By Dr. Jim Dahle, WCI Founder
I am often asked for recommendations on how to choose a financial advisor, and sometimes people ask for recommendations for a specific financial advisor. My mantra with financial advice is to get “good advice at a fair price.” However, when it comes to specifics, I am often left with a conundrum of one sort or another. You see, I haven't yet found the perfect financial advisor to whom I can send readers.
The Do-It-Yourself Financial Planning Solution
Sometimes people asking for a financial advisor recommendation are simply asking the wrong question. Perhaps what they should be asking is, “Do I need to hire a financial advisor, or, if I am willing to put in a reasonable amount of effort and discipline, can I do this on my own?” Although I often recommend advisors and though I have sold ads to many of them, it is pretty easy for readers to see that I'm not paying anybody else to do my financial planning or asset management.
“That's fine,” you may say, “but you're The White Coat Investor! Of course, you don't need a financial advisor.”
The truth is that you don't have to know everything (not that I do) about finance to take care of your own finances. You only have to know the parts that apply to you. For example, I would have never learned anything about how student loans or student loan refinancing works if I wasn't writing this blog. It just doesn't matter to me. Likewise, once you have a mortgage, you don't need to follow all the new developments in this space. Once you have a reasonable investing plan, you don't have to learn a dozen other ways to get to the same goal. Estate planning doesn't have to be done every year, and you don't have to know the asset protection laws in any state but your own. Disability insurance and life insurance only have to be bought once in your life. You don't have to know how whole life insurance works if you don't want to learn; you can simply ignore it along with dozens of other optional financial products. The amount of knowledge you have to assemble to do your own financial planning and investing can be surprisingly minimal, especially when you consider two factors.
The first factor is that you want to make all your mistakes, especially your investing mistakes, when you're young and have a small portfolio. Hopefully, by the time you're in your 50s and are faced with a decision about what to do in a stock market downturn, you've already been through three or four bear markets. Perhaps you went through your first one at 30 with a four-figure portfolio.
The second factor is that it's OK to make a few mistakes that cost you real money, because it isn't like financial advice is free. Good advice is pretty expensive stuff. For example, at a pretty typical 1% of assets under management fee, a doctor saving $50,000 a year for 30 years will end up with $5 million instead of the $6 million they would have had if they had done it (correctly) themself and not paid the AUM fee to an advisor. The way I look at that is that I can make up to a million bucks worth of mistakes and still come out ahead. I'm a slow learner, but I'm not that slow. That also assumes, of course, that the advice you are getting is good and that your advisor doesn't make any of the mistakes you make on your own.
More information here:
Should the White Coat Investor Become a Financial Advisor (and Charge AUM Fees)?
My Perfect Financial Advisor
I have a list of recommended advisors (who are also, for the most part, advertisers on the site). I think they're all good people running a great business. However, none of them are perfect, and I don't think their businesses are either. Here is what the perfect advisor would look like to me:
#1 A Fiduciary Duty
This means the advisor's first duty is to do only what's right for me. It's kind of like a Hippocratic Oath. You would be surprised how many advisors are only held to a lower “suitability” standard instead of a fiduciary one.
#2 An Up-to-Date Academic Understanding of the Field
Financial advising and investing isn't physics, but there is academic literature containing important concepts. The perfect advisor is familiar with all of it. They would probably subscribe to a journal and read a blog like Michael Kitces regularly. They could discuss the weaknesses of the Trinity Study, would know the difference between Fama and Bogle, and would be an expert on financial history.
#3 A Meaningful Designation
There aren't very many designations in the financial field that mean much. My list is very short: CFP, ChFC, CPA/PFS, and CFA. The perfect advisor ought to have one. Heck, if I'm going to pay someone for financial planning, they'd better have one of those first three designations. If they want to manage my investments too, maybe they should have a CFA too. Personally, I think it's criminal that someone can practice in the financial advisory field BEFORE getting what should be a minimal education. They certainly won't be practicing on my investments. Even the CFA—probably the hardest of these designations to get (not counting the CPA portion of the CPA/PFS combo)—only requires 15 weeks of studying over a 2.5-year time period. An advisor without one of these designations is telling me they aren't committed enough to their profession to do less than a semester's worth of studying about it.
#4 A Clientele Just Like Me
Doctors have a few unique things going for them, and the perfect financial advisor knows all about them. They know the ins and outs of PSLF. They have walked multiple clients through each of the student loan refinancing companies. They know what to look for in a physician contract, design retirement plans for many small practices, and do 8606s in their sleep. It would also be nice if the advisor had the ability to evaluate many of the alternative investments doctors are pitched—imaging centers, surgical centers, syndicated hospital shares, practice buildings, life settlements, and other investments only available to accredited investors.
