
Great article, but it struck me that you missed one important triage point: risk tolerance. If the risk tolerance is finite on a positive continuum somewhere, the article applies. But many have ZERO risk tolerance, dictating ONLY fixed income investments investments. I believe that discussion takes you down a different trail: CDs, annuities, life insurance, etc
This doesnt make any sense. Those people are just misinformed on risk and need to be educated. They are taking a huge risk in that kind of allocation, that is it will not keep pace with inflation or increase their purchasing power.
This isnt avoiding risk its trading it. While they may feel safer they would be much less so in reality.
Exactly, as Nick Murray says “You can either have the discomfort of price fluctuations when you are young and have an income from your job, or the discomfort of running out of money when you are old and no longer have an income from your job.”
As Phil Demuth has said,
There are very serious consequences to having zero risk tolerance as discussed in this post:
https://www.whitecoatinvestor.com/the-reason-you-take-market-risk/
Thats an excellent paragraph, I love it.
Here actually is where an advisor is helpful (I don’t actually believe they can make a nonsaver save). COnvincing/ teaching an investor that only fixed income investments over several decades almost inevitably leads to a lot less money.
What matters most? Confiscation — in the form of fees and taxes. I’ve got my overall expense ratio down to 0.08, and try to invest in the most tax-efficient manner. Dividend growth investing is certainly not a tax-efficient way to invest, at least not in a taxable account, which is where half my retirement money is.
I do try to gain a little “edge” with some tilts to small cap value and emerging markets. I think it’s natural to want to perform above average, so I suppose I can’t help myself, but I also think I would be just fine with a simple three or four fund portfolio.
Cheers!
-PoF
Dividend growth investing is not a less tax efficient way to invest. It is also less diversified and therefore has a higher dispersion of expected returns and therefore a lower probability of an optimal outcome.
Ouch…should read, dividend growth investing is not ONLY a less tax efficient way to invest…
Dear PoF, I don’t perceive your “tilting” to small cap value and emerging markets as being that edgy. It sounds like a reasonable and rational AA that was described in the WCI post about the 150 portfolios, or Bernstein’s Investor’s Manifesto. I enjoy your website and posts. Keep it up!
I personally think that most advisors want to tinker for your third reason – to justify their fees. After all, if they just advised their clients to invest in a three or four -fund Vanguard portfolio, many of their clients would wonder what exactly it is that they’re paying for. As you mentioned, it would be better for financial advisors to focus on the parts of their jobs that can’t be outsourced to robots-if they don’t, they’ll find themselves obsolete. Overall wealth management, tax strategies, debt management, and focusing on the clients entire financial picture would be better for the client and the advisor.
This is a great analysis of advisor motivations. If you just want to mirror the stock market, buy index funds or ETFs on your own. It’s almost impossible for an advisor to add enough value with this strategy to justify their fees. As WCI suggests, the only way to outperform the market is to find inefficient and illiquid markets like real estate and small businesses. The trick then becomes finding a manager who you trust. An inefficient market rewards those who have superior information and relationships, so you won’t be able to do this on your own as a part time investor. Can an advisor help you find the right manager? I think one out of ten or twenty can, but you can find good managers on your own. Does the strategy make sense and is it clearly explained? Are the fees clearly disclosed? Contact the manager directly and try to poke holes in the strategy. If you don’t get good answers, move on.
I agree. That is a difficult trick. Especially since the feedback loop is so long. You might not know if you can trust them for 5-10 years.
You might not see complete investment results for 5-10 years, and by that point, they are obsolete anyway. What you can figure out is whether the manager is being transparent, and whether the strategy is well thought out. That’s just about asking the right questions, which doctors are pretty good at.
Seeing a full cycle of investment results can take 5 to 10 years, by which point they are not terribly relevant anyway. Evaluating whether the manager knows what he is doing and is being transparent can be done by asking the right questions – something that doctors are pretty good at.
It might be an interesting guest post to see a list of those questions and what the right and wrong answers (and why) to them are!
That’s a good idea. I’ve done a couple of “Ten Questions” pieces for investing in REITs and in Net Lease deals. These are posted in the Resource Center at https://www.capfundr.com/. I will do one on evaluating managers as well.
I have never used financial advisors for 2 reasons.
First, I would like to find an advisor who would share the risk. Advice is not worth anything unless it is effective. My philosophy is that if I make money, then my financial advisor should make money. If their advice does not bring in gains then they should not be paid for poor advice. So far I have never found a financial advisor who would share the risk with me for a larger percentage of any gains.
Second, for financial advisors who have been in the field for many years, I always wonder, “if they’re so good at being financial advisors, then why aren’t themselves retired and living the good life”.
