For the FITs | Financial Advisors: What You Need to Know
As we start a new year, with to-do lists and forward planning, here's a few considerations for starting a year of responsible financial planning.
Do you need a financial advisor? No! Or, maybe. Let's discuss the value of a financial advisor, starting with the types of advisors, how they make money, humans vs. robots, and whether or not you need one. As highly-paid specialists, you'll be approached by financial advisors looking for your business, so knowing this information is critical.
Types of Advisors
I'll use the term "financial advisor," but you will come across advisors with many confusing titles, including certified financial planner (CFP), chartered financial analyst (CFA), financial advisor, investment advisor and more.
All these titles mean different things, but the term "financial advisor" does not mean anything by itself and can mislead you into thinking an advisor has useful qualifications, when that person might be little more than a sales person. Look for the advisor to be CFP or CFA, as both learn the basics of managing personal finances. If the advisor has a different qualification, research it to understand what it means before engaging in business.
What's in a Fee?
If you hire an advisor, know how they get paid and how much they plan to charge. It's not as obvious as it should be, and only slightly easier than figuring out how much an aspirin will cost a hospitalized patient.
Advisors can be "fee-only" or "fee-based," with the former being the only one you should use. Fee-only advisors are compensated through an hourly rate, flat-fee or assets under management (AUM). I prefer hourly rather than AUM. With AUM, you are charged a "small" percentage of your assets per year, rarely less than 0.5 percent and sometimes as high as 2 percent.
That might sound great when you only have $100 in the bank (wow, just $2 per year!). However, if you are a good saver, before long you will have $1 million invested and the annual fee will be upwards of $10,000 per year. Not such a small fee anymore!
Fee-based advisors should be avoided except in rare situations. They can charge hourly fees or AUM, but also make commission on products they sell. For obvious reasons, this means your interests will not always align.
Always ask if the advisor acts as a "fiduciary." A fiduciary must put the client's interest first. As a doctor who always considers the patient's best interest first, it was surprising to learn the same does not apply to all types of advisors. Fee-only advisors generally act as a fiduciary. On the other hand, fee-based advisors often do not act as a fiduciary, as they have a strong incentive to sell products that will bring in higher commission, even if the product is inferior to alternatives.
Humans vs. Robots
We have all seen the constant advertisements for "robo-advisors" like Betterment, WealthFront, SigFig and others. One difference between these services and a human advisor is that robo-advisors do very little advising, instead focusing almost entirely on investing your money and maintaining a specific asset allocation.
Rather than give truly personalized advice that takes into account your big-picture financial issues, robo-advisors determine risk tolerance and place your money into a generic set of investments, often low-fee index funds. Some robo-advisors offer access to a human advisor, but usually for an extra fee and it may not result in any meaningful difference in how your money is invested.
These services flaunt low fees and magical results, but don't be fooled. For example, a nearly universal selling point used by robo-advisors is tax-loss harvesting (TLH), a method of using investment losses to get tax deductions or offset gains.
First, you can do TLH yourself without a robo-advisor. Second, TLH doesn't even apply to tax-advantaged accounts like an IRA or 401(k), which are often the only accounts young physicians have. Furthermore, the benefit of TLH diminishes over time as you have fewer and fewer investments with losses, yet you continue paying a fee to the robo-advisor indefinitely.
Making the Decision
The majority of doctors who attend my financial talks become motivated to be DIY (do it yourself) investors, realizing it's not as hard as they thought. Nonetheless, I get asked this question weekly. So, do you need a financial advisor?
If you made it this far in your medical career, you clearly have basic math skills and can manage basic tasks. If you keep a simple portfolio, such as the three-fund portfolio (Google it), which is as good as any complex solution an advisor might present to you, then there is no question you can at least manage your investments. The most expensive part of a financial advisor is the management of investments, so learning this basic skill will pay massive dividends. You could literally save hundreds of thousands of dollars in fees!
However, some people need help and that's okay. Just like it can be hard to find the motivation to exercise, not everyone wants to manage their own money, no matter what the cost. If the alternative to an advisor is doing nothing, then I absolutely support having an advisor who keeps you on the right financial path. Similarly, if you have a weak stomach for financial loss and won't remain invested when the stock market goes up and down, then give the reins to someone else.
People with complex financial situations or those who would be willing to manage their own finances but are too nervous often fall victim to expensive financial advisors. They are likely best served by a fee-only advisor who charges hourly. You can meet that advisor annually to update your financial plan, then implement it yourself. After a few years, you'll see that managing finances is simpler than you realized, and you can start doing it on your own if you want.
Do you need an advisor? Probably not. Is it okay if you have one? Yes, but make sure you choose a fee-only fiduciary advisor, with the lowest fee possible. And avoid being up-sold into other financial products you don't need. Once you feel comfortable managing your money yourself, do it!
This article was authored by Daniel Kirshenbaum, MD, a cardiology fellow at Boston Medical Center in Boston, MA.
Keywords: ACC Publications, Cardiology Magazine, Motivation, Specialization, Learning, Financial Management, Research, Investments
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