#5 A Reasonable Investing Strategy
Every advisor (and investor) invests a little bit differently. Maybe they use DFA funds or a combination of low-cost ETFs. Perhaps there is a little bit of an active management tweak based on valuations or momentum. Maybe they include some alternative investment classes like peer-to-peer loans, commercial real estate, or (gasp!) some type of cash value life insurance. Fine. I can live with all that. There are many roads to Dublin. But the overall strategy needs to be reasonable. If the entire strategy is based on buying massive quantities of whole life insurance, avoiding Wall Street entirely, picking individual securities, or some market-timing scheme, beware!
The perfect advisor is laser-focused on the cost of their recommended investments. Advisors who are not cost-focused like to preach that “Cost is what you pay; value is what you get.” I disagree. Cost may be what you pay, but value is a fraction—with cost as the denominator and “what you get” as the numerator. In investing, you get what you don't pay for.
#6 Unbiased
I often meet “financial advisors” who are paid on commissions try to convince me that it's an acceptable way to pay for advice. “How else can you get advice until you have a half-million?” they say. “I only do what's best for my clients.” I totally disagree. Commissions are a terrible way to pay for advice. Look at professionals you go to for advice. Lawyers aren't paid that way. Accountants aren't paid that way. Doctors aren't paid that way. (Can you imagine if your only reimbursement were 5.75% of every lab, CT, and prescription you ordered?) Why in the world would you pay a financial advisor that way?
Don't get me wrong. I like commissioned salespeople just fine. In fact, at least one WCI employee is partially paid on commission (plus an hourly rate for a lot of the behind-the-scenes work she does). If she sells more ads for this site, she makes more money (and so do I.) But I think you'd be stupid to go to her to ask, “Where should I advertise my business?” or “How much should I pay to advertise on The White Coat Investor?” It isn't that these commissioned “advisors” are bad people (usually.) It's that they are continually facing a terrible conflict of interest that even a highly ethical person cannot completely resist forever. They have kids to feed, and the worse the financial product, the higher the commission that the company designing the product must pay to get it sold. To make matters worse, even if they sold you a halfway decent product the first time, they're constantly tempted to churn (or at least tinker with) your investment plan to generate a new commission. It is simply a terrible model that should be avoided.
Some fee-based (that means paid by commissions AND fees) advisors are less bad if the only thing they're taking commission on is the life and disability insurance they are selling you. But I would much rather see them rebate the commissions (I'm told this is illegal, but I'm sure there is a way to discount your fees for someone who buys insurance from you, perhaps just a lower fee that first year or something). Or at least refer you to an independent agent (making sure you only purchase what you really need.)
#7 Fairly Priced
I'm not a huge fan of paying for financial advice based on your assets under management (AUM) for three reasons.
The first is that an advisor has a bias against recommending financial strategies that remove money from the pot they're managing. This might be commercial real estate, a Roth conversion, paying off your mortgage/student loans, or simply spending more.
The second is that the advisor simply won't take you until you have a meaningful amount of assets such as $500,000-$1 million. That could take many investors a decade or more. You need the advice most at the beginning of your investment career, or you may never get to $500,000!
The third reason I don't like AUM fees is that they can become ridiculously big as your portfolio grows. It simply isn't any harder to manage $2 million than $200,000. It certainly isn't 10 times as hard. Many advisors will give you a bit of a break as your assets grow, but it's usually nowhere near as big as it should be. For example, you might pay 1% on your first million and only 0.8% on your second million. But managing that second million didn't take any more work, much less 80% more.
A much better way to pay for asset management is with a flat annual fee. I think a reasonable hourly rate is the best way to pay for financial planning. However, I can live with an advisor you pay using any of these three methods. The key is to actually add up the cost (whether it's based on hours, a retainer, or your assets) and make sure the total price is fair. If you're paying $5,000 a year for asset management as an annual fee or 0.5% on a $1 million portfolio, it's all the same.
My idea of fair pricing is an annual fee in the $1,000-$10,000 range for asset management and $100-$500 per hour for financial planning, although the trend the last few years has certainly been upward. Maybe that $10,000 figure needs to be $15,000 now. I like to see the fees as low as possible provided the advisor can still provide good service and stay in business. But if doctors are willing to pay $20,000-$50,000 a year for financial advice, I can't blame the advisors for taking it. I certainly don't price the ads on this site or my fees in the ED based on what some random blogger thinks I should charge for them. I charge as much as the market will bear.
