Financial Advisors: the Good, the Bad, and the Ugly

(😇👺😱)

Okay, let’s face it: the idea of managing your own finances can seem like a daunting, time-consuming endeavor; one that requires a specialized skill set, secret knowledge and/or a crystal ball.  That’s why many physicians seek out the help of a financial advisor. 

You may have questions:  Do you really need one? What exactly do they do anyway? How can you be sure you’re getting good advice and at a fair price?  

In this post, I’ll share with you some basics about what you should know and consider before hiring a financial advisor; and for those who may find the subject a little dry, I have peppered it with some entertaining icons to aid digestion (warning: this post contains 75% of your recommended daily intake of emojis). My goal is to help you gain a better understanding and empower you to make informed choices that are right for you when it comes to managing your money.  And I’ll share a bit of my own experience on this matter. 

First, I must confess: I have a love-hate relationship with financial advisors (🥰/😡).  I had one for 16 years.  And then, I didn’t. 

Intrigued yet?

My story is this: as soon as I paid off my student loans, (which I did within five years after training), with my only remaining debt a reasonable mortgage, and already maxing out retirement accounts, I started to have money coming in that wasn’t earmarked.  I had always been a saver (thanks Dad) and decided to open an account at Schwab and invest in mutual funds. I didn’t know much about doing either. I had no idea how to pick mutual funds. Choosing a few that were doing well (according to Money magazine) seemed like a smart choice (more on why this isn’t a good strategy and how to pick mutual funds will be covered in a later post).  So I did what a lot of people did in the late nineties. I bought tech funds! They went up, up, up. Then came the dotcom crash in March 2000…

The dotcom bubble, also known as the internet bubble, was a rapid rise in U.S. technology stock values fueled by investments in internet-based companies in the late 1990’s. During the dotcom bubble, the technology-dominated Nasdaq index rose from under 1,000 to more than 5,000 between the years 1995 and 2000. The dotcom crash that followed saw the Nasdaq index fall by 76.81%.  By the end of 2001, most dotcom stocks had gone bust.  

I wasn’t feeling very good about the value of my Schwab account (😭?).  Suddenly (and it was sudden), my funds were not worth nearly what I paid for them.

What does this have to do with financial advisors?  After seeing my investments rapidly decrease in value, I decided I should get professional help.  I went with a financial advisor from the same company that did my taxes (and provided financial services for my radiology department).  It was hard to hear this advisor tell me that I should sell my mutual funds and diversify my portfolio so that it wasn’t heavily weighted in tech funds.  I kept asking my advisor if I shouldn’t wait for the funds to regain in value and not “lock in a loss.” She taught me about the concept of “sunk cost.” A sunk cost refers to money that has already been spent and which cannot be recovered.  Those funds were not going to rebound and the sooner I sold them, the faster my portfolio could get on the road to recovery.  

My advisor got me into some reasonable funds and I felt confident having someone who knew something about investing making decisions for me.  I paid her a fee based on a percent of my account’s value. It was reasonable, because my account wasn’t worth much. But over time, as I consistently invested more and more, my account grew, and before I knew it I was paying my advisor a LOT of money.  I started to learn a lot about investing and how advisors were paid, and decided I wasn’t getting “financial advice at a fair price.” In fact, I was paying a lot for advice that I no longer thought was very good. I was reading a lot about low-cost index funds and my advisor tried to convince me that having some actively managed funds was better than investing in all index funds.  As I learned more about personal investing and my philosophy on investing started to conflict with that of my advisor, I decided to fire my investor and start managing my own finances.  

Having an advisor at one point in my life was one of the best decisions I ever made and firing that advisor later in life was another of the best decisions I ever made.

 

As many as 80% of physicians need, want, and should use a financial planner or investment manager.

Self-management of finances is not realistic or practical for all radiologists.

As many as 80% of physicians need, want, and should use a financial planner or investment manager, either because they don’t know enough to manage their finances on their own or they don’t have/want to spend the time to do it themselves.  Often it’s both.  

Going it alone when you don’t know what you’re doing is a recipe for financial disaster, as I learned first hand, and the fall-out can spill into other areas of your life (e.g., arguing about money is a leading determinant of divorce).  I benefited from getting professional advice, until I wasn’t.  When I was no longer deriving enough value from the advice to make it worth the cost and I no longer shared my advisor’s investing philosophy, it had become bad advice at a bad price (🤯). 

So how do you get good advice at a fair price?  For starters, keep reading this post. 

Good advice

Seeking good advice starts with choosing someone who is a fiduciary.  This is a person or organization that manages your assets and is legally and ethically bound to act in your best interest.  The fiduciary must manage your assets for your benefit, rather than for her own profit, and cannot benefit personally from the arrangement unless and until explicit consent is granted (in writing).  

Registered investment advisors (RIAs) must register with the Securities and Exchange Commission (SEC) and state regulatory agencies; they have a fiduciary duty to clients.  Broker-dealers just have to meet the less-stringent suitability standard, which doesn’t require putting the client’s interests ahead of their own.

