I write a handful of columns a year for ACEP NOW. My most recent column was about whether or not you need a financial adviser, and if you do, how to get a good one. This article originally ran here. If you're in the market for an adviser, I would encourage you to check out this list of pre-vetted advisers who sponsor the site.
Q.
Is there any value to hiring a financial adviser?
A.
Many emergency physicians wonder if they should spend their hard-earned money on financial advisory fees. The answer to this question, like much in life, is, “It depends.” The key is comparing the value received from the adviser to the price you pay the adviser. When hiring a financial adviser, it is absolutely critical, despite the difficulty of doing so, that you get good advice at a fair price.
Many doctors hire a financial adviser because they are too busy and would rather pay someone else to deal with the hassle. The impression might be that it isn’t worth the doctor’s time and is similar to hiring someone to take care of the lawn and clean the house so you can spend your time making the big bucks practicing medicine. Unfortunately, the truth is that doing financial planning and managing your investments is likely the very best use of your time.
Consider a typical financial advisory relationship for a doctor. Perhaps the doctor is paying an “industry standard” 1 percent of portfolio assets to the adviser each year and has a portfolio worth $2 million, so the cost of the advice and service is $20,000 per year. Particularly after the initial financial planning and setup of the investments and investment accounts, the adviser may only be spending five to 20 hours a year dealing with this physician’s investments. By doing that without an adviser’s help, the doctor would be “earning” (saving) $1,000–$4,000 per hour, and that’s an after-tax figure! I know many emergency physicians make good money, but I don’t know any doing that well. Perhaps the most important reason many physicians choose to be their own financial planner and investment manager is the substantial cost of hiring someone to do it for them, especially considering the ease of doing so compared to learning to practice medicine safely. You see, whereas an emergency physician needs to know almost everything about emergency medicine and a competent, experienced financial adviser ought to know almost everything about financial planning and investing, if you are functioning as your own adviser, you need only understand the portions of personal finance, investing, and the tax code that actually apply to you, which is a small fraction of what an adviser needs to know.
Just because real financial advisers are very expensive, many advisers are actually commissioned salespeople in disguise. [No, that is not the sentence I sent them, but for some reason it made sense to their editor.-ed] Chances are good that competent, low-cost advisers can provide more value than their cost, especially early in your career. Even after the plan has been designed and implemented, the adviser serves another important function: helping you stick with the plan.
Advisory Costs Matter
First, consider the costs. There is little reason to pay the “industry standard” or “average” level of fees given how many good advisers out there are willing to do it for less. Many advisers working under an Asset Under Management fee model will work for less than 1 percent, especially as the size of your portfolio grows. However, you can also simply pay an hourly rate for your initial financial planning and investing plan design and then a flat, relatively inexpensive (a few thousand dollars per year) ongoing asset-management fee. If you are spending a five-figure amount on advisory fees each year, chances are very good you can lower your cost while maintaining or even improving the quality of your advice, service, and after-fee investment performance.
Good Advisors Do Add Value
Second, consider the many ways in which an adviser can add value. The most useful thing an adviser can do for you is to help you develop an initial financial and investment plan. That means educating you on what matters when it comes to finances, helping you better define your goals, and generating a written plan on what you should do with the money you have now and will earn in the future in order to maximize your happiness and reach your goals. Even after the plan has been designed and implemented, the adviser serves another important function: helping you stick with the plan. Investors, especially physician investors, are notorious for performance chasing and behavioral biases that cause self-inflicted financial catastrophes, such as buying high and selling low. In addition, the adviser can function as a financial coach, reminding you of your goals and encouraging you to save enough of your income to reach them. Of course, the adviser also takes care of the necessary portfolio chores, such as opening accounts, typing buy and sell orders into the computer, and generating periodic reports about asset allocation, investment performance, and progress toward goals. Finally, an adviser provides an important backup function. For most couples, one person is far more interested in personal finance than the other. The presence of an adviser provides a bit of insurance that if something happens to the interested partner, the financially naive partner will have someone to ensure the finances are managed in some reasonable way.
DIY Is A Reasonable Option
Each of these functions that a competent, low-cost adviser can provide has significant value. However, that value is different for every investor. For an investor who already has a written financial and investing plan and has the interest, knowledge, and discipline required to maintain the plan, that value is likely to be much lower than the substantial cost. However, an investor who has none of those things can easily justify paying significant fees to a financial adviser as money well spent.