#8 Tied in with Other Services
Many naive doctors think one financial professional can be their “money person” and take care of all their needs. The truth is that they probably need five or six people, including a financial planner, an investment manager, a tax strategist/preparer, a practice accountant, an insurance agent, an estate attorney, an asset protection attorney, a healthcare attorney/contract negotiator, and a retirement plan consultant. Some advisors can do two or three of these things well, but nobody does them all. Ideally, all these people will be under one roof, and they are seamlessly tied together. Some of the larger firms are trying this, but I don't think anyone is doing it perfectly yet.
More information here:
How to Negotiate Lower Advisory Fees
Recommending Financial Advisors
Knowing all that, I'm now left with a dilemma when people ask me for a recommendation for a financial advisor. These are not usually people who read this blog (or any blog) religiously, and they don't have the time or interest to read even a handful of books on investing. Chances are very good that even if they were paying 1% a year for advice, they would be better off with an advisor. Look around your hospital, you know who I'm talking about.
My usual go-to is to use the list of recommended advisors that we have already vetted. We've swapped emails with them, spoken to several, followed up with clients who have worked with them, and even visited some of their offices. We've reviewed their websites and their filings with the SEC. Some of them (rarely) have had a formal complaint which we have had to ask them about. We also see comments and receive emails about these advisors from readers of the site. If we get significant bad feedback from clients, we remove them from the list.
Despite these occasional negatives, I still feel comfortable recommending each of these advisors to the right doctor. However, not a single one of my recommended advisors meets all the criteria I have spelled out above. To make matters worse, many readers would like a recommendation for an advisor in their hometown. That's easy in some towns with a quick internet search and a little time on the SEC site, but it's very difficult in a small town in the middle of nowhere. Besides, after the pandemic we should all be very comfortable with Zoom, and that allows you to pick from advisors all over the country to get the best advice at the best price.
At the end of the day, if you want an advisor at the lowest possible cost and with the fewest financial conflicts of interest, go take a look in the mirror on your way to the library to get some good investing books. If you're not willing to do that, then realize that while we can help you get a very good advisor, we can't help you get a perfect one.
What do you think? What criteria did you look for in an advisor? How do you decide who you send colleagues to? Do you think objective investment advice can be given by an advisor paid with commissions? What about one paid with AUM fees? Comment below!
[This updated post was originally published in 2015.]
I wish I needed a financial adviser… Someday. For now I’ll go with paying down debt and hoping to someday max out my 401K with low fee funds.
Great article by the way
Dan. You are not being truthful to put it mildly
Your words raise many red flags
Hey Ken,
Calling someone untruthful is a strong accusation. Care to clarify which facts that I’ve laid out are not true in your opinion or raise red flags?
And that is a serious question too – if you think my facts are wrong or there is some evidence that I don’t know please feel free to educate me. I’m always willing to shift my view if you can show actual facts and evidence that support the argument.
Good list. My adviser ticks all the boxes – except he is paid according to assets under management. But, I am more than happy with the fee schedule, and it is well below the stated average (less than a third). So I think that criterion should be taken with a grain of salt, or have an asterisk by it. Plus, I have known him over 35 years, he lives modestly, and is honest to the point that I would – and do – trust him and his firm completely with my finances.
Glad to hear you are happy with your adviser even after getting educated on these topics. I wish that situation were more common.
I agree wholeheartedly with your article. I started out in private practice in 2002. I knew nothing about investing or finance. I made plenty of mistakes. But for whatever reason, I read and learned about finance. Fast forward to today, I can honestly say that I haven’t learned anything significant from my meetings with financial advisers in the past few years (I’m always hoping). I never took a formal course in finance or economics. This is one field that physicians can learn without a great investment in time IF they have the desire. I’ve come to the conclusion that no one will manage your money better than yourself. Paying a percentage of AUM is totally unnecessary. Use an advisor when you start out early in your career if you must, but learn from him or her and try to put in a little effort educating yourself. When you have sizeable assets you can simply do it yourself and save yourself a bundle.
A great point. A good adviser will do a whole lot more than provide asset allocation advice, which is actually not that easy to do given how little most advisers know about the mathematics of stock market and risk management, and how poorly developed this mathematics actually is (so that most firms still use outdated and totally wrong math to manage risk, often with disastrous results for their clients).
A good adviser should be a problem solver first. There are many important questions that have to be answered, which most doctors/dentists will not know the answer to, because reading generalized materials will not do you much good, since the actual answer depends on multiple assumptions that are specific to each individual. And in the course of solving problems, the adviser would often have to create customized simulations that can help answer many different types of questions under various assumptions. Rules of thumb can be fine for making basic decisions, but without a good understanding of the nuances, much of this ‘common knowledge’ can be useless because we are dealing with exponentially growing quantities, so a small change in our assumptions can lead to a totally different answer, and the same advice might not work for two different situations.
