By Dr. David Graham, Guest Writer
I think The White Coat Investor should start managing money, even though all paths in the investment world eventually lead to AUM fees. As a WCI reader, I assume you know something about the business models for managing money; if you need some background, read how to find a good financial advisor.
Considering that WCI stands for the best financial treatment of physicians and other high-income professionals, is an AUM fee inevitable in case Dr. Jim Dahle starts offering financial advice to his readers? Or is there a better way to manage that?
Just to be clear, this is just a thought experiment. As far as I know, Jim has no plans to start providing financial advice or investment services. But let's continue with this experiment and play out the pros and cons of him charging an AUM fee for financial services.
WCI Objections to AUM Fees
Some of you will immediately react to the idea that WCI might charge an AUM, aka Assets Under Management, where an advisor will charge you a certain percentage of your portfolio (perhaps 1%). Despite what Jim has said, the AUM is inevitable. He objected to AUM fees in his 2022 piece on What Is a Financial Advisor.
“The other three methods of paying an advisor are fee-only methods. If commissions are my least favorite way to pay an advisor, an AUM fee is my second-least favorite . . . While this is good in that it incentivizes the advisor to grow your assets, it's bad in that it incentivizes the advisor to recommend against anything that might reduce the size of your nest egg under the advisor's management . . . An advisor paid on AUM tends to become an asset gatherer. They're not paid to perform; they're paid to gather.”
Consider the criticism that AUM advisors are asset gatherers. Wait, why can’t you do AUM when you get paid to perform rather than paid to gather if performance means doing a better job than the “white glove” specialist firms charging 1%? For W-2 physicians who don’t want to mess with their brokerage accounts and 401(k) (which some white gloves won’t even touch), I bet Jim can give better advice that reduces the perverse incentives of AUM fees. Understand that 1099 folks are more complicated and might be best served by a specialist.
Next, he writes:
“An AUM fee is a perfectly acceptable way to pay for financial advice. It might even be the most common method of paying for advice among real, fee-only advisors. The AUM fee dilemma comes in when you start becoming more wealthy. The industry average AUM fee is around 1% per year. If you have a $100,000 portfolio, that works out to be $1,000 per year. I told you that a fair price for financial advice is a four-figure amount per year—$1,000-$10,000. Obviously, $1,000 is a screaming deal. However, what about when you have a $10 million portfolio? Now that 1% AUM fee is $100,000 per year. That's a massive rip-off.”
We can all agree that the logic is impeccable.
First of all, Jim wouldn’t have to charge AUM if he didn’t want to set up this (hypothetical) business. He could charge a flat fee and, as he likes to say, give you fair advice at a fair price. Or, like I’m arguing, he could charge AUM and put a cap on those fees. For someone in accumulation, they need help getting their plan set up and then will have life happen occasionally. Should the cap be $4,000 (plus a 4% yearly increase) in accumulation with access to everything WCI offers? Investing plus the full educational library. What is the right cap for AUM in accumulation? What is the standard for advice when you can get it set on automatic and let time work in your favor?
Who knows; let the market set the price. The cap on AUM fees can cover services and not be a rip-off. You can focus on quality if you do AUM. You can actually have real people help with advice who have your best interest at heart. See the Vision and Mission below.
We know that the WCI is not a charitable organization. Clearly, and with perfectly adequate disclosure, WCI currently makes money via advertising and other mechanisms. Charging AUM fees would not be “selling out.” It is providing a service between two consenting individuals that brings benefits to both. That’s what providing value in business means.
Finally, Jim writes that “if your advisor is not willing to bring those fees down significantly as your assets grow, you need to find another advisor that will.” WCI can do that while still charging AUM and without giving sub-standard advice.
The Vision and Mission of WCI
WCI discloses financial and other conflicts of interest. Jim's company has a clear Vision and Mission. So, how well do AUM fees fit into that Vision and Mission?
Vision of The White Coat Investor
The vision is to “serve as the most trusted, authoritative, and useful resource.” This applies to both financial information and services for the high-income earner. I see AUM as a service to many white coat investors; as we all know, there are many folks who, even though they know they could do so on their own, choose to use a service to invest. With adequate financial and other disclosures, I don’t see an AUM as contrary to the vision of WCI. It is a service Jim can provide to physician investors. I think WCI would disclose conflicts of interest and provide value at a better price.
Mission of The White Coat Investor
The mission may be a bit trickier to make work. In part, it says “connecting white coat investors with best-in-class financial resources.” This is currently done via resources such as the Best Financial Advisors for Physicians page, which provides links to advisors who ‘’give good advice at a fair price.” But, Jim also notes that “I have yet to find a perfect advisor, and deciding who can and cannot be listed here is one of the most difficult things I do on this website.”