Even the least competent physician investor who desires to fully rely on a full-service financial adviser needs to learn a few things. These include understanding what a fair price is for advice as well as learning what high-quality financial advice and portfolio management look like. I know of no better way to find out whether your adviser is giving you good advice than to go get a second opinion from another experienced, fee-only adviser at a separate firm. That second opinion may be the best financial advisory fee you will ever pay.
In summary, a competent, low-cost adviser can provide substantial value, but whether that value is more than the price depends both on the price and on how ready and willing you are to function as your own financial planner and investment manager.
What do you think? In what ways do you think an adviser adds value? How hard is it for a busy doctor to function as their own adviser? What percentage of docs do you think can do it? What percentage will? Comment below!
Excellent article. I especially agree with your points regarding how even physicians who want a full-service financial advisor should have some basic knowledge of financial planning. After all, we encourage patients to ask questions and not just do whatever the doctor says, especially when making big decisions such as surgery or cancer treatments. Similarly, you should have a minimal knowledge of financial planning to know that your financial advisor is adding value and not just acting as a salesperson.
I agree that at some point a physician is best served by learning how to manage his/her finances without paying the high AUM fees of an advisor, especially when the account starts to generate 5-figure fees. But advice regarding a financial plan, execution of trades, generating reports, and keeping a physician on track are not the only things a financial advisor may do. I’m sure this varies from advisor to advisor. My advisor was very helpful when I moved to another state with a new job. She advised me to merge two 401a, two 403b, and two 457b plans and took care of the phone calls and paperwork for me ( signed the forms). She advised on what I could afford for a mortgage down payment and how to best generate the cash from my taxable account. She works at a large firm that also has tax accountants and they do my taxes at no cost and provide tax advice all year at no cost. The advisor works with the tax accountant to minimize my taxes. My advisor provides advice regarding my non-taxable accounts but has never managed them (so they don’t contribute to the AUM fee). She includes all sources of income in running monte carlo anayses for me annually. Another thing that I don’t see mentioned in posts about financial advisors is that their fees are tax deductible (on schedule A). I feel my money was well spent on an advisor because I was naive regarding personal investing and too busy with my job to want to learn. I retired at age 57 and have since read numerous finance books. I’ve moved most of my retirement and taxable accounts to index funds and am seriously thinking about firing my advisor. I could have saved more money had I been as smart as the WCI years ago and managed my own finances. But I also could have done a lot worse.
Miscellaneous itemized deductions (investment advisors and tax accountants) are deductible only to the extent your total miscellaneous itemized deductions exceed 2% of your AGI and then only if you itemize–which many low to modest income people don’t and which some high income people don’t either due to phase outs.
BTW, I understand the impact of investment advisor fees. I really do. But what I now see (in client tax returns) as the craziest part of financial advisors is not the AUM fee but the high complexity, high cost investments they stick people into. What I’m particularly aghast at are the “alternative asset class” multistate and international investments. Almost always the investor advisor doesn’t understand what this does to the taxpayer’s tax return. And what I observe is that in these inefficient alternative asset classes, you totally get beat up. Which is exactly what you’d expect if some retail advisor puts a relatively small time individual investor into this stuff.
Fees can be deducted on Schedule A, but they’re subject to the 2% floor. A better way to pay them whenever possible is to have them taken directly out of a tax-deferred account. As I recall, the percentage of the fee taken from the tax-deferred account has to be the same as the ratio of tax-deferred to other accounts. Obviously you would not want the advisor to pull money from a Roth account to pay the fees.
The only way to know if you have a competent advisor is if you have some basic knowledge on personal finance. That can easily be learned with just a few basic books and this site.Paying AUM fees will rob you have hundreds of thousands of dollars over your lifetime. COSTS MATTER
I think most of us would agree that it is best to become financially literate and handle one’s own investments.
The key is getting to the basic level of knowledge and confidence to pull the trigger. The greatest gift we can give is to direct folks to sites like bogleheads and WCI. Hopefully before the individual has built up a high cost taxable account that with too much gain that will be painful to transfer.
I plan to be a DIY until the day comes (hopefully in old age) when I lose my mental capacity to do so. If that happened today, I’d use the Vanguard 0.3% advisory service over a robo-advisor.
I agree with you gripper. When I feel that I am slipping the vanguard PAS is calling my name
Great article and agree completely on all fronts! As Financial Advisors, we prefer educated clients who understand what services are being provided, at what cost, and most importantly, what is valuable to them. It doesn’t matter how little a service costs if the service isn’t valuable to you.