For example, the following questions, when addressed correctly can save you a lot of money, and minimize your risk, diversify your future tax liability and provide you with significant flexibility at retirement:
1) How should one repay debt? Which debt to repay first? Should I repay debt or invest instead?
2) Should I invest in after-tax, in Roth or tax-deferred accounts? The answer to this question will actually change as your finances change (including your tax brackets).
3) How should I be invested after-tax? Many doctors don’t realize that they will pay a significant tax on their after-tax holdings that should be estimated before making a decision on how to invest.
4) How should I manage investment risk? Would I simply subtract age from 100 or is there are much more fundamental way to address long term investment risk?
5) How much return do I need? Should I try to get as much as I can or should I instead concentrate on protecting my principal (as much as possible) while increasing my savings instead?
6) What is the best way to take distributions from retirement plans (including 401k, 457b, SERP, defined benefit), lump sum, annuity, Roth conversions, etc?
7) What is the best retirement plan for my practice? How can I set one up without paying asset-based fees? Which plan would work best, 401k or SIMPLE?
8) Would a 2 or 3 asset class portfolio provide enough diversification, or should a multiple asset class and better diversified portfolio be used for larger investment amounts?
One can look up basic asset allocations online, but to answer many of the above questions one needs to do not only research, but actual numerical modeling. Without doing it, it will be nearly impossible to say which approach would work best for taking a non-governmental 457b distribution (which depends on many factors), or which plan would work best for your practice (401k or SIMPLE, for example).
Just like doctors are not prescription machines, good advisers are just asset-allocation machines, and they should do a lot more for their clients!
You understate the difficulty in obtaining the CFA credential. The CFA Institute which governs and grants estimates 900 hours of study over 3 years to pass the three tests, which have roughly 50% pass rates, or only 1/8 pass all three consecutively.
It is very difficult to acquire, similar magnitude to an M.D., far in excess to CFP.
Otherwise a nice compendium.
I disagree. I’ve heard estimates of 750 hours, but I’ll give you 900 if you like that better. Let’s see when I hit my 900th hour in medical school:
I think we started about the third week of August. I recall something like 4-8 hours of class a day, followed by another 4-6 hours of studying after class, maybe 5-6 days a week. So we’ll call it 60 hours a week. So, by the end of September we were at 360 hours. By the end of October it was 600. By November it was 840. We were well over 1000 by the time we went home for Christmas. So yeah….900 hours equals one semester. How you think that is similar in magnitude to an MD is beyond me. It’s frankly insulting.
I get that they’re a hard test. I get that you have to wait 6 months between Level 1 and Level 2 and 12 months between level 2 and level 3. I get that lots of people fail it. I also get that there is an experience requirement behind it. But it pales in comparison to the requirements to practice medicine. 4 years of college. 4 years of medical school. 3-7 years of post-graduate training. Financial advisors, even those with the highest designation in the field, are not doctors.
https://www.whitecoatinvestor.com/financial-advisors-arent-doctors/
I think the CFA is great, but let’s not oversell it. Most people study for it while holding down a full-time job. Nobody is going to medical school, much less residency, while holding down a full-time job.
I’m have my CFA Charter, CPA and going to get my CFP this fall. My wife is a Surgical Oncologist and I’ve been with her since before she was accepted into medical school so I have a fairly good basis for making these statements.
I would agree that it isn’t equivalent to the training that any physician goes through. It’s really not close. My wife and her colleagues worked harder in those 12 years than anyone in any other field that I know. That said, it was a legit 900 hours of study for me to pass all three exams and that didn’t include my education, and employment knowledge required to fulfill the requirements. It’s kind of like saying someone that is Board Certified only studied a couple of hundred hours for their board exams, so to be a Board Certified Surgeon it only takes 200 hours of time. Clearly, that’s an extreme example, but studying for the test and the knowledge needed to even begin studying for the exam are two different things.
I’ll bet 3/4 of that time was the CFA, which most people working as advisors to individuals don’t bother getting.
At any rate, good on you for getting the meaningful designations. Surprised more serious advisors don’t do so.
I think I will have studied > 200 hours just for my board recertification exam next month, never mind the original, steps 1-3 of the USMLE (Step 1 was 6 or 8 weeks of full-time work.)
Most do not bother because a CFA is beyond whats needed to be a good FA, CFP is plenty, ChFc is also a solid designation.
By the time a person gets his series 7, series 66 and gets hired, trains and then works under a Senior advisor for a couple of years and adds a couple designations, they have thousands of hours invested into being a financial advisor.