Cynical in Oklahoma City
A lot of real estate money managers do exactly they- invest their money alongside yours. They do generally charge a bit more than a typical advisor helping you with a portfolio of index funs though.
Great post as usual! And congrats on the two Docs coming together to make this even better for your audience. Well done. As a “wealthy executive and business owner” for comment purposes (not a Doc or related), I subscribe to everything we talk about on WCI and similar themes.
I think the advisor’s only role ultimately for people like us, given the rise of index investing, ultra low cost management and robots, is to be the conduit for more advanced structural things that we need to protect ourselves and our families from risk, minimize taxes, and optimize our financial lives in an integrated way. I’m not talking about insurance, which is personal and can be very simple. I’m talking about hard and soft structures and other long term planning things that end up being important when you have something approaching real wealth (like Docs, other professionals and business owners if they follow WCI themes).
Of course, garden variety advisors do not have these skills today and likely never will. That’s why I think over time the cohort of people currently in the market will be largely disintermediated on the low end, and be replaced by real legal, accounting and life/wealth planning people on the high end.
I’d say I had it mostly covered after I read ‘The Bogleheads’ Guide to Investing’
I like your article very much. I am 72 years old and have done my own investing for 25 years employing your 7 principles and avoiding investment advisors. The implementation requires more emotional intelligence as opposed to actual IQ. An issue does arise when one converts these accumulation phase principles to the distribution phase. I personally did not want to be selling securities to fund retirement because of sequence risk. The opportunity to include an income strategy came in 2008-09 when I shifted in part to individual dividend stocks, etfs, and municipal bonds. So far so good, when I retire I should be able to go to the grocery store. The point is, an article dealing with conversion to the distribution phase would be interesting to readers because it is not straight forward in view of tax consequences etc.
I am relatively new to the investing game. But we have been following all of your advice for a couple of years now. I just took a screenshot of my investment return for my 401K last year and sent it to a friend because while he lost about 10% on his individual stockpicking and the constant maneuvering of his portfolio, I got a return of 12% last year on my broad Vanguard index funds (total stock market and total foreign market…) that were very low cost. Now that’s not to say that I will always come out ahead of him in the next 30 years, but it was a good reminder to us both that actively seeking that edge does not always turn into actual returns.
An article on the distribution phase would be helpful
I’ve done some and I have more planned.
https://www.whitecoatinvestor.com/common-questions-about-investing-in-retirement/
You can teach personal investing in stocks bonds reits etc in an hour
A fifth grader could learn this just as easily
Not rocket science
This is an excellent article. As you state, “There are some people that simply do not have the relatively low level of interest required to learn enough to manage their own portfolios or lack the discipline to stick with a good plan. Those people, perhaps 80% of doctors, can be best served by putting them in touch with those who give good advice at a fair price. ” Your discussion of what really matters when selecting an advisor is right on.
I do take exception to the fact that you consider percentage of assets under management fees to be a fair price. Perhaps low %AUM fees applied to very low AUM are fair, but, as has been discussed many times before on this forum, such fees are excessive or even exorbitant when applied to high net worth individuals, many of whom frequent this forum. An HNWI with AUM of $5m might pay as much as $43,750 in advisor fees each year, which has no justification whatsoever in the context of the type of “edgeless” planning that you correctly describe.
Actually it can be $75,000 if you do not watch what your fees actually are.
I also think that is important to have time to understand how to invest.
Invest is a concept that can mean a lot of things. Maybe for me investing is more like passive investing. For others means picking stocks or bonds.
I only recently came across the idea of setting up an investment plan. I don’t know why I never thought to actually plan out an investment strategy, but it makes sense. It’s just as important to have a plan to monitor expenses (a budget) as it is to monitor the growth of your money over time.
I spend a lot of time researching individual stocks or some new way to invest in an asset class but I always circle back to almost exclusively using only index funds. Fees and long term performance for the funds are hard to argue against. Many of these advisors will pitch products (active funds or insurance) that they make significant commissions off of and I agree will take away any possible “edge”gained. Our group has an advisor and he met with us to discuss a likely market drop when Trump was elected into office. If I would have sold my stock investments and re-balanced, I would have missed out on ~10% gains. I think I’ll stick to my low cost funds for the foreseeable future and not be swayed by the promise of an “edge.”
Any thoughts on the lifecycle funds offered by Vanguard or Fidelity. Low cost and automatically rebalances. Would this better than paying for a 1% AUM fee?