To help answer the question of value/cost, we put together a list of considerations that represent much of the planning work we do (over and above investment management). We believe 75% of our value-add comes from our planning focus. We still manage portfolios with tax efficient, low cost index ETFs, still aggressively tax loss harvest when the market presents those opportunities, still manage capital gains tax impacts, etc, but we believe the greater value add comes from attention to questions such as these that follow. As you read the list, mark any that you consider valuable. For any that you mark, consider assessing a dollar value. Then ask, “How does that amount compare to the proposed fee?”
1. Helping you achieve financial freedom – “doing what you want when you want to do it”.
2. Managing expectations and behavior by providing context and perspective as a result of our firm’s aggregate experience.
3. Helping you identify, clarify and quantify life goals in consonance with your values, priorities and means.
4. Serving as an accountability partner helping “gently hold you accountable to your best intentions” – to include possibly helping you reconcile stated goals vs your checkbook register/credit card statement.
5. Receiving objective advice; not having to wonder if there’s a hidden agenda – Fee-Only™ fiduciary.
6. Enabling you to answer the challenging questions: “How do we balance living for today while securing our future?” Helping you look beyond the obvious to second- and third-order effects of your decisions.
7. Optimizing your employee benefits/compensation, education planning, and tax opportunities.
8. Educating you so you feel confident about the plethora of financial choices available – saving you time, effort, and worry by doing the research, proposing relevant options, helping you evaluate them in consonance with your values/goals, and then implementing the choices you make.
9. Organizing your financial life…
a. Consolidating/linking accounts
b. Semi-annual tax planning/preparation meetings with your tax preparer
c. Annual (minimally) plan update to re-focus you on what you’ve deemed important.
10. Providing discipline for your plan – helping you stay on (or correct) course when necessary. Automate where/when appropriate.
11. Proactively addressing issues for when “life happens” as we know they will.
12. Being there to help you modify your plan when life does happen… marriage, birth, education, job/career change, health issue, life phase change, death of a family member. Planning is not a “once and done” effort.
13. Partnering with you, your tax preparer, and your estate planning attorney on your life journey – so that you have a team available which knows you, understands your values, and helps you navigate your path.
14. Preventing “big” mistakes – you can only overcome so many before you run out of economic cycles.
a. Too much, insufficient or wrong type of insurance – based upon need, not purchasing ability.
b. Giving away, borrowing or lending too much money
c. “Retiring” too early – instead of focusing on Planning for a Life Well-Lived™
d. Missing important government deadlines, e.g. failing to take Required Minimum Distributions (RMDs) from an IRA – 50% penalty!
e. Emotional investing: Buying high and selling low – a recipe for losing money
15. Tying together all the planning pieces into an integrated solution, and continuing to serve as a trusted resource/advisor.
16. Being available for your family (if/when you can’t) as a trusted resource with history/knowledge of your family – their values, their circumstances, and their hopes/aspirations.
17. Leaving a meaningful legacy…prepared family, organized estate, successful inter-generational wealth transfer plan, and meaningful remembrances.
18. Asking the right questions at the right time. A good advisor gives great advice; a great advisor asks good questions…
a. How do you best deploy your human capital?
b. Should you pay down/off existing debt; or, would you be better off refinancing, consolidating, or even taking on more debt?
c. What can you do to be more tax-efficient with your funds?
d. How can you maximize your charitable gifting while minimizing the cost to you?
e. Are there gaps in your risk management which you should fill with insurance or some other risk management method?
f. What are the implications of self-insuring? Does it always make sense? When might it not?
g. Can you help with (grand)kids’ education without ever becoming a financial burden to them? What’s the most efficient way to do that?
h. How can you optimize your Social Security funds to provide the best combined benefit? Note: “Best” isn’t always “most.”
i. Should you invest this ‘found’ money all at once or phase it into the portfolio?
j. Would it make sense to make partial Roth conversions along the way to avoid IRA Required Minimum Distributions (RMDs) that, when combined with Social Security and our other income sources, could put you in a higher bracket when you’re 70 than when we’re 60?
k. As you mark milestone birthdays, what actions should you be taking/considering?
l. How can you address estate planning issues you’re wrestling with? Note: “Equal” isn’t always “fair”.
m. How do you responsibly fulfill your fiduciary duty as an executor/trustee for a family member or trusted friend?
n. How can you ensure your financial/asset account titling and beneficiary designations don’t undermine your estate plan?
o. As you consider older age and possible cognitive decline, what can you do to protect yourselves, your family, and your estate?
p. How will you react during periods of market volatility? Will you work the plan – your customized investment plan – or, follow the herd?
q. Does your Investment Policy Statement (IPS) and its implementation?
i. Support your goals, values, and priorities for your resources?
ii. Reflect your willingness to withstand (extra)ordinary market events?
iii. Optimize cost/tax efficiency across all accounts?
iv. Efficiently account for the withdrawal from the differently taxed accounts?