Ill agree that even with all of this, Medial training in many if not most cases is more difficult. However, as a doctor you do your training and then get a job and cash your check. As an FA you are doing all this training while trying to build your book of business. Most FAs do not make it 5 years in the business, the ones that have, by and large are pretty damn good
I think I agree with all that. But if I were going to be a financial advisor, I’d get a CFA too.
We have some common ground, lol
I agree with Dan on that point. The CFA is RARELY done in 2.5 years. The average Charterholder takes FIVE years to complete. Those are the people that actually get through the program, which is a small percentage of those who start. The pass rates are extremely low. You are marginalizing it. I can speak from experience.
Would you go to a physician who learned everything online or by reading books and is uncertified or licensed? Of course not! Yet you will do your own planning being ‘self taught’ and have no professional certification. You need a professional at some point.
Agreed. I could mow my own lawn, but I have better uses for my time. I could do lots of things – fix my car, paint my house, even put a roof on my house. I can and have done all those things. I hire professionals for those jobs.
It is a bit sad that some folks don’t have access to good financial advice and asset management. And it’s sad but not surprising that some don’t think they need it. I think the “I”m a doctor” mentality may come into play a little bit here.
Finally, doctors are no different than financial planners or any other professional; the difference is doctors have to get a diploma and degree. As with financial planners, some doctors are better than others, some are incompetent, some are lazy, and some are unethical. I’ve observed physicians over my career who performed unnecessary surgeries, who gave unnecessary chemotherapy, and who charged for an office visit or hospital visit at a level which they did not provide. Pretty common, actually.
@RJ, having done those maintenance jobs yourself, I’m sure you were in a better position to hire a contractor to do the work. If you had not bothered to mow or paint, you’d have relied on the good graces of the contractor for a fair deal. Docs similarly have to go the DIY route first – who knows, they might be good at it and never let go – before contracting out investment management. This stuff is not difficult!
At what point? A certain level of assets? A certain number of accounts or asset classes? At what point exactly is a professional required?
I’m a physician. 99% of what I learned was time spent reading books in school. So can someone read books and go it alone for investment management? Absolutely. Any suggestion otherwise is mythology. One time expenses for estate planning, buying insurance needs a professional, however.
This is very well thought out and written and I would say is a must read for anyone thinking about using an adviser.
My only addition would be to recommend that you understand the tax implications for your investments. For practice/business owners this may not be a huge deal when choosing an adviser. However, for the wage earning employee with major limitations on ways to tax shelter their investments, I think this is as big of a conflict of interest as how you pay for your advice. If you use a 401(k) or Roth you can shelter $18k/year while using an IRA or Roth on your own (as any adviser can have you use while controlling or selling you the investments) you would be limited to only $5500/year and be subjected to income limits.
Most advisers will say that doing comparisons of different fee models is unfair b/c it assumes the individual investor would do things the same as an adviser. I would agree. However, I would say that argument is a double edged sword. Any advantage an adviser would claim would assume they would give you all the cost and tax advantages you would choose for yourself, even when there are many incentives for them to not do so.
Most of you will be doomed from the jump. Letters behind a name means nothing especially when it just means they are rehashing “conventional wisdom” of the past. i do fee based insurance consulting, and people rarely using financial consultants that offer fee base. They prefer house hold names. As I’m sure many of your subscribers do. However, a recent article in Market Watch talks about industry reform into a fee base system across the board but i doubt it happens. Why? Simply because the brokerage. And consumers lack of financial literacy.
being an independent insurance consultant i’ve done financial reviews, mainly with teachers and professors examining their insurance policies, pension plans, and investments.
There is always an income gap. Why? Broker have an agenda and will train their financial advisers a certain way. Same in the insurance industry. Which leads to both financial advisers and insurance agents sub consciously doing what’s best for the broker or insurance company.
If i didn’t come into the financial world as an independent I would have been like many captive agents selling products and never taking the time to learn how they work and why they work. i made the transition from a chemist to sales agent to consultant with financial education.
Now, consumers who lack financial education are also cheap and don’t want to pay a consultant to learn about compound interest, APR, Roth IRA, banking system, AND DON’T USE THE INTERNET TO read leading papers from economist, insurance professionals and financial managers- won’t know if the advise they are given is good or not UNTIL IT’S TOO LATE.
ADD TO THE FACT THAT THE RULES AND PRODUCTS ARE ALWAYS CHANGING. Is it any wonder why economist say that American scored the worst on financial literacy compared to U.K and China. Or that 60% of Americans aren’t saving enough for retirement? Or understand how fragile the American Dollar really is? Or how the FEDS have been keeping the stock market afloat?
Again, this is my profession. I study and read and analysis everyday. Do you?
