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[Editor's Note: This is a guest post from Dave Denniston, CFA, who describes himself as “an author and authority for physicians providing a voice and an advocate for all of the financial issues that doctors deal with.” He has been a paid advertiser at WCI in the past. In this post, he discusses his thoughts on his profession.]

Is your advisor costing you years of your retirement?

You’re going to love this answer… because of course, it depends. There are 3 reasons why and 3 reasons why not your advisor may be costing you years of retirement.

Why Your Advisor May Be Costing Years of Your Retirement

David Denniston

David Denniston, CFA

Here’s a quick summary of the reasons why…

  1. Asset Under Management fees (AUM) shaving 1% or more off of your returns
  2. The use of illiquid investments
  3. Being charged for services that you’re not using (to be addressed in the future)

#1 AUM – The Good, The Bad, and the Ugly

Many folks argue that assets under management (AUM) may be costing you years of retirement. When your advisor is charging you 1% and you only have $10,000 in assets, you’re only paying $100/year. That’s a darn good deal for full service advice! (Heck, that’s less than $10/month!)

Let’s be honest- that’s probably UNDER payment rather than OVER payment.

However, the story doesn’t end there. Let’s compare that to years down the road when you’ve actually accumulated some dough. When you have $1,000,000 in assets, paying $10,000/year for pretty much the same advice is one ginormous difference and many physicians feel like this arrangement is a raw deal.

Let’s take this another step further. Your $1M grows to $3M over 10 years and you can imagine that you’re averaging $20,000 a year in fees or $200,000 over that decade. That’s definitely a year or two of retirement. Can’t argue that point.

I’ve personally made the argument that the good news is that with AUM- I am incentivized for your assets to grow. It’s absolutely true. In working with clients and AUM, I want your assets to get bigger and bigger and not shrink. That’s a good thing! However, it’s also true that with AUM I’m not as incentivized for you to pay off your debts and it’s also true that I want you to roll over every retirement plan you have when you leave your last job to an account I am managing.

Robo-advisors like Betterment are providing advice at a fraction of the cost that many financial advisors have (although they are still using AUM) and that’s definitely making the field far more competitive.

#2 When An Illiquid Investment Evaporates

In some cases, direct participation programs in stuff like real estate, equipment leasing, and other atrocious vehicles are sold in the names of diversification.

I think we can all agree that diversification is a good thing. Yet, from my experience- these products line the pockets of the people and companies selling the stuff and not the investors.

Here are a few examples:

First was an illiquid investment in what was supposedly real estate that was sold through the channel of financial advisors/brokerage firms. Turns out it was a Ponzi Scheme.

Luckily, most of these investments aren’t Ponzi schemes where you potentially lose all of your money, but are instead suffering from a malady I call “fee-itis,” such as this case:

Let’s say that “Joe Smith” a client of a financial advisor invested $100,000- this allowed the client to buy 10,000 shares at the rate of $10/share. There was a commission paid to a financial advisor of 7%, but that’s not all…There was also a profit sharing arrangement with the broker-dealers at around 2% commission and then the fund company took another 1%. So far, we’re at 10% before they even buy a piece of real estate.

But that’s not all…

Then said company goes and buys some real estate. They charge another commission of 5% to 7% for buying the building.

After everything is said and done, the investor put in $100,000. What was left over to invest out of the gate? A mere $85,000. They would need nearly a 20% return just to break even. Unfortunately, if you delve deeper, that’s not the end of the story- the sponsoring company also charges fees for managing the asset and doing the accounting and the marketing and so on.

Then, you add on leverage and a bad real estate market… many investors were left holding the bag. As noted in the article, this investment once “worth” $10/share fell down to $1.30/share- an 87% loss in principle. Yikes!!! (To be fair, they had another product which has done significantly better*, but had a similar fee structure)

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There are many, many more examples, such as this one using equipment leasing. I could go on-and-on…

In many cases, we’re not talking a 1% difference in AUM any more…  if you fell into one of these traps where you’ve lost a significant chunk of money- where you lose 30%, 40%, or even 70%– now, you are way, way behind. Heck, even if you did turn a slight profit of 10% to 20%- I would encourage you to compare that to the performance of the public markets.

THAT my friends will put the brakes on your retirement.

AUM is a paltry sum compared to those mistakes. In that sense, it’s not such a bad deal after-all if we are comparing it in a bubble.

Needless to say, these relatively illiquid investments which in some cases in the recent past have cratered- this MAY cost you years of your retirement.

At this point, you may be wondering….

Does this guy still want to be a financial advisor?

As a matter of fact, I do love this profession. I’ve been in this industry since 2002 and through 2 crashes– even experiencing a lost decade where justifying my worth was never more difficult. On top of that, the sad news is that my industry is under the gun. As a matter of fact, some experts argue that we’re a dying species.

However, I contend that this is a profession that at its heart has the noble missions of empowering others, helping guide others to retirement, and protecting your money. At the core, I consider myself a guardian, protector, and guide and I know many other financial advisors feel the same.