Number one: Ask if he’s working for you as a fiduciary. Otherwise, it exposed the advisor to conflicts of interest that many (most?) find to lucrative to avoid, regardless of what is told to you. Stock brokers, banks, and insurance salesmen are not required to be a fiduciary. Ask for proof; they have it. Fee-for-service only.
A great video on the difference between a Fiduciary Standard Vs. Suitability Standard (Brokers) and is here http://www.wisepathfinancial.com/wisepaths-fiduciary-standart-values
It depends highly on your financial interest and aptitude in my honest opinion. It’s always good to pay an expert, provided it’s a one time deal, for a checkup. Then adjust yourself to the checkup, imitate the advisor and away you go. Obviously the hard part is finding an advisor you can trust by defining their motivations. But paying for a one or two Time session often will lower those conflicts of interest. Alternately if your willing to read and learn in your own there is no need for an advisor. What I wouldn’t do is retain an advisor over time. Most of personal finance is set it and forget it until the next major life change. You don’t need an advisor during the forget phase.
Absolutely. I think “second opinion” consultations are dramatically underutilized-relatively inexpensive (often free) and highly likely to at least uncover egregiously bad advice.
Totally agree with this one. This is probably the most common thing I do. It does not take long before even a novice is sold on the Boglehead approach. After all, it does not take a nephrologist to grasp that 100k into a 5.75 percent load fund is not a good deal. This is especially true when the expense ratio of the fund is 1.5 percent! Yes, a client would rather pay 20k and not know about it than cut a check for $2500. It is related to the perceived lack of a fee than the actual mathematics of the transaction.
I do wonder about the usefulness of financial advisers. The general rule of thumb is that they’re not useful unless you have a ridiculous amount of assets and investments to manage. In many ways I think it could make sense for a physician (or any other extremely busy person), but it depends on their personal situation and finances.
I’m not a physician nor do I have crazy net worth, so life sans a financial adviser is A-OK with me. 😉
I disagree that having “ridiculous” assets somehow makes you need advice you didn’t need earlier. Managing $5M isn’t very different from managing $500K or from managing $50K. In fact, good advice has more value early on when you have less experience and when it can make more of a difference. The problem is, particularly with the AUM model, is there aren’t many advisors serving the population with a low (or negative) net worth. Those specializing in serving docs have figured this out and found ways to stay in business while doing just that, but most asset managers want a minimum amount of assets like $500K or $1M or $5M. By the time you get there, there’s a good chance you’ve already figured out a reasonable way to invest.
To your point about the amount of work not changing after a certain amount of money saved, keep in mind that many AUM advisors have a breakpoint — 0.50% or 0.25% after first million, for example.
Also, those with not much in AUM yet should be very eager to work in that model; it would be quite a deal. To stay in business, most advisors have set a minimum flat fee if they have not set a minimum AUM.
Most have a break point of some kind. A few have a BIG break point that would reflect the lack of significant work on the second million. But MOST have a tiny break point. It goes to 0.9% after $1 Million or so, and that 0.9% is only applied to the second million. So you might pay $10K a year on the first million and $9K a year on the second million. Not exactly reflective of the fact that there is almost no additional work involved in managing $2M vs $1M.
Frankly, if you’re going to use an AUM fee, what I’d like to see and what I think is financially viable would be something like:
0.75% for the first million, with a $4K minimum and 0.25% after that.
But that leaves a lot of money on the table (actually in the client’s account) compared to an “industry standard” 1% of AUM.
We’re awfully close to that.