Mr. Daily, I get that you’ve been selling Nationwide insurance to Ohioans for 29 years. That’s great. I agree that brokers and insurance agents often do what’s best for the broker and insurance company. Part of that issue is that most of them, like you, came into their profession from a career in sales. Then when teachers and professors go to agents for advice, mistaking them for unbiased advisors, they end up being sold products they may or may not need.
I’m glad that you study and read “analysis” every day. I’m sure as you continue to do so you will see what I have written about your industry is true.
I’m not surprised that you think designations are worthless. However, I think readers should consider that the source of that opinion is an insurance agent who, as near as I can tell from your website, doesn’t have one. 29 years. No CLU. No ChFC. Seems a pretty low hurdle to me for someone serious enough about their profession to stay in it for 3 decades. Is it impossible to be a good financial advisor or insurance agent without a meaningful designation? Probably not. But why go to someone that doesn’t have one when so many people do?
I have a great way to pay advisors. Everybody would have “Financial-Advice Insurance” whether they need advice that year or not. When they go to an advisor, they would pay just $10 for the visit even though the actual cost would be about $250. The difference would, of course, be paid for by the people who didn’t need advice that year through their insurance premiums.
And you’re going to pick on how financial professionals are paid?
Feel free to start your own blog about the problems in medicine. I assure you that you’ll never run out of material!
I am a bit disappointed to see that your list of preferred advisors lacks diversity in terms of female (only one) and/or culture/ethnicity. With the strikingly large number of minorities and females in the field I was hoping to see more variety in your list. I am a fee only advisor (female and Indian) and know the value a person can provide when they share a similar background and upbringing. Not to shoot down your list as I do know a handful of the advisors personally and they are great in terms of what they do and the services they provide. However, in addition to the items you list above a client really needs to feel connected to their advisor. Your blog is very prominent and has a huge following so I hope you continue your vetting process to add advisors who not only have all the qualifications on your list but also has the diversity aspect that I know so many physicians are looking for in their advisor.
I may not have made this clear. The recommended list of advisors are paid advertisers on this site. When an advisor comes to me and asks to be put on the list, I review their website and ADV2 for their fee structure, total fees, investment philosophy, experience, and credentials. If that all looks okay and they’re willing to pay, they get put on the list. That’s how the list is made. Probably 1/3 of those who ask to be put on it get put on it.
If a female Indian advisor comes to me, wants to be added to the list, has a minimally biased fee structure, reasonable total fees, an investment philosophy reasonably close to mine, and a reasonable amount of experience and education, she will be added to the list. It is so hard to find advisors who meet those criteria and are still looking for clients, that if I also demanded they had a certain ethnicity or gender, I might not have a list at all. If a client’s main criteria is to have a female, minority advisor, they are likely to end up with terrible advice from a commissioned salesman. Far better to have your main criteria be “gives good advice” than “shares my gender or skin color.” If you can find someone that does both, so much the better, but the smaller your ethnic group, the harder that is going to be.
I don’t actually go out looking for advisors to add to the list, starting with a list of ethnicities and genders. If you’d like to be listed, you know how to reach me. Include a link to your site and your ADV2 in your email.
Hello, I looked at the list of advisors that you recommend. How about the Vanguard advisors? How are they?
They are no different than advisers working for other mutual funds.
1) Not fiduciaries – they are employees who are working for Vanguard, not for you, so they won’t tell you anything that’s outside of their view. I doubt that you will get someone who’s knowledgeable in working with doctors and dentists and their rather complex retirement plan needs (hospital plans, self-employed plans, group practice plans).
2) No comprehensive planning – they are not even supposed to offer tax advice, so don’t expect them to recommend and/or manage a solo 401k, Cash Balance, HSA, backdoor Roth, etc. No risk management, including insurance and making sure that your portfolio downside risk is taken care of as you accumulate more assets, recommend and manage Defined Benefit/Cash Balance plans, etc.
3) No management of any outside assets or coordinating strategies across accounts.
And for the assets at Vanguard, they typically recommend a cookie-cutter and rather simplistic asset allocation that you can do yourself. So basically they are asset allocators at Vanguard only. Not really something I’d pay 0.3% for. If your situation is rather simple (a W2 employee at a hospital or a university) and the cost is too high, I suggest doing things yourself until such time that you can afford to hire a competent adviser. Doctors and dentists can have rather complex financial needs, so a good adviser will be more than worth it.
Mostly agree with this assessment. Four positives about the Vanguard serice:
1) The price is right.
2) They all have CFPs as I recall.
3) The recommended asset allocation may be simplistic, but at least it’s reasonable.