 

Right price (💰)

The “right price” is inexplicably tied to whether the advisor is a fiduciary and whether they offer good advice, because bad advice is not worth any price.  You can get both good and bad advice that costs an arm and a leg. You shouldn’t have to sacrifice a body part to get good advice.   

Financial advisors get paid in two basic ways.  There are commission-based (or “fee-based”) advisors that earn money based on what they sell to their clients, and “fee-only” advisors that charge a flat hourly rate, annual retainer fee, or take a percentage of the assets they’re managing for you.  

Commissions (💸) 

Companies pay commissions to employees or contractors who facilitate or complete financial transactions to sell services or products (e.g., mutual funds, stocks, insurance, etc.). The rate of compensation is  usually a percentage of sales, based on the revenue generated. When a financial advisor gets paid this way, her incentive is to sell as many of the products that will pay her the greatest commission. Human nature makes it hard to do anything different.  This is called a conflict of interest. An analogy is a physician who prescribes medications and accepts money from a drug company.  

Assets under management (aka, riding the gravy train 🚂) 

An AUM (assets under management) fee is what investment advisors charge based on the total market value of all financial assets which that advisor manages for her client.  The advisor deducts her fee from your account, usually on a quarterly or monthly basis, based on the current value of the account.  It’s easy to see the incentive here – the more money managed, the more money paid in AUM fees.  This is good and bad. This incentive is certainly aligned with the client’s desire to see her investments grow.  Win-win, right?  

But there are conflicts of interest with this model.  The advisor is not incentivized to recommend that you pay down your student loans, pay off your mortgage, spend money (even in retirement), or act in any other way that would decrease the value of the account/s they manage.  An advisor may manage any or all of your investment accounts. The more accounts they manage, the more they get paid. And they are only incentivized to recommend that you invest in accounts that they manage. This might include rolling over a 401(k) account into an IRA that they manage.  What could go wrong with that? For one, if you read my prior post on the pro-rata rule, you know that having any money in an IRA account negates the benefit from investing in a Roth IRA.  

One in five investors don’t know what they pay in investment fees.

How much does AUM-based advice cost? (🤔) 

You wouldn’t buy a TV set without knowing what it’ll cost, and yet more than one in five investors don’t know what they pay in investment fees. Another 10 percent don’t even know if they’re paying any fees at all. It’s easy to be in the dark about fees when you don’t get a bill every month or quarter, but rather the fees are taken right out of your account.  If you don’t know how much you’re paying for advice, you don’t know whether it’s too much. 

The average AUM fee for a human financial advisor is 1 percent, but advisors often charge on a sliding scale. So the more assets you have under management, the lower your fee percentage will be.  The overall average fee will be less than 1%.  Let’s look at a real-life example from the advisor I used:

 

Assets Under Management	Annual Fee*
First $1,000,000	1.00%
Next $1,000,000	0.90%
Next $2,000,000	0.80%
Next $1,000,000	0.70%
Over $5,000,000	0.60%

*Subject to a minimum quarterly fee of $500, or $2,000 annually

Under this arrangement, if you had an account worth $1,000,000, you would be charged 1.00%, or $10,000.  

If you had an account worth $3,000,000, you would be charged the following:

First $1,000,000 at 1.00% = $10,000

Next $1,000,000 at 0.90% =   $9,000

Next $1,000,000 at 0.80% =   $8,000

Total           $27,000

 

Robo advisors (e.g., Wealthfront, Betterment, Ellevest, SoFi, Vanguard Personal Advisory Service, and Charles Schwab Intelligent Portfolios) offer a lower cost alternative to the typical AUM fee structure.  A robo-advisor (also spelled robo-adviser) is a financial advisor that uses an investment algorithm to automatically select investments.  The investment choices are based on how much risk you’re willing to bear, what level of returns you want, and when you need the money.  Some hybrid models provide automated “robo” service in addition to access to a human financial advisor. Most charge between 0.25 and 0.5 percent per year, depending on services provided and account minimum requirements.  

What is an acceptable amount to pay? This depends on the amount and quality of service provided, and how much you value that service.  Maybe that number is $5,000, or $10,000. But the question you should ask is does it really take a lot more time and effort to manage a $3M portfolio than a $1M portfolio? In the examples above, the difference was $17,000.  Over the course of 30 or more years, we’re talking more than daily lattes at Starbucks big money.

One strategy in using AUM-based advisors is to use one when your account balance is low.  The fee for a $200,000 account, using the scale above, would be $2,000. This is less than a lot of flat-fee advisors would charge.  If you think anything less than $10,000/year is reasonable, you can simply move away from an AUM-based advisor to a flat fee advisor when your account exceeds $1,000,000.  Or you can try negotiating a lower fee.

Keep in mind that however much you pay an advisor and by whatever method, you pay that fee regardless of whether your investments increased or decreased in value that year!  

