By Dr. James M. Dahle, WCI Founder
I once thought financial advisers were “experts” in their field like a physician and that it was worth paying to get their advice. Now, while I’m sure there are some financial advisers out there that do their clients more good than harm, the vast majority are salespeople with little to no experience in finance or investing. Have you ever considered what the qualifications to become a financial adviser are? They’re posted on job hunting sites all over the internet.
Here’s an Example for an Ameriprise Financial Advisor Job:
Required Qualifications for Financial Adviser
- FINRA Series 7 and Series 63 or 66 licenses and state insurance licenses, or the willingness and ability to obtain them through our company-paid training and licensing program
- Ability to pass a pre-employment background verification and U-4 FINRA verification
- Outstanding verbal, written and listening communication skills; superior customer service skills
- Ability to develop and maintain professional relationships; have the desire, comfort and confidence in networking with others
- Ability to quickly compile, verify and calculate information to provide solutions and recommendations
- Demonstrated ability to display and maintain a highly professional demeanor consistent with Ameriprise values and brand
- Ability to work a flexible schedule; with some evening hours required
- High level of confidence, perseverance and a strong desire to achieve and succeed.
- Demonstrated high level of skill in the following areas: organizing, planning, and prioritization
Preferred Qualifications
- Previous sales experience or exposure
- College degree
Wanted: Sales Guy Who Can Pass a Test
What are they looking for? Well, mostly prior sales experience it seems to me. Finance degree? Nope. MBA? Nope. CFA or CFP (designations that actually mean something)? Nope. The only technical requirement is a series 7 and a series 63 license. How long does it take to get those? Well, I’m not exactly sure, but there is a “Dummies” book for it. Here’s what some advisers say about it:
- “Study your balls off for a week and you will pass! There is NO shortcut to pass this test, If you are a good student, a week is all you need, if you are a moron, you may need a month to study. Take every exam 2X and study why you got a question right/wrong. I did not bother to even read the material. You should not get a single options or regulatory question wrong. I studied for 6 hours a day for 7 days to pass the first time.”
- “Buy series 7 for dummies 6 months before you take the test. Pick it up and flick through it twice a week for 6 months. 15 dollars USD secondhand on amazon.”
- “There were guys at bright studying a week and getting high 90s. One guy just studying for the weekend and got something in the low 80s.”
- “I was basically told “pass this or you’ll be fired” so I read the book, and then spent the weekend before taking practice tests over and over. I got an 89. There is no short cut.”
That was in their own words. I think most of us have spent four times as much effort preparing for a single anatomy test!
What Financial Advisers Think About Doctors
As long as we’re using their own words, why don’t we take a peek and see what they think about doctors? We’ll just wander over to registeredrep.com and search “doctors.” Here’s what we find:
- “Follow them home from the clinic. Give them 5 minutes to kiss the wife and kick the dog. Then smile and knock, knock away….”
- “I’ve been getting doctors on the phone by telling them I have some great pictures of them with their daughter. The ones w/o daughters call back very quickly.”
- “You may ask the gatekeepers which times/days he sets aside to meet with drug reps. Call on them at that time.”
- “If you have a background dealing with these guys and know how to work their psychology to your advantage, it could be a win.”
- “I agree with Cape1. I have a few physician clients and prior to becoming an FA, I worked in the medical field. Learning their psychology is key as well as learning to massage their egos.I’ll go one further though… although most think they know more than you (about everything), what you’ll find is that most have crappy portfolios and ACTUALLY know very little about financial matters.”
- “I would say 35 earliest, over 40 would be ideal. They are generally horrible investors. Most are too proud to admit they know nothing about investing. I would maybe think about disability insurance or malpractice insurance if I was going to market to doctors. They hear sales calls and pitches all day from drug reps. Be original. Try speaking to the office manager or doing something different.”
- “My experience with docs is much better. Dentists, family practitioners, pediatricians, psychs, and even veterinarians, all terrific delegators. Surgeons, on the other hand, not so much.”
- “From my experience/perspective, attorneys, engineers and surgeons are not who I want to build a book around. I’ve had several engineers come to me through referrals, but I’m really upfront with them about how it’s important that they resist the urge to micromanage.”
- “I’m looking at the possibility of prospecting doctors for the sole reason I know they have money, and a lot have their own practice where a good potential for 401(k), retirement, business assets could come from.”
- “I’d figure out where they live and prospect them there. Too many gate keepers at the doctors office – they are used to sales guys blowing their phones up.”
- “Clients pay us a lot of money so they don’t have to know what the freakin risk is of a CDO. If we as advisors can’t see that, then we shouldn’t be in this business. Most advisors don’t do NEARLY enough to earn their fees. That’s one thing that bugs me about life at Jones…there is this “belief” (which exists at many firms) that the firm will worry about the investments, and we just go out and prostltute for new clients. Of course, that’s masqueraded as “planning time with clients”. In reality, the firms don’t care what we know about investments, they just want us to dedicate as much time as possible to finding more assets.”