4) You can do a lot worse than having all your investments in Vanguard index funds. Most of mine are there anyway.
Bottom line- don’t expect much on the financial planning side, but if all your assets are at Vanguard (i.e. no outside 401(k)) it could be just fine.
If you read some investing books and learn yourself you will come to one conclusion :
-decide on asset allocation
-fill in the pie with low cost index funds
It really is that simple. You are a fool to pay for %AM
If you need an advisor, fee only. Pay hourly for their time/work.
AUM paid advisors are considered fee-only. There are very few advisors willing to do asset management for an hourly fee that are still looking for clients and willing to advertise here. Go ahead and try to find some. Let me know what you find.
I assume he means paying an FA for a detailed plan. This can run $2,000-3,500 depending on the complexity. 95% of the time, if someone pays for a plan the advisor will take those assets under management. However, if they want to take the plan and do it themselves they are free to do so.
Going through the process people are educated and see that a financial plan is not just asset allocation and index funds.
When you are talking $5,000,0000+ in market assets, there are so many strategies beyond index fund investing. Index fund investing can be a great way to build wealth, there also has to a plan for preserving that wealth and moving a portion of wealth from paper assets to stable real wealth.
Do you honestly think doctors, lawyers, and accountants don’t get paid based on production?
I get paid on production- i.e. how many patients I see and talk to and how many procedures I do, or rather an average of what all the docs in my group do (we divide the pot up by shifts worked.)
Why do you ask?
I’m a financial wellness educator, so I can confidently say great list, but I’d add one critical question: always ask prospective advisors for their track record in writing. And it should be independently verified, too, so you can confidently rely on the information.
Think about it…you’re hiring someone to help you protect and grow your wealth, shouldn’t you know how good they are at it? This reporting is demanded by corporations and institutions, but few individuals know to ask for this information…and few advisors volunteer it.
There are financial advisors who are willing to be transparent and will provide their long term, independently verified investing track record. The CFA Institute publishes Global Investment Performance Standards (called GIPS), which are accepted as a best practice worldwide . If you hire a GIPS compliant investment manager, you can compare apples to apples and see how good of a job they are doing for you after fees and costs. That’s critical information.
You can find GIPS compliant firms here, through the CFA Institute:
https://www.gipsstandards.org/compliance/pages/firms_claiming_compliance.aspx
You can learn more about it by googling GIPS compliance, or here’s some links that might be of help.
https://www.wsj.com/articles/SB10001424052702304259304576375861063201854
https://arroyoinvestmentgroup.com/is-your-investment-manager-doing-a-good-job/
https://jasonzweig.com/financial-advisers-show-us-your-numbers/
Why would that be important if they are putting you into a reasonable asset allocation of low-cost, broadly diversified index funds? Their track record would look like the market’s track record. Or do you believe that the market can be reliably beat after paying the costs of doing so?
The DALBAR studies, if you’ve seen them, show that even with the use of index funds, actual returns can vary dramatically. Advisors are not immune from the same biases that individuals experience.
What really matters is how much an advisor is generating for you net of all fees and expenses, right? You probably want to see, over longer periods, if they are earning consistent returns for their clients generally in line with the broad market indexes. Then, you want to see how well they protect portfolios relative to the market indexes during the inevitable bear markets. While of course there are no guarantees, GIPS provides you with a reliable form of this information.
The DALBAR study is so flawed as to be almost worthless. I agree that advisors don’t always improve behavior and always add fees.
No, I don’t expect an advisor to successfully time the market or “generate high returns.” I expect an advisor to do the things listed in the original article. Getting the client into a reasonable portfolio of low-cost, broadly diversified funds and staying the course is all I expect. It shouldn’t be that hard for an advisor to make sure the client gets market returns.
Because index funds are not a cure all. Again, if your client is 67 and has $3,000,000, are you going to advise they just stay in index funds entirely? If they have done that up to that point, thats ok, not the best, but certainly not the worst strategy.
Continuing that into retirement is not smart
Jim,
Thank you for this useful summary. I have parents that are in their 70’s and in need of appropriate financial planning (not to mention estate and insurance considerations). I regularly read your ‘The End of the Rainbow’ series in ACEP Now. Have you posted an ‘end of the rainbow’ post here specifically addressing general guidance for those not planning for but actually at the end of the rainbow, i.e., in retirement? I suspect many of your readers are facing the task, as I am, of trying to provide guidance to their aging parents. Thanks in large part to you I have a decent grasp on what I should be doing, but I don’t know the nuances of this later stage in life (asset allocation, which accounts to use first, Social Security considerations, insurance considerations, overall strategy, etc.). If you’ve already posted this, my apologies. If not, I think it would be an extremely useful post.