What if WCI connected physicians with an AUM service better than what is currently available? It might be a lower AUM or higher quality service. Instead of recommending good advice at a fair price, what about giving better advice at a better price? AUM leaves plenty of room for the advisor to make money. That’s why it is so popular. WCI can help physicians and grow its multiples.
I think WCI can stick with its mission of connecting white coat investors by being the best-in-class financial resource.
The drop in advertising revenue as WCI opens a service that competes directly with its advertisers won’t be significant because there is room for specialists. When you can provide more value than WCI, you are welcome to advertise because WCI would want the best for complicated scenarios. A solid business plan can predict the growth of AUM and determine how long (months, maybe years) it would take to grow an excellent service to white coat investor readers that will be financially renumerating and one that is done entirely above board and consistent with the vision and mission.
Why WCI Is the Perfect Financial Advisor
This is why WCI is the perfect financial advisor.
#1 A Fiduciary Duty
While fiduciary is nearly a meaningless term due to regulatory morass (it means that the person advising you must be acting in your best interests and not their own), it is a necessary starting place. I’m sure WCI will sign a fiduciary pledge without hesitation. Don’t work with someone that won’t.
#2 An Up-to-Date Academic Understanding of the Field
Table stakes for physicians. We understand evidence-based medicine.
#3 A Meaningful Designation
I took and passed the CFP (Certified Financial Planner) test in three months. It is about as hard as any one organ system you learned in med school. Education is necessary, and the CFP is, unfortunately, the best (basic) “degree” one can earn.
#4 A Clientele Just Like Me
A service by doctors for doctors. Sounds pretty good to me!
#5 A Reasonable Investing Strategy
As we all know, there is no such thing as an unbiased advisor. Disclose and minimize. All advisors have conflicts of interest.
#7 Fairly Priced
This is interesting! Jim gives three reasons why he is not a fan of AUM. First, the advisor wants to keep your assets to manage, so they may not suggest appropriate strategies (such as paying off debt) as it reduces the assets they manage. In all my wisdom, I don’t see a way around this bias.
Next, you need to have assets for them to manage. High incomes without assets may be better served by a fixed or flat fee type model. If that is best practice, it can be done. You can do AUM and still have a flat fee option.
Finally, uncapped AUM fees become outrageous the more money you have. The solution is tiers and a cap. While a flat annual fee or a reasonable hourly rate is best, it doesn’t pay the bills. AUM pays the bills. And it can ensure that the advice is right and that the investments are evidence-based.
#8 Tied in with Other Services
Unless you have the money for a family-office-type arrangement, this is a bit of a pipe dream to me.
Physicians Helping Physicians
The strength of WCI is that it is physicians helping physicians. AUM is a decent model for the approximately two-thirds of physicians who would rather pay someone to mow their lawn and manage their money. These folks know they could manage their money if they really wanted to, but they've decided it is worth the fees to have someone else do it. You know you don’t want just anybody doing it, but there is trust in the WCI brand. It's physicians helping physicians, and it's high-income professionals sharing their experiences and getting the right services at the right price.
Many physicians are not well served by financial planners. They need help, and, for the right price, WCI can help them. Sure, if the portfolios are complicated, then a 1% specialist fee seems pretty good. That’s why there is a section of advertising from financial planners who help a specific group of high-income professionals. Specialists: we get that.
Moreover, I have met plenty of physicians who want to get their CFP or who want to educate their fellow physicians about money. It seems that putting together a cadre of physicians (supported by expert non-physicians) is a business model with legs. This is a win-win-win. The physician client wins, the physician advisor wins, and WCI wins. Isn’t this about education? Who knows how to learn and teach better than physicians?
Conclusion – Should the White Coat Investor Start an AUM Advisory Service?
A wise man once said that by the time you understand the different models that financial advisors use, you probably can manage the money yourself. While that is true, many docs don’t want to manage their money. They can go to a robo advisor or VTSAX and chill, or they can trust The White Coat Investor like we trust the writing, podcasting, conferences, and other forms of educational content you find here. You know it is better than all the other alternatives, at least most of the time. WCI says the advertisers are the good guys; why can’t WCI be the good guy in AUM?
If you don’t want to manage your money—and most doctors don’t—why not support the mission of The White Coat Investor to educate high-income professionals and give them a fair shake at Wall Street? WCI is making a difference, and financially independent physicians provide better patient care, set boundaries with administration, and have space to improve how healthcare gets delivered. Why can't it do the same with financial planning?
If you want to hire somebody who actually does this for a living, our list of recommended financial advisors can help you design a portfolio to reach your investing goals! They offer good advice at a fair price.
What do you think? Should WCI start managing money via AUM? Would you trust WCI as much as you do now if Jim was more closely associated with AUM? Or is this really something WCI should avoid? Comment below!
[Editor's Note: David Graham is an MD who retired from clinical medicine at the age of 48. He completed a Certified Financial Planner certificate, blogs at FiPhysician.com, and offers advice-only retirement planning. This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]