If you weren’t sure what kind of relationship a typical financial “adviser” was looking for with you, now you know.
Selling. Selling. And Selling
Our esteemed colleague, Dr. William Bernstein, said this in his classic 4 Pillars of Investing:
“Make no mistake about it, you are engaged in a brutal zero-sum contest with [the financial industry]– every penny of commissions, fees, and transactional costs it extracts is irretrievably lost to you….
Brokers do undergo rigorous training, sometimes lasting months–in sales techniques. All brokerage houses spend an enormous amount of money on teaching their trainees and registered reps what they need to know– how to approach clients, pitch ideas, and close sales. One journalist, after spending several days at the training facilities of Merrill Lynch and Prudential-Bache, observed that most of the trainees had no financial background at all. (Or, as one used car salesman/broker trainee put it, “Investments were just another vehicle.”)….
What do brokers think about almost every minute of the day? Selling. Selling. And Selling. Because if they don’t sell, they’re on the next train home to Peoria. The focus on sales breeds a curious kind of ethical anesthesia. Like all human beings placed in morally dubious positions, brokers are capable of rationalizing the damage to their client’s portfolios in a multitude of ways. They provide valuable advice and discipline. They are able to beat the market. They provide moral comfort and personal advice during difficult times in the market. Anything but face the awful truth: that their clients would be far better off without them. This is not to say that honest brokers who can understand and manage the conflicts of interest inherent in the job do not exist. But in my experience, they are few and far between….
Brokers will protest that in order to keep their clients for the long haul, they must do right by them. This is much less than half true. It’s a sad fact that in one year a broker can make more money exploiting a client than in ten years of treating him honestly….
Your broker is often your neighbor, fellow Rotarian, or even family. And eventually, by design, they all become your friend. Severing that professional relationship, although necessary to your financial survival, can be an extremely painful process.”
Eye-opening? Of course. But a sad fact of life. Now there are financial advisors out there who will act as your fiduciary, but they are few and far between. The fact of the matter is that by the time you know enough to choose a good financial adviser, you probably know enough to do all of this yourself.
Great post!
One of my friends relatives is an government auditor and he said that doctors and lawyers and other high paying non-business professionals were the worst investors ever. They always get caught in a bunch of schemes and lose a ton of money.
So…its a note of caution I guess. Just because you are smart doesn’t mean you don’t need to read up and get a good background in finances before you start throwing your money around.
Great post. An all-too-common career story for a typical “financial professional” can be seen in this NY Times autobiographical piece by a former Fidelity and Merill Lynch financial advisor (who’s now had to declare personal bankruptcy.)
http://www.nytimes.com/2011/11/09/business/how-a-financial-pro-lost-his-house.html
He called about a job as a security guard, only to find that it was a call-center job that involved *selling* securities. Then “things went well” and a few years later he’s in charge of everyone else’s money and plunking down customer fees on an overpriced house. These are the kind of jobs these people have – its about being good at talking people into fees and commissions, not having any kind of actual financial skill.
“Like most financial stories, this one is personal. It starts with me getting into the financial services industry more or less by accident. I answered an ad in 1995 that I thought was for a job related to “security” (as in security guard) but was in fact related to “securities.” That’s how little I knew about the stock market. A few months later I found myself working a phone at a Fidelity Investments call center.
Things went well, and by 1999 I was a Merrill Lynch financial adviser and a certified financial planner. By then, we also owned a house in Salt Lake City. We’d bought it two years earlier, with a $25,000 down payment. A few years later, an opportunity arose to form a partnership with a successful Merrill adviser in Las Vegas. “
Nothing new to my attention. The story on the guy mixing up security guard job with securities, all the while being actually in charge of people’s money is the lack of substance of financial industry in a nut shell. This is so absurd.
I used to be in family medicine, but left to go into finance because I loved economics and investing. I would agree that the bar is set pretty low for entry into the field and there is a big push for sales and finding high net worth clients for obvious reasons. It’s a business, just like medicine is. I would disagree with you on the education part though. Degrees really don’t mean anything in this field, that’s why it’s not required. There is no certified training course/degree or text books that can substitute for real life experience. Instead of residency, we have on the job training. Take for instance a medical student who just got their MD. The MD doesn’t mean that they know how to treat a patient. They have to finish a residency to do that. The same is true in finance. Are there bad advisors out there who are just in it for the money? Sure, and apparently you found one, but every field has bad apples including medicine. I can tell you after seeing some incredibly complex strategies that my firm has come up with for clients…they come up with stuff that you can’t find in a text book or online. Trust me, I’ve tried in order to learn more on my own. I’ve seen the amount of planning and consulting with other specialists that goes on and heard of cases where the client initially balked at the what? a $20,000 fee that later saved them a quarter million later. The most frustrating thing for a financial advisor is that our value is not something immediately tangible. Our value is often not recognized until it’s too late for the client. In the mean time, we’re just seen as money sucking vortexes in it for our own self interest. That just really sucks for people like me who actually do want to do a good job.