Of course that could be a reasonable approach, but consider all of WCI’s 7 points of what really matters. WCI suggests that perhaps 80% of doctors prefer hiring an advisor because: “There are some people that simply do not have the relatively low level of interest required to learn enough to manage their own portfolios or lack the discipline to stick with a good plan.” No problem with these people hiring an advisor, but low energy or lack of discipline hardly justifies paying the often exorbitant 1% AUM fee.
Which is worse- not doing it or paying someone 1% to do it. That’s the question you must answer. I agree it’s not that hard. I agree nearly every doc COULD do it. But they still have to actually do it.
This is NOT a Hobson’s choice. The third choice, and only satisfactory alternative for the 80% who prefer hiring an advisor, is to select an advisor who does not charge %AUM fees. Your list of advisors, which you link above, does include some advisors who charge flat or hourly based fees. It only makes sense to select such an advisor.
I think it’s okay to pay an advisor an AUM fee as long as you do the math each year and make sure it is comparable to what you could pay as a flat annual fee. But if you can get investment management for a flat fee of $5K a year, and you’re paying $25K in AUM fees, there’s a problem.
Agreed. But do make the comparison, and make sure you know the exact dollar amount of all fees. ~1% of AUM fees will substantially exceed the flat fee for all HNWI (unless, perhaps, the quotes for flat and % AUM come from the same advisor).
I agree that the AUM fees are usually higher than the flat fees.
Your 5:1 ratio seems about right.
It depends on what you’re getting for the AUM fee. Presumably you’re getting some financial planning and some service there which a lifecycle fund isn’t going to do for you. It also depends on whether the advisor’s portfolio is giving you a factor tilt and on whether that factor tilt pays off, because the lifecycle funds don’t really tilt at all.
Do I think it is reasonable to use a lifecycle fund? Absolutely. Do I think it is guaranteed to be the best way to invest? No way.
I found lifecycle funds to be too conservative as you get older. They’d have me in 50% bonds at 50 with hopefully another 50 years of life to go. As a Millenial you’re probably ok with their fund for your age/ retirement age target but I advised my millenial daughter to designate a later target date than she actually intends to get a bit more stocks in the mix over time, or better yet to swap for stock index funds when she has enough money (in Vanguard) to have more than one fund.
Great post. I think the problem with the wealth management industry is that it conflates two separate services – portfolio management which can be done with an algorithm which is worth a few basis points, and financial planning that can have enormous value, and potentially worth a lot and should be paid for by flat fee or hourly rate. To pay for financial planning with an AUM fee makes as much sense as your doctor telling you he’ll look after your health care for a percentage of your financial assets every year. Very difficult to change this – only by investors getting educated and demanding it will the market place respond.
Excellent argument.
First, I apologize on behalf of my industry that a lot of us are doing it wrong. But please have patience with us. Our industry is still evolving. Medicine is way ahead of ours.
I want to emphasize that a growing number of us want to give advice the right way, for the right reasons. And we are committed to doing all that it takes to get there, just as anyone in a respected industry would. I think CFP is a good step. I think fee-only advice is a good step. I think an advanced degree in financial planning is a good step.
And we are thinking about it: https://www.kitces.com/blog/the-rise-of-the-financial-planning-academic/
https://www.kitces.com/blog/what-comes-after-cfp-certification-finding-your-niche-or-specialization-with-post-cfp-designations/
There are even undergraduate degrees in Financial Planning now at schools like Texas Tech and University of Georgia.
Investing is the easy part. Learning to effectively communicate to different personalities, be motivating, and have a foundation of industry knowledge to quickly be a resource are what takes skill and practice.
Often, when a someone learns you are a doctor, isn’t the next question often, “what kind of doctor?” We aren’t there yet. Oh how I wish the insurance advisor and stock pickers who claim financial advisor as their title would just say what they truly are.
It is exhausting trying to convince people why I’m unique and better than a “typical advisor”. Yes, everyone needs to sell themselves in any job, but I swear my industry does that more than any other industry. A lot of us don’t want to constantly have to do that. I believe financial health is just as important as physical health. Can’t we start there?
As you know, high credence jobs have difficulty in measuring value. For example, if a patient didn’t see an internist for preventative care all their life, would he/she be on more or less medications later in life? If a person didn’t seek out advice and map out a financial plan at the beginning of their career, would they have been better off doing it on their own?
I agree with you, WCI. I want to remind everyone that there are a growing number of financial advisors that do too!
-Molly Stanifer, CFP; wife of MD
Great to see comments like this from the industry. One of the most rewarding thing about this whole WCI enterprise was learning that all financial professionals aren’t underqualified and overcharging for bad advice. Unfortunately, I think you’re still in the minority!