I would still argue that we advisors can still add plenty of value- but only at a reasonable cost.

Why Your Advisor May Not Be Costing Years of Your Retirement

Now that we’ve explored the ‘dark side’, here’s a quick summary of why this might NOT be the case…

  1. Educating you and being accountable (& more than just investments)
  2. Managing risk appropriately & helping you to stay the course
  3. Implementing wealth creation strategies

#1 Educating You and Being Accountable

While one may argue the AUM merits and cons, there are many soft skills that good advisors can provide. Blogs and podcasts are amazing to take in knowledge, but they may not answer your specific questions. The truth is your situation is specific. It is different than your colleagues. You may curbside consult with some, but they don’t have your mortgage or student loans.

Plus, do you really want those closest to you to know every financial detail? That could be super embarrassing or just make everyone uncomfortable with their varying levels of wealth. I can just hear it now… “Wait, you’re getting paid how much and you’re saving how much?” This is why having someone come with a truly unbiased opinion to give you input without feeling weird and to answer your questions is incredibly valuable.

On top of that, there’s so much more to a good relationship with a financial advisor IF you utilize it- tax reduction planning, college planning, retirement planning, estate planning, and simply someone to be there in case of emergencies. I’ve had the pleasure & the burden of serving clients when a spouse dies or when there are mental health issues with parents. As a matter of fact, as I write this post, I’m in Colorado helping the family of a retired dermatologist (who has developed Alzheimer’s) through this financial maze and an emotional roller coaster.

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Consider how in many relationships one spouse is the mind & money person and the other spouse is the heart and nurturing person. The latter is far less money driven and interested than the former. Having some input from a trusted source can be incredibly valuable to the “heart spouse!”

#2 Managing Risk Appropriately

Many young attendings have not yet experienced a downturn in the stock market or it was very early in their careers where it actually had a positive effect on their net worth. When it happens again, and believe you me it will happen again, many physicians will pull the trigger and sell at or near the bottom when the pain is high and then won’t get back in until it is far too late.

That’s why the average investor performs relatively poorly even though their underlying investments have done well. Cognitive dissonance is no joke and is hard to overcome. Just imagine, if you sold your aggressive portfolio when it was down 50%, your $1 million suddenly became a paltry $500k. Now, you’re scared and frightened of the markets. You’re feeling unsure of the future. You don’t want to lose what you have left!

Thus, you shift your allocation to having only 30% in stocks. You get some growth, but it’s not enough. Next thing you know, the markets have doubled from the bottom and in comparison…. your $500k is only back to $600k because you’ve positioned things so conservatively after a downturn. THAT fear and corresponding action will cost you years of your retirement.

A good advisor adds value by helping you stay the course and sticking to the plan. They help you not make some dumb mistakes– to focus on your goals and your buckets and adjusting appropriately.

#3 Implementing Wealth Creation Strategies

The other area that I’ve personally found more and more interest in is in wealth creation strategies. For those of us that have big goals and big dreams and want to make an impact on our family and on this world, we’re searching for the edge to become multi-millionaires. I’m finding that as a financial advisor who has an array of experiences and a variety of income streams, I really have a lot to add to help others who want to get on this same path.

Since investment management can be fairly straight-forward (assuming you can emotionally tolerate the buy-and-hold roller coaster, these more complicated strategies are a way for me to add value and justify my worth in ways that they could never get from Betterment or the other robo-advisors.

Final Thoughts

While The White Coat Investor has argued that there is no perfect financial advisor,  I think he would agree that some are certainly better than others. I’ll be the first to admit that I’m not perfect, but I’m constantly honing my craft and getting better every day and most importantly… putting my clients first. I don’t pretend to be the only good guy out there, for instance here is the list of advisors on which WCI has done some minimal vetting.

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Just looking at that list gives me a headache and I’m in this profession. There’s a mind numbing array of choices when it comes to financial advice, and that's ignoring all the bad eggs out there giving this honorable profession a bad name. Nevertheless, there are many good people and good advisors who can give you rock-solid advice. Get some help if you want it, but get it at a reasonable cost.

Required legal disclosures: Several of the links in this article have listed 3rd party firm/individual are not affiliated with or employees of United Planners Financial Services. United Planners does not supervise this firm/individual and take no responsibility to monitor the information/services they provide to you.

The opinions expressed are those of Dave Denniston and The Capital Advisory Group and are subject to change based on market, tax, and other conditions. The information provided is general in nature. Consult your investment professional regarding your unique situation. Securities offered through United Planners Financial Services 800-966-8737, Member FINRA, SIPC. Advisory Services offered through Capital Advisory Group Advisory Services, LLC. 5270 W. 84th Street, Suite 310, Bloomington, MN 55437, 952-831-8243, United Planners and Capital Advisory Group Advisory Services LLC are not affiliated.

What do you think? If you work with an advisor, how do you ensure you're getting good advice at a fair price? What percentage of doctors would benefit from hiring a good financial advisor? Comment below!