The phrase “bad apple” suggests they are rare. While many advisors want to help their clients, most are handicapped by a need to make money and support their family and a lack of understanding of what is actually best for their client. Why else would we see so many people “advised” into loaded mutual funds, high-expense insurance based investing products, expensive and ill-advised limited partnerships etc etc? I would submit the vast majority of “advisors” are bad apples, whether they mean to or not. All of them? Of course not. But by the time you know enough to identify the good ones, you know enough to do most of your financial tasks yourself.
While a $20K fee that saves $250K is obviously a good idea, why in the world should a financial adviser get paid $20K for something that takes less time, effort, and risk than a surgery that a highly-trained neurosurgeon only gets paid $2000 for? It doesn’t make any sense.
A quality financial advisor should be able to make a darn good living charging $100-500 an hour. Yet most don’t work that way. Why not? Because there are too many of them. So they make nothing for the hours they spend prospecting for new accounts, and then charge too much on the handful of accounts they do get. It’s a silly system.
“While a $20K fee that saves $250K is obviously a good idea, why in the world should a financial adviser get paid $20K for something that takes less time, effort, and risk than a surgery that a highly-trained neurosurgeon only gets paid $2000 for? It doesn’t make any sense.”
Seriously? You’re comparing apples to oranges. Personally I’d be willing to pay a fairly generous paycheck for someone’s knowledge and experience if it truly saves me/earns me a shit load of money later. The amount of time and effort spent would be irrelevant to me. Value is in the eye of the beholder I guess.
Anyways, yeah… practically anyone can call themselves a financial advisor because the term is very broad. It’s like saying someone is a health care worker. What matters most is the amount of knowledge and experience the person has which is incredibly hard to prove because there is no standard as far as education and training goes, unlike medicine. When I left medicine to go into the business, I’ve learned a couple of things so far. One is you can tell a lot about a financial advisor by the kind of questions they ask you. If they don’t take the time to understand your personality, make sure you’re organized financially, go over your finances with a fine tooth comb, and make sure you have all your basics covered before recommending investments that will “make them rich” then you should probably look for another advisor.
PTFA-
I think that’s what the first phrase of my sentence you quote says…i.e. it’s okay to pay a lot of money if it saves you even more. But if you had the option to pay $20K to save $250K or $10K to save $250K, which is the better value?
And while I agree making sure “the basics” are covered before recommending investments is important, I’d prefer an adviser who recommends investments that don’t “make them rich.” I want him recommending investments that make me rich.
Here’s a comment I saw on the Bogleheads recently:
“I worked for a small trading company, and for some reason, they liked the idea of everyone having Series 7 certification (even us server admins).
I went to the Series 7 class, full of 23 year olds yearning to be financial planners, and I was amazed how the teacher mentioned doctors as easy marks at least 3 times (the phrase “marks” may not have been used, but “gravy train” definitely was said once).”
Buyer beware.
Anecdotal evidence at best and from Bogleheads, a source I wouldn’t trust for advice about anything financial.
[Off-topic comment deleted. If you wish to start your own blog pointing out the problems with medicine, feel free to do so. There will be plenty of material I assure you. But that’s not the subject of this blog.-ed]
Interesting that you wouldn’t trust a Boglehead for advice about anything financial. Why come to a Boglehead’s site and read it then?
Why? To enlighten readers whenever I encounter hypocrisy and anecdotal/circumstantial evidence masked as unbiased advice and fact-based conclusions–especially with regard to opinions about other professions and professionals.
Take, as just one example, your response just a couple hours ago to another commenter’s mention of a “Million Dollar Round Table” in the FA industry.
You wrote, “I don’t know about most readers, but I certainly don’t think the best “financial advisor” is the one who can “produce” the most sales.”
Seems fair enough. Focus on clients not sales volume. Now let’s review the chapter 2 title of your book:
“How to have a seven-figure net worth five to ten years out of residency.”
[Off-topic comment removed.]
I’d like to offer a new book concept based on your book’s closing chapter 16. You should call it:
“How to help consumers quit getting ripped-off by doctors.”
Look, Jim, I get it. You don’t like FAs–clearly you view many of them as incompetent financial poseurs out to rip off and/or overcharge their clients. I view doctors and most medical professionals much the same way. Too many of them don’t see clients coming through the door, they see billing codes. Both the finance and healthcare industries have a long long way to go to clean up their acts. Like you, I’m not going to hold my breath while I wait.