Medicine, of course, has its own issues and can hardly be held up as a shining example of goodness. But this site isn’t about the medical industry.
All of this is true for MARKET investment.
For alternative investments: real estate, buying business, buying websites, franchise etc, you NEED to have a lot of knowledge. Can’t just chuck money and hope market does it thing.
I agree. That’s one of the most beautiful things about index fund investing. You literally can just chuck money and hope the market does its thing.
I feel like it has taken me just under a year to learn how to invest. Since half of that time was during residency, I probably could have learned the same information in a few months in private practice. Three books taught me the basics: The White Coat Investor woke me up to planning ahead for personal finance and retirement; A Random Walk Down Wallstreet convinced me that indexed funds are the only mutual funds to consistently offer a reliable return on investment; and The Boglehead’s Guide to Retirement Planning taught me how to create and manage my own portfolio. Sure I still have more to learn, but the principles in these books gave me the information I need to confidently design my portfolio and to provide direction for any friends and family seeking guidance.
I just read an interesting article by Mike Kitces “Quantifying The Value Of Financial Planning Advice” https://xp145.infusionsoft.com/app/linkClick/6630/d4e1704f79e98399/422736/24e02250ff52eff1
Made some good points and for most people a second set of eyes can be valuable. He also discusses the idea of Doctors might be able to better use their time than becoming a financial expert. Of course the WCI provides recommendations for fee only advisors. A good one of those is all anybody should need.
Yes, the less you make the more of a case you can make for being a DIY investor. But even as a doctor, the time you spend managing your investments may be the highest paid thing you do.
Consider someone with a $2 Million portfolio paying 1% a year. That’s $20K. Let’s say he learns and figures out how to manage his own money. It’s a pretty simple approach, so let’s say he spends 5-20 hours a year managing his investments. That’s an hourly rate of $1000-4000/hr. Know anyone who makes that after-tax at the hospital? I don’t either.
I’m ignoring the upfront education of course, but it’s a pretty compelling argument.
Absolutely agree. I mean we all have some time off right? You can learn the basics very quickly, and I dont care what you do, once you learn to think about structuring your life and decisions a better way, its very hard to beat that return you can achieve.
Especially considering our high incomes, it makes it even more valuable as its potential is/should be, more than you make in your career.
Again, this is not a Hobson’s choice — either DIY or pay the piper his 1% of AUM. For HNWI it is not unreasonable to expect %AUM fees to be 5 times greater than an hourly based fee or a flat fee (roughly based upon time spent). So the latter fee might be $4k in your example, and the doctor’s equivalent $200-800/hr. You suggested that perhaps 80% of doctors simply do not want to handle their own financial planning. That is perfectly understandable provided they refuse to pay the exorbitant %AUM fees and search out a qualified flat or hourly fee advisor.
The doctors who need advice are unlikely to be HNWI’s yet. I agree that AUM fees are likely to be higher. But it’s a pretty simple math equation. If you’re paying 1% on $500K, that’s $5K. There aren’t a lot of flat fee folks doing it for less than that. In fact, there aren’t a lot of flat fee folks doing it period. It’s fine telling people to go find a “flat-fee” advisor, but try to compile a list of them. Go ahead. How long is your list? That’s the issue. When the rubber hits the road, there are precious few experienced flat-fee and hourly advisors who work with a significant number of physicians. I wouldn’t be surprised if I know half of them personally.
“Those people, perhaps 80% of doctors, can be best served by putting them in touch with those who give good advice at a fair price.” So is $10k a “fair price” for $1m of AUM? $30k for $3m? $50k for $5m? You suggested that a doctor on this blog should be able to manage his account each year in 5 to 20 hours. At $2m AUM you compute it at $1000 to$4000/hr saved by DIY. An advisor should be able to do this in fewer hours because of his greater expertise and leveraging of staff. You’re right that it is a pretty simple math equation — for both the doctor and the advisor. Is it a fair price? C’est la vie?
Fair price is what the market defines it to be. Since there are good advisors out there willing to manage your money for a four figure amount, I think if you’re paying more than that you’re paying more than a fair price. I just reviewed an application today for an advisor who charges a flat fee. Prices range by what you need but the “premium” price was $7K a year. If you can get top tier service for $7K, I don’t know why anyone would pay $20K for it. Mostly because they are price insensitive or more likely, don’t know what the going rate is or even more likely don’t actually know what they’re paying because they’ve never done the math.
“The fair market value is the price at which the property (services) would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” As you state, it seems likely that they have no “reasonable knowledge of relevant facts”. Fortunately you are here to set them straight.