Not everyone feels comfortable managing their own finances, so I’d like to discuss whether to get help planning your personal finances and how to select an advisor if you need one.
Do You Need Financial Advice?
It isn’t hard to manage most of your financial life if you are willing to learn a little, spend a small amount of time on your finances, and get help only when you need it. The areas you’ll need to address include creating and executing an investment plan, managing your assets, maximizing tax-efficiency, tax preparation, insurance, estate planning, asset protection, and other areas depending on your situation.
This list can be daunting to many, and most physicians are busy and would prefer if someone did this for them or helped them out significantly. If you’re in this camp, you likely need financial advice. In addition, some people want access to investments that they can’t get on their own like hedge or venture capital funds. I’m not one of these people, but if you are you’ll need an advisor.
How Do You Select an Advisor?
There are a number of important factors to consider when selecting a financial advisor. These include:
- How are they paid?
You want a “fee-only” advisor who is going to be paid a flat fee, hourly fee, or percentage of assets under management. You want to avoid any advisor who is compensated with commissions on trades or investments they sell you. This will ensure that their incentives are aligned with yours.
- How much are they paid?
Whether you are paying a flat fee, hourly rate, or percentage of assets, you should be able to get an advisor for under $5000/year. The industry standard for a percentage of assets fee is 1% of assets under management, but you should be able to find this service for significantly less. Vanguard’s asset management service is 0.3%, for example, as are many of the “robo-advisers” I’ll discuss at the end of this article. Also, make sure he/she discloses any additional fees you will have to pay.
- What are their credentials?
There are a lot of different credentials that financial advisors can have, and many of them are nearly meaningless, like a physician having a BLS card. The ones that represent significant training and education include Chartered Financial Analyst (CFA), Certified Financial Planner (CFP), or Chartered Financial Consultant (ChFC). If they are an insurance agent, Chartered Life Underwriter (CLU) is a quality credential. If they have a MBA, CPA, or JD, that can be a plus as well. The rest of the credentials you’ll see mean little.
- What services do they offer?
As discussed in the 2nd paragraph, there are a lot of services you may want or need. Make sure that your advisor either provides the ones you want or has someone who can. Also make sure it is clear which of these services your fee includes and which it does not.
- How much experience do they have?
We’ve all been medical students and residents, so we’ve all been inexperienced professionals. Looking over our shoulders most of the time, however, was a supervisor with experience. Make sure your advisor has experience, specifically with physicians. We have unique problems like sizeable student loans and professional liability issues that they should be familiar with.
- What is their investment philosophy and is it compatible with yours?
Make sure that they can explain their financial philosophy to you in a manner that makes you comfortable and that you can comprehend. You don’t want to hire an advisor who talks over your head. Just like a doctor who avoids using complex medical jargon when talking to his/her patients, an effective financial advisor should be able to make complex subjects understandable for clients. Also, make sure their investment philosophy is compatible with yours. If you are a believer in passive index investing, you don’t want to hire an advisor who believes primarily in active management.
Are There Other Options?
“Robo-advisors” are on-line tools that have lower fees than a financial advisor but less of that personal touch. Betterment.com or Wealthfront.com are two of the larger companies, but there are others as well. While I have never used these services, I think they are worth considering when you are examining all of your options for obtaining financial advice, especially because the price is right.
What Do I Do?
As someone who writes financial articles, I have a personal interest in this, stay reasonably up-to-date on the latest developments, and do most of my own financial management. When I need help or feel like I’m in over my head, I have access to CFPs from Vanguard, a CPA, and an estate-planning attorney that I can call in a pinch.