You clearly didn’t actually read Chapter 2. It basically says save a bunch of money and invest it wisely. At any rate, as I mentioned before, this website is not about medicine. If you would like to start one about medicine, feel free. If you want to write a book to help consumers quit getting ripped-off by doctors, you should probably start with a chapter on treating anxiety. Then you could write one about dealing with uncertainty. There’s actually probably a great book there. Maybe I’ll write it after retirement. However, the purpose of this site is not to defend medicine. Medicine has plenty of problems of its own. The purpose of this site to talk about the financial industry.
I have no problem with real financial advisors. I have a problem with salesmen masquerading as advisors. That’s like a doctor getting paid for how many drugs she prescribes or how many tests she orders. If you think that’s actually how medicine works, you need to do a little more studying before starting that site. Attorneys get paid for their time. Accountants get paid for their time. Doctors get paid for their time. Real financial advisors get paid for their time. Salesmen get paid commissions.
I didn’t need to read Chapter 2 (in fact I have no desire to read any of the book). I alluded to it with a throwaway reference about debt reduction and investing. You know full well that such an aggressive goal– 7 figures in 10 years–motivates much more than simply debt and investment management.
[Lengthy ad hominem attacks and off-topic comments deleted. You’re right. It is my website and if the main purpose of your comment is to attack me, then expect your comments to be heavily edited. If you wish to share or even debate ideas in a civil manner, I’m more than open to that. That doesn’t seem to be the primary focus of any comment you’ve ever made on this site though. Frankly, I have better things to do with my time than moderate comments on four year old blog posts every time a “financial advisor” finds them. You may or may not have noticed that financial advisors are not the target audience for this blog, despite the fact that many read it and agree with my descriptions of the industry.-ed]
7 figures in 10 years is hardly an aggressive goal for a physician making $200-300K. That simply requires saving 20-30% of his income and getting 5% real out of it. No nefarious tactics needed.
The fact that more physicians don’t achieve this is the reason this blog exists.
[Repetitive, badgering, non-contributory comment deleted. Further comments from this commenter held for moderation rather than simply blocked in hope that one of them will eventually contribute something useful to the discussion.-ed]
No, you clearly don’t “get it”. Salesmen are seeking prey. How often do they claim a fiduciary standard? You truly view medical professionals who have sacrificed to study, train, and heal the human body in the same way? That is sick.
I am not an advisor or a doctor, but I deal with both as a consultant. The funny thing is, both stereotypes are right – “Doctors are the worst investors” and “advisors are all salespeople that just care about their fees”. But they are just that, stereotypes. For both sides, there’s truth to it. I’ll address it toward Doctors, because that’s who this article was aimed toward, but know that if this was written on a blog for advisors I’d spend more time addressing it to advisors.
Doctors – if you have your own practice, you are salespeople. You want new patients (or if you are at capacity, you wanted new patients to get to that point), and you presumably market or marketed to get those. If, like many practices, you grow through referrals, that’s sales also. Don’t fault an advisor for wanting to grow his (or her) practice. I work with at least 40 different advisors each year, and the majority of them care about their clients and got into the field because they enjoy following the markets and/or helping others. There are of course some that did it firstly because they thought they could make a lot of money, but then again that also is true of some Doctors. As far as fees, now it gets more convoluted. I don’t think most advisors purposely “rip off” clients, but there are many who charge (or collect – it’s always psychologically easier to collect fees paid by investments than consciously choose to charge a high amount) high fees and feel they deserve it because of the time they spend or the knowledge they bring. Bottom line, save for the relatively small percentage of “scumbags”, most advisors are honest and do want to help. That said – the inexperience and lack of rigorous licensing requirements means that as well-meaning as some might be, they may not know much about the field. If they REALLY care, they’ll further their education and training, get additional certifications, etc. This is why I recommend speaking with references and going with an advisor with some experience. They don’t have to have 30 years’ experience (in fact, it’s just as likely someone with 30 years’ experience hasn’t kept up with the changing conditions, regulations, tax laws, etc), but at least 5 years. Why 5? Most advisors fail in the first 1-3 years. If they make it to 5 years, they are statistically in it for a lifelong career. Lastly, remember that the stats are highly skewed – you’ll find thousands of articles on how advisors don’t beat the market. While some try, my personal feeling is that beating the market isn’t how you should judge your advisor. The value of an advisor should be in helping you navigate the different types of investments and in deciding how to allocate your investment based on your age, risk tolerance and market conditions. Is XYZ stock poised for an awesome run? If it is, should you put half of your retirement savings into it if you’re 60? Or is it smarter to skip that opportunity (or throw a small investment in it), and opt for a bond fund? Based on interest rates, are bond funds a dangerous proposition? Foreign funds can be risky – but based on current conditions, are they a safer investment than domestic large caps? I’m not suggesting answers to those questions, of course – but that’s where a GOOD advisor earns his pay. That is also where most individual investors fail. You won’t learn that by reading Money, Kiplingers, or the WSJ, despite all of the articles that address it (if I had time I’d explain why, even though the articles are all good and written by experts).