Via email from an advisor:
As an hourly, fee-only financial advisor, I agree that DIY is a reasonable option for many investors. An occasional check in with a professional is all that may be needed. I believe the same is often true in the area of health care as well. A number of years ago, my cholesterol, blood pressure and weight were moving to unhealthy levels. My doctor at the time, who received no significant training in nutrition, proceeded to prescribe drugs to reduce my blood pressure and cholesterol – treating the symptoms and not the problem. Fortunately, as a former scientist, I was skeptical. As a result of some great information published by Dr. T. Colin Campbell and Dr. James McDougall, I soon moved to a plant-based diet and returned my blood pressure, cholesterol and weight to healthy levels. Sometime later, I was encouraged to take Vitamin D supplements even though a meta-study in Lancet did not indicate any benefit (except, of course, to the supplement industry). The final straw was the recommendation to undertake an unwarranted colonoscopy (a standard recommendation in the US, not in Europe or Canada). Instead of subjecting myself to one of the “annuities” of the medical field, I found a “fee only” vegan doctor to get a second opinion. Best investment I’ve made in a long time.
Ignorance and false security is bliss I guess.
A vegan doctor? What is that? If you’re a trained scientist, you’re still one. Why then call yourself a former scientist?
I agree an advisor can offer great value, especially helping the client stay invested in a crash – preventing the “big mistake” of selling in a crash is of immense value, especially if the client is closing in on retirement age.
The problem is the AUM fee model is just crazy, resulting in enormous amounts of money being transferred to the wealth management industry. That tiny 1% reduces ending wealth by 25% over 30 years. The AUM fee model makes about as much sense as your doctor saying he will look after your health care for 1% of your financial assets every year.
There are some firms now offering financial advice and portfolio management for a flat fee (or hourly rate) but they are few and far between. Only when investors become educated and demand change will the market place respond
An AUM advisor will tell you there is a significant problem with the flat fee and hourly model- people don’t pay it and so don’t get the advice, even if it would be worth it for them. It’s like how people won’t pay for a colonoscopy (or regular dental checkups) they need but if it included “for free” as part of their insurance, they’re happier and healthier. There’s something behaviorally beneficial there about hiding the fee, at least superficially, from the person paying it.
I think there is some truth in that. I’m not sure what the best way to work around that is. What I’ve been trying to do is to tell people that financial advice is expensive stuff and they’d better be prepared to pay for it. If I can get people comfortable paying $200 an hour or $4000 a year for financial advice, then I think those models will be okay. But for some reason people are more willing to pay $15,000 in AUM fees taken directly out of the account without them seeing it (although it’s all in the disclosures) than to write a check for $4,000 every year.
While I am a fan of DIY investing, I can think of a few scenarios where a good financial advisor may add value. As already mentioned, one could be as a “second opinion” or “financial check-up” consultation. Another could be helping with potentially bad “behavioral” mistakes, such as freaking out and selling your investments during a market correction or recession.
The adviser’s greatest value for a physician is 2 things:
1) Setting up a plan and explaining the why – the plan should be one that makes sense for that physician and his/her family. If anyone has questions what they should do they should set up a meeting with an adviser. What I’ve seen in my meetings with young physician clients is their vast underestimation of the saving’s rate they will need to reach their goals. These initial meetings, for flat-fee or AUM advisers, are almost always free and the advice (when heeded) is life changing.
2) Staying the course – whatever financial plan a physician has set up he’s needs someone to hold him/her accountable. It’s been 8 years!!! since a bear market and many that are new to investing (or even investing large sums of money) have no idea the emotions and pain that losing money can do to someone and how it can take them off track. An adviser who can explain what is going on and keep them from selling at the bottom will earn his fee and then some.
The one thing that convinces me to potentially utilize an advisor is the very simple fear that I will fail to take important financial steps that might be very obvious to a professional. For example, failing to max out certain retirement accounts from work or backdoor roth IRAs before investing in taxable accounts. This is a simple example, but I feel like there might be plenty of others that I’m not aware of. Thanks for the post, WCI.
I have had mutual funds with Wells Fargo and investments with First Command at way too high of fees. First Command by far being the worst. I have been reading a lot on WCI, PoF and other blogs, recently considering moving everything in the these accounts to Personal Capital, which has a great online wealth tracker that is free but also offers financial advisement/management (for quite a bit less than I am currently paying). I do not doubt that I can set up investments with Vanguard at low fees, but one thing that I have thought a lot about lately is what happens to my family if I died next month, year, three, etc. I love personal finance, investing, etc, but my wife has little interest other than being told we are doing well. So one of my considerations is the piece of mind that if I am managing our investments with someone like Personal Capital, they would not skip a beat and continue to assist her (plus advise what to do with over a million in life insurance that suddenly was paid out). Of course, I could leave a “break open upon death” binder listing different investments, update it every year, etc (that might be a good separate post WCI), but there is some peace of mind with a decent advisor, but knowing you pay a price for it.
peace of mind…