Flat fee

Flat-fee advisors do not charge based on the value of your account.  They charge an hourly rate, an annual or quarterly retainer that’s not based on the size of your account, or a flat fee for each service. For instance, a flat fee advisor may charge $2,000 to create a comprehensive financial plan. Or charge $5,000/year to manage your investments.  Many professionals are paid by a flat fee (e.g., lawyers, accountants). Radiologists are still largely paid by fee-for-service (i.e., X dollars per CT read).  

If the advisor isn’t licensed to sell investments (and many flat-fee advisors are not), it’ll be up to you to implement the plan they create and manage your investments going forward.  Since flat fee advisors have no affiliation with the investments you use, they’re often seen as the most unbiased financial advisors. These advisors are good for radiologists who are financially literate enough to carry out that advice and manage their investments on their own.  Those who do not have much confidence in their own ability to manage their finances may need a higher level of ongoing service, but they will pay for it. 

So what makes a good advisor? (🏆)

First of all, understand that anyone can call themselves a financial advisor, wealth manager, financial consultant, financial planner, etc. and none of these titles equates with training, experience, or expertise.  Some may have only had minimal sales training. The following professionals have had extensive education, undergone testing, and gained the experience to be deemed qualified to offer sound financial advice.

CFP

A CFP (Certified Financial Planner) has completed a CFP Board-registered education program, passed the CFP^® examination, holds a bachelor’s degree from an accredited university or college, and demonstrates financial planning experience.

ChFC

A ChFC (Chartered Financial Consultant) is the “Advanced Financial Planning” designation awarded by The American College of Financial Services.  It represents the completion of a comprehensive course consisting of financial education, financial examinations, and practical experience. To be considered for the program, the applicant must already have a minimum of three years experience working in the financial industry. Also, it is recommended that applicants have a degree related to finance or business before applying.

CPA/PFS

The requirements for the Personal Financial Specialist (PFS™) credential include 1) holding a valid CPA (Certified Public Accounting) license and being a current member of the AICPA (American Institute of Certified Public Accountants), 2) completing 75 hours of comprehensive personal financial planning education, 3) obtaining 2 years of full-time business or teaching experience (or 3,000 hours equivalent) in personal financial planning, and 4) passing a Personal Financial Planner (PFP)-related exam (e.g., CPA/PFS, CFP, or ChFC). 

CFA

A CFA (Chartered Financial Analyst) is a postgraduate professional qualification offered internationally by the American-based CFA Institute to investment and financial professionals. It has the highest level of international legal and regulatory recognition of finance-related qualifications. A CFA has completed 3-4 years of education and passed 3 rigorous examinations.  

But how do I find one of these people? (🕵️‍♀️)

Ask your radiology colleagues if they can recommend someone, but tread with caution.  Beware of the person who is eager to give advice, but has little financial acumen. Just because someone is a brilliant radiologist and all-around nice person doesn’t mean they recognize good financial advice.  If you don’t know someone to ask, the White Coat Investor has put together a list of advisors that he deems provide “good advice at a fair price.”

What services does a financial advisor provide?

Some advisors are willing and qualified to provide many of the services listed below and some are not.  In my opinion, if you’re paying someone a large sum of money for financial advice, they should have one of the distinctions listed above and do more than manage your investments.  They should be able to make recommendations by looking at YOUR big financial picture. And as a radiologist, you want an advisor who has experience working with physicians, ideally other radiologists.  In the end, you should feel comfortable that you’re getting value for what you’re paying.

Depending on your individual needs, consider a financial advisor who can help you with one or more of the following: 

• Financial plan development, with realistic financial goals
• Debt management, including student loans
• Budgeting
• Health and long-term care planning
• Estate planning
• Maximizing and managing retirement accounts
• Developing a retirement plan
• Mortgages/refinancing
• Social Security
• Inheritance management
• Tax planning
• Investing
• College planning
• Insurance needs (e.g., life, disability, home, auto, umbrella)
• Referrals to other professionals with specialty training/experience (e.g., tax accountant, estate lawyer, etc.)

Bottom line (🕰=💵, and other final words to the wise)

Only you can decide whether the service of an advisor is providing enough value to merit the fees they charge.  If you want to outsource everything in your life except being a radiologist (e.g., lawn care, snow removal, childcare, grocery delivery, financial management), you might highly value those services because you don’t want to spend the time (and time=money) to do them yourself.  You have to ask yourself, how much is my time worth? You can figure out how much your time doing radiology work is worth. Are you willing to pay a financial advisor the same rate? If having an advisor means you won’t make poor financial decisions, costing you hundreds of thousands of dollars or more over your lifetime, then paying a lot for good advice would be a better option than going it alone.  I suggest paying only for the advice you value and need, and not paying any more for it than you need to. And stick with someone who has the fewest conflicts of interest, is transparent about those conflicts, and is a fiduciary who is legally bound to act in your best interest.