I also deal with just as many Doctors in a year, and I will say that it’s absolutely true that above all other industries I consult with, a much higher percentage of Doctors believe they are knowledgeable investors. I do understand why – you spent an insane amount of time learning your field, and to be able to even make it through you had to be “smarter than the average bear”, and work harder. You are no stranger to research, so it makes sense that you’d want to do your own research. You also work in a field where you know more about the subject than everyone around you (your patients, your staff). You’re used to being the expert. It makes sense that you can be the expert of anything you put your mind to, and it also makes sense that you would question information someone else gives you (after all, your patients routinely tell you what’s wrong with them, because they “read it on the internet”). However, I’ll tell you from experience that most of the Doctors I deal with do not do better on their own than they would with professional assistance. Granted, if you’re a member here, you probably are among the more educated on the subject, but it’s just not possible to know enough as a casual investor to invest optimally. That said, it’s VERY important to know the basics and even to have a strategy you are comfortable with, so that if you do get advice you can mentally audit it and know if the advisor really knows what they’re doing. In fact, if you are dead set against having an advisor, meet with one anyway. An honest advisor will give you their opinion for free without you becoming a client (because they will hope you value their advice enough to WANT to become their client). They may give you some insight that you were unaware of, or some advice that might help you, and you won’t need to pay them on an ongoing basis. Also, don’t assume an advisor will cost you – if your whole aversion to advisors is having to pay more, depending on what you have for investments, the investment companies may be keeping 100% of fees that otherwise could be split with advisors on the back end. I see it all the time.
Last note of caution – be wary of advisors that tell you things like “my clients enjoyed an X% return last year, while the market only returned Y%”. So many people use the market as a yardstick, and much of the time it’s completely irrelevant. A 60 year old probably shouldn’t be chasing the S&P. A 30 year old might be, or might be looking for more. While some people use the wrong yardstick, so many MORE people use NO yardstick. I had a CEO tell me that he had all of his money in a certain mutual fund that was incredible – he got a 35% return last year. I took a look, and he was right. He had the fund for about 5 years, and he was certainly killing the market. I’d be pretty happy, too. The only problem is that the particular Vanguard fund he had was in the bottom 30th percentile of all funds in its asset class. It only did well because that sector did well. The fund itself was a dog in relation to others that aimed for the same benchmark. You might be saying, “that’s common sense”, but I can tell you first hand that this is not an uncommon exchange, and this is just one of many, many pitfalls I see.
Advisors – like I said, I’m not going to write a lot to advisors here, but bottom line is that if you are one of the advisors referenced in the post above (and if you are, you know you are), things are getting tougher for you to be a fee hog. However, if you act as a true Fiduciary (as you should be, regardless of how the law defines you in a particular situation), and are putting your clients first, they’ll never have a problem paying for you. I routinely see clients who happily and knowingly choose to pay more for investments because they feel the money their advisor makes is fair. I also see plenty of clients who would dump their advisor and pay MORE to have a quality advisor, because the advisor simply collects a paycheck.
Oh, and I don’t just consult on investing, but it’s a major part of what I do, hence why I discuss it so often with clients. Again, I’m not a Financial Advisor and don’t give any investment advice – I only help clients know what to ask and what to look for, and help look for better business processes….so the disclaimer is that none of what I’ve posted is advice, simply an opinion.
I can’t say I disagree with any of that. I agree that truly unethical advisors aren’t all that common. However, there are plenty who are ridiculously uneducated on their profession and even more whose incentives are so misaligned it is very difficulty for them to do the right thing. As noted in many other places, I have no problem with someone paying a fair price for good advice.
just found your site looking for mortgages. awesome site! bought the book within minutes.
Very kind of you. Thank you.
James I wandered over to this post…just because.
I’d like to point out the 3.4 million and growing disclosed records of doctors who take money from Big Pharma. Yes, I looked up your name and lucky you I didn’t find any “disclosed” records. Kudos. Your industry peers…not so lucky.
While you rail against professionals in other fields (in this post, financial advisers), take a moment to recognize and acknowledge that healthcare professionals share the same dysfunction and questionable credibility:
http://projects.propublica.org/docdollars/
Whether we’re talking about financial advisers or doctors, their clients should always get a second opinion and perhaps even a third, time permitting. Perhaps then they can make a more informed decision.
I would suggest you start your own blog about how financial professionals can navigate the medical waters without falling victim to the sharks. This one is about financial stuff for doctors.