Thank you for considering,
Liam
Try this one:
https://www.whitecoatinvestor.com/common-questions-about-investing-in-retirement/
Or this 5 post series:
https://www.whitecoatinvestor.com/investing-in-retirement/
Thank you. These are a great starting point.
I have enjoyed the free financial analysis that comes with Utah Medical Association (UMA) membership. The Physician Wealth Advisers (formerly UMA Financial Services) offers free financial counseling as a part of membership. Only with any investments made with them is there any fee but otherwise there is no additional cost beyond the UMA membership fee. I believe this is the best arrangement on the planet.
A few random comments:
*When I graduated from college, even as co-valedictorian, and passed my CPA (back when it was really difficult😂), I was dumb as a rock.
*When I became a CFP, I may have been dumber than a rock – i didn’t even know what a fee-only financial planner was.
*The only way to learn and improve is with actual practice and experience, combined with a desire to do so and (in my case) a passion to build a firm that would do right by clients and the knowledge that, by doing so, s/he would build a successful practice.
*Clients, doctors especially (who are taught to be extremely observant), know how to root out those who are only in it for themselves. BUT they have to know what they’re looking for, which is one of the reasons WCI has been so successful
*A CFA designation is generally about active investing and analyzing investments, not financial planning, Hardest to get, but I was glad to see it last on the list, CFAs are great for mutual fund companies but may not be the best fit for a doctor looking for a financial planner without the necessary experience and the desire to overcome some of what they have studied.
*A portfolio is not a plan. It is the result of a plan and the tool to make the plan work. The portfolio is the easiest part of the planning process, as it should be.
*This was a very helpful article and I hope you guys will take it to heart.
There are a myriad of financial people out there as you might see on Facebook and elsewhere that have no designation. They call themselves planners or retirement specialist or any other name. Most are in to selling insurance products like these hybrid annuities and life insurance tied in to it
Jim, great post! Fiduciary obligation, engaging in evidence-based investing (much like we do in our area! ), and a flat yearly fee model for portfolio management with an hourly cost for financial planning are, in my opinion, the three most crucial factors.
Small quibble from a CFA charterholder here: 15 weeks of studying is a major understatement of what it takes to actually prepare for these exams and have a reasonable chance of passing, and does not appropriately factor in the years of required work experience (3 years or 4 years depending on when someone became a charterholder). I estimate my own study hours total about 30 weeks (assuming a 40 hour work week) when I went through the program in 2002-2004. Each year I had weekly study time of 10-15 hours for about 5 months, and then much higher hours in the month before the exam (including taking a week off work to study full time right before the test). I have several colleagues who have also gone through the program and my study time seems typical.
I’ve never taken it so I have to rely on what those who have are saying. I would assume there’s a bell curve though and it sounds like you were further out on the right of it than those I spoke with when I first wrote the article.
That makes a lot of sense. For my job, we have to track our time in 10-minute increments for billing purposes, so most of us are pretty accurate time estimators. Most “normies” that I know underestimate how long it actually takes to do things. Also, it’s a lot cooler to say you passed a hard test with fewer hours of studying than to admit how hard you had to grind for it!
Technically I don’t believe a true fiduciary exists. My priority is to maximize my yield while managing my risk. While a fiduciary may do fine doing the later, I don’t see how I’d be maximizing my yield by paying them to do something that I could’ve done myself.
If you can do it yourself, then it’s simply a question of what your time is worth. People hire advisors for two reasons:
# 1 They can’t do it well themselves
# 2 They don’t want to and feel they get a good value by freeing up that time by paying someone else to do it
You and I aren’t like that, but 80%+ of docs probably agree with one if not both of those statements.
I am trying to determine what type of financial advisor or planner I need to hire.
I am comfortable in investing my money. But I’m looking for some guidance and to have someone look over where our investments are currently and if we should make changes to our portfolio. I would also like some assistance in knowing where we should continue to invest more money into. I don’t want to pay a financial advisor to do the investing for me. I am just looking for some guidance, and confirmation that we are on track and what our next steps should be. I’m trying to figure out who that would be, and what the payment strategy is appropriate for this (I’m assuming a flat fee payment?)
Or an hourly rate. We’ve got a lot of people on our recommended list who can help you become a competent DIYer.
https://www.whitecoatinvestor.com/financial-advisors/
Dr. Dahle,
If one were interested in learning to do one’s own taxes as effectively as possible, or at the very least be as knowledgeable as possible to capitalize on every deduction available to physicians, what tax book or books would you recommend they start with first?
Thanks!
https://www.whitecoatinvestor.com/best-financial-books-for-doctors/