At any rate, you won’t find many emergency docs at all on that list. Imagine a list showing how many insurance agents received commissions from insurance companies, stock brokers who received commissions from brokerages, and loan agents who received commissions from banks. It would make that list look downright lame.
There you go making assumptions again and drawing conclusions not necessarily based in fact.
You’re missing the point, or perhaps purposely avoiding it. It’s not about the specific profession, but about the “bad apples” in each that unfortunately taint the perception of entire industries. You warn doctors about financial advisers when you should be warning doctors to simply do due diligence in all of their interactions. It’s a matter of good business and not-so-common sense.
On a different and more serious note…
James, you’re a doctor, not an expert in finance no matter how you slice it. And while you make light of the licensing financial adviser’s must obtain, you’re not licensed nor does it appear that you’ve made any attempt to obtain any licenses. If you’re confident in your skills with your “second job”, why not get licensed and make it official?
Fact is, you have a three year old blog and now a for-profit book that both provide some level of financial “guidance”. I assume you understand that both, but especially the revenue generating book, fall into a very muddy messy legal grey area that would/should raise a few eyebrows at FINRA and the SEC.
Good intent aside, there is a three pronged test to determine if you’ve overstepped your bounds:
1. Giving advice about securities
* this includes references to securities in general, not just specific investment recommendations; for example, even advising a client to invest a set percentage in “stocks” is considered advice about securities
2. Being in the business of giving that advice
* this refers to presenting yourself as an investment adviser
3. Being compensated for that advice
* this includes receiving compensation of any kind, including fees, commissions, or a combination of the two – and the compensation does not have to be received directly from the client
You might want to consider pulling the book and making it available to your readers as no cost e-book. Just some “friendly advice” from one professional to another. 😉 Good luck.
My point is that some professions are mostly composed of bad apples.
I think it’s extremely unlikely that a financial blogger will get in trouble with FINRA and the SEC. There are thousands of financial bloggers and millions who participate on financial forums. As far as I know, the SEC/FINRA hasn’t gone after any of them. What are the odds that I will be the first? I think it is quite clear that the business I am in is selling books and ads, not giving formal financial advice. If you read the disclaimer at the bottom of every page of the blog, it should be quite clear to readers, FINRA, and the SEC that I am not a financial professional. That’s also one good reason not to “get licensed and make it official.” Thank you for your concern.
Yikes. You come off as very angry in your videos. Good luck getting people to your seminars.
Joseph, I assume you are referring to the videos on my site.
I appreciate the feedback, thank you. However, having delivered more than 100 free home financing workshops to five New England communities since mid-2013, luck doesn’t play a factor in attendance. These are free workshops. No ads, no sponsorship, no BS.
I should mention that attendees find the workshops through their local adult education programs. The website serves only as a series of refresher sound bytes and resource links….and past attendees get a kick out of how different I come across in the videos. Frankly I had fun with making the videos, they’re free, and as far as the content, well…I’m an actual former loan officer.
Love what you have to say. As the son of a retired physician and owner/founder of an RIA I can see how much of what you say is applicable. I may quibble here or there but your overall philosophy is sound. Keep up the good work. I have written a book that may interest you which I can send to you if you like. It is called “Financial Tales” and many of the stories are about the trials and tribulations my father endured when he first journeyed down the investment path.
Thanks for your kind words. For those interested, here’s a link to the book mentioned.
Excellent post. The sad reality is that the question: “Where are the customer’s yachts?” is still valid. When I got out of fellowship and got my first “real” job at the belated age of 32, I did a short, intense immersion in reading about personal finance, recognizing that I did not have the slightest idea on how to manage my retirement money. After sifting through a lot of shady stuff, found Vanguard, Malkiel, Bernstein, became a Boglehead and never looked back. Thank you for your blog — just bought the book, btw.
That’s exactly the way to do it- a little mini fellowship at the time you need that info most. Way to go!
I’m an advisor that works mainly with physicians and I agree 100% with this blog. Fortunately, I’m a fiduciary RIA and a member of the MD Preferred Services Network, so my business model and approach is far more transparent and favorable than most brokers and advisors. I’m paid soley through a % fee; no commissions, no trails – so my interests are entirely aligned with the client’s and I have to always perform and improve in order to keep their business. You are correct that most advisors have little or no experience and knowledge when it comes to investing. They are held to the suitability standard which allows them to pick products that will pay them big commissions rather than products that help the client – thus lowering their incentive to build efficient and diversified portfolios that perform well over time. Thank you, I will show this to my prospects.
While I prefer fee-only advice, and see it as leaps and bounds above commission based advice, I’m not sure you can say that your interests are entirely aligned with the clients by virtue of being paid by an AUM fee. For example, your incentive is to recommend against such things as:
1) Spending more money
2) Giving money away
3) Investing in money in anything that doesn’t count toward the AUM (real estate, private deals etc)
4) Paying off student loans
5) Paying off a mortgage
etc.
Hi, WCI!
I love this site. Thanks so much. I’m an adviser, and here’s what I think about doctors 😀
– smarter than I am
– skewed toward confident
– feel (and usually are) busy
– analytical
– skewed toward opinionated
– younger docs seems to be skewed more than older toward having higher life/work balance
– some expect to be rich just by being a doctor (whereas I think being rich is about giving generously, being content, and living in the moment while preparing for the future)
OK, onto the issue of the alignment of interests. You are so right that there are conflicts of interest “even” in the AUM model.
In fact, there is a specific example of a conflict under the AUM model — it might belong under item (3) in your comment above — that bears special mention: an unscrupulous adviser could recommend against investing in a “held-away” account (e.g. employer-sponsored plan) and instead in an account that is under management by the firm (e.g. Roth) when it would be best to invest in the employer-sponsored plan.
As I prepared to be an adviser, I really struggled (still do) with how to bill since there are problems with every model. In medicine, there is always some talk about the way the fee-for-service model may exacerbate the issue of over-testing, over-prescribing, over-surgerying (that’s not a word!). But the other payment models have problems, too. The point is that, as you know, every system has problems. In my field, here they are:
Hourly: The conflict is that there is an incentive to bill more hours. Lawyers are a bit notorious for billing like 20 “billable hours” in one “real” hour. I don’t know if there is actually a problem with this in financial planning, though. The real problem with hourly financial planning is that people don’t buy it. Millions of people waste thousands in investment fees that drip out a few dollars at a time on some account statement somewhere, but they will not fork over money directly. It feels different somehow. An example? My grandparents have serious difficulty managing and rationing their little nest egg as they shop for “affordable” and dignified assisted living, medical insurance labyrinths, chronic health issues, fatigue, and general “old age.” They are smart people, but they never learned about investing and now they can’t. Any attempt to teach basic ideas (really basic!) feels like, well, teaching your grandma to minimize a computer window. They are overwhelmed trying to learn anything new. They are so far from being able to read, understand, and follow the advice in this excellent blog that the thought of it makes me laugh — and feel sad at the same time.
Anyway… I learned about their problem when they called me for help. This was before I knew I wanted to be an adviser. I guess they just knew I had an interest in such things. So I looked at their budget and their investment statements. I saw that they were being “advised” by a guy that charged a lot for basically no help, and I thought the investments were very, very risky for their situation. (It seemed like the adviser was going out on a limb to get dividends.) So I phone-interviewed a few fee-only, hourly advisers in their neighborhood, and then I told my grandparents to meet with one (or more) of them, then engage the one they feel best about in order to get a second opinion.
My grandparents never called any of them. I suspect that the change and novelty felt daunting. If you know old people, you understand. Also, I know that they were deterred by the upfront, cash fee at a time that they felt worried about money! (It was no use explaining that they pay about $1000 a year to their current “advisor” [I can’t help but use quotes!]).
So….. In sum, hourly advice causes sticker-shock and is therefore not a scalable model. It’s good for those who can manage on their own for the most part and who are willing to fork over some money for occasional guidance. But even among the young professors, doctors, computer engineers, etc., I know, few are willing to pay up front. Psychological.
Commission: The commission (“suitability”) conflict is well-known, so I don’t need to expand on that. Moreover, I sometimes wonder if the mere fact that they focus mostly (or entirely) on investing is responsible for the perpetuation of the misconception that financial planning is just about picking investments. As readers of this blog likely know, picking securities is almost the easiest part. The real challenge is learning to live within your means, communicating and agreeing with spouse, saving at a high rate, selecting asset location (401k, etc), selecting asset allocation, minimizing fees/expenses, practicing sacrificial-level charitable giving (makes you good, and happier too), maintaining clear records in safe places, aligning beneficiary designations with estate plans, reviewing insurance, etc etc etc.
Financial planning does NOT equal “Big salary + big-name stockbroker.”
Lastly, let’s realize that brokers have the previous issues PLUS the conflicts associated with the AUM model.
OK, actually lastly: I know a broker-adviser who has gives great advice and helps his clients very well. I run around with nice, honest folk. He isn’t rich in money, but he’s rich where it counts.
Flat retainer: Great model. There isn’t really a conflict, in fact, and is probably the best model if you can just convince someone to pay for it (kind of like hourly). It’s even better than hourly in that it can free up communication throughout the year, since the client will feel free to call or email a concern or life change, since there isn’t an hourly charge. BUT: The trouble is finding a fair price: some clients need and utilize very little help — maybe $300 a year of time — and others $3000! It’s really hard to know the ethical way to bill in this way. If I could figure this out, I’d probably do only this going forward.
—–
Now, I’d like to address the issue of your post square-on.
Conflict issue: Some of the AUM conflicts are a beast (see below), but I find that most of the AUM conflict are not a major problem, especially if addressed openly.
1. “Spending more money.” I wish that there were a problem with physicians spending too little money. Not an issue in real life. (Well, there are 300+ million people – I’m sure there’s an anecdote out there of SOMEONE who has millions in investments and is eating cat food, but I really think this is a trivial example.)
2. “Giving money away.” Big problem, AUM or not. People need to give more, and especially people earning doctor salaries. People in the upper-middle class give the smallest percentage of their income of any demographic. I agree this is a problem, but it’s much bigger than adviser fees. It’s about wanting to live a certain lifestyle, feeling so close to it, and having your budget “upside down,” as Dave Ramsey puts it. Give, then pay bills, then save, then spend. In that order. And sacrificially.
3. “Investing in anything that doesn’t count toward the AUM.” BINGO. That’s a problem. Esp. real estate, private investments, etc. I would add “Employer retirement accounts vs. retiremet accounts managed by adviser.”
4. “Paying off student loans.” This one is less of a big deal, in my opinion. That’s a bit more cut-and-dried, and if you have a good adviser, they’ll not steer you away from the mainstream.
5. “Paying off a mortgage.” Like the first issue, it’s true in theory, but it’s not a problem in real life. First, it’s pretty cut-and-dried what to do, and second, I don’t think it’s often you’ll have a client for whom early mortgage repayment is a good idea. But you’re right, in theory.
Of all of those, number three is the one you really need to watch out for. A good adviser will point out the conflict openly and in a timely manner, encouraging you to think outside the box and “trust but verify” especially diligently on that one issue.
In sum, AUM conflict is real, but I think it isn’t a huge deal if disclosed fully.
Thanks for taking the time to read, WCI. I really, really love your site. I think you do a TON of good. Cheers!
Excellent discussion of the issues surrounding the fee-only business models of the financial advice industry.
Depends on the firm!
Enough said…
Terrible article, guilty of just about every sin in the journalistic book.
YOU should have some responsibility in the way influence others through your writing, in same way advisors influence their clients.
At least advisors have a fiduciary standard, continuing education, exams, etc, etc…
Shame on YOU sir!!!
Journalism huh. Did you mistake a doctor’s blog for The New York Times or Wall Street Journal? Shame on you sir.
What was it you didn’t like about this article, that I quoted financial advisors in their own words? I can see why that would make an advisor feel uncomfortable.
[Ad hominem attack removed.]
Loved this one!!
WCI, I applaud you for your thick skin! It’s a shame that people can’t diagree in a civil manner. It just proves your points even more. Thank you for the WCI service (dare I even say ministry!) to fellow physicians.
Keep up the great work! I’ve been hearing about this site from the west coast to the east coast from friends, colleagues, attendings. I bought your book and feel it was money well spent. Thank you for taking an interest, being fearless in your content, and keeping it real. It is extremely confusing to navigate all this financial jargon and it so easy to be led astray by people who claim to be well intentioned experts. Fwiw, in my opinion, your book should be required reading for every graduating medical student or resident.
Thanks for your kind words. Welcome to the WCI community.
I am a financial advisor and I agree with your opinions. All doctors should have a high level of skepticism when choosing an advisor. I guess the thing I wanted to add to this conversation is just trust people who enrich your life. Whether that person is a financial advisor or a physician. If you feel like you want an advisor then try one out, but drop him if he is not enriching your life and I don’t just mean the returns in your portfolio. You will know pretty quickly if he is or isn’t. You are better off on your own if you can’t find that.
This article is so poorly written and full misinformation that I will not even attempt to argue with you.
Anyways, you’ll understand when you pull out at the bottom of the recession again because you did not have someone to advise you. It’s obvious people need guidance, 2008 anyone?
Americans have no financial knowledge and don’t understand politics. For that same reason someone who dedicates his life to understand how money works and helps out the average citizen should get compensated.
And no, financial advisors are not making 20k deals everyday (or every week for that matter). Your content is hilarious.
Thank you for not arguing with me. That’s very kind of you. No, I didn’t sell in 2008. In fact, I bought more all the way through the downturn and made our quite well in the recovery, without using the services of an adviser. By the way, the content in this post is mostly from those who call themselves advisers, not me, so I’m glad you enjoy it.
I’m an advisor for the last 10 yrs and I’m a MDRT.org member (Look it up). The content of this post is 100% BS. There, that’s from a real advisor.
My understanding of Million Dollar Round Table is that it is an organization composed nearly entirely of successful insurance salesman.
From wikipedia:
I don’t know about most readers, but I certainly don’t think the best “financial advisor” is the one who can “produce” the most sales. I spend most of my time warning readers about salesmen masquerading as advisors. You seem like one of those based on the comments you put on the site today. Thanks for stopping by.