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Finding the Right Financial Advisor

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This blog is written for and by DIY investors and retirement planners. In the process of working on it, I’ve learned a lot of people need personalized financial advice and guidance.

It would be failing a large percentage of our audience to not recognize their need and assist them. This is challenging with a financial industry rife with conflicts of interest.

I recently sat down for an interview with Ryan Inman on the Financial Residency podcast. Ryan is a fee-only financial planner, who focuses on working with physicians.

Ryan is married to a pediatric pulmonologist which led him into this specialization. He observed how vulnerable most physicians are, which leads them to “end up getting taken advantage of or making catastrophic financial mistakes.”

Ryan’s assessment is spot on. Unfortunately, this scenario is not limited to physicians.

I share Ryan’s mission of providing financial education to high earning professionals. Many of us spend years learning skills that enable us to earn more money, but receive no training on how to manage it. This puts a large bullseye on our backs for the financial industry. I know from experience.

I invited Ryan to share his perspectives as a consumer advocate working inside the industry. We have no financial relationship.

1.) Would you share how you got started in the financial industry and how you ended up as a fee-only financial planner?

I got started in the financial industry working at Merrill Lynch under a fantastic advisor, but soon realized that the typical advisor in the industry was more concerned with selling financial products and obtaining new clients with investable assets than working with those who could really use financial guidance to succeed in life.

I was fortunate to realize this early in my career and was able to gain some excellent experience from a fee only planner in my next job. While they were focused on high net worth (they had million dollar minimums) it was work centered around providing high quality advice instead of selling products and earning commissions.

Ultimately I decided I didn’t want to work with the ultra-wealthy as much as physicians who were starting their careers and could really benefit from truly unbiased, quality financial advice. I started my firm, Physician Wealth Services, to work exclusively with physicians and their families all around the country.

2.) Financial industry jargon is often confusing. Can you describe what a fee-only financial planner is and how that differs from a fee-based planner or advisor?

It can be really confusing to understand the various differences between how financial advisors work but it’s important to ask the right questions.

A fee-only financial planner delivers the highest level of fiduciary and comprehensive financial advice. They can charge a variety of ways: assets under management, hourly or flat fee for comprehensive service.

Having a transparent flat-fee for specific services allows clients to understand the value of the relationship and removes the conflict of only working with people that have a high net worth.

Fee only advisors do not accept any fees or compensation based on product sales which is critical in the differences between fee only and fee based. Less than 3% of all advisors are fee only.

A fee-based advisor typically charges clients on an Asset Under Management (AUM) arrangement which means they receive a percentage of the assets they manage as compensation. This raises conflicts since they get paid for managing client assets, not necessarily for giving them the best advice.

Fee-based advisors can also receive compensation from various other sources including sales of life insurance or other investment products that may or may not be in the best interest of the client.

If you are going to work with an advisor, choose one that is flat fee (where the fees are listed clearly on their website, not given to you based on “complexity”), is fee only and specializes in your situation. This could be by profession or by life event (divorce as an example).

3.) I’ve written that all financial advice comes with conflicts of interest. You talk a lot about the efforts you take to minimize or eliminate conflicts of interest with your clients. Tell me if and where I’m wrong in my assessment of the industry. What should someone seeking financial advice do to minimize these conflicts of interest?

As you point out, there are always conflicts that can arise when helping someone with their money, including potential bias. Someone seeking financial advice should look to work with an advisor that has eliminated as many of these personal conflicts of interest as possible.

Make sure you ask questions to understand the compensation model, the services you will receive, the investment philosophy and work with someone that you feel comfortable with.

Your advisor shouldn’t be compensated by anyone other than you. They should be investing their own portfolios the way they invest the money of their clients. They should charge a true flat fee for advice given, not a fee based on “complexity.” The more simple and transparent the pricing structure the better.

4.) Our audience consists mostly of DIY investors and financial planners. What are the biggest mistakes you see DIYers make? In what area(s) can a financial planner add value that exceeds their fees?

DIY investors tend to make more emotional decisions. This does not mean that they are making right or wrong, good or bad, choices.

Working with a professional can help create an objective plan to put focus in place on what matters most. Most of us have busy lives that get in the way of keeping up with things that their financial professional can help them with, and remind them of, throughout the year during quarterly check-ins.

Tax laws change, retirement plan contributions amounts increase, and our kids grow up faster than we expect them to. Having a financial planner can ease some of the time that you would have to spend creating financial checklists and creating a plan, which some people will still enjoy doing on their own!

For planners, it’s not just about the numbers. The value that you can bring to the table is to help client’s understand their “Why?”. Don’t just ask them their goals. Help facilitate discussions around their personal and financial lives. It’s more of a life plan than just a financial plan. Help your clients live out their ideal life.

5.) From an advisor’s perspective, what do you look for in a good client-advisor relationship? Why would someone not be a good fit with a particular advisor?

A good client-advisor relationship is really important to get right from the beginning if possible. It can be disheartening for everyone to get a few meetings in and still not click because there is a lot of information that is shared back and forth. A clear outline of your services along with a transparent cost allows clients to make an informed decision.

Someone would not be a good fit to work with an advisor if the demographic or niche the advisor served was not aligned or they weren’t providing the right services. For example, it might not be a good fit for an advisor with ongoing services to work with a DIY investor looking for a one time plan to implement on their own.

6.) Most of our readership have been saving and investing, have accumulated substantial assets, and are pondering the retirement decision. Among this population, what are the biggest and most common threats to their wealth? What measures should they be taking to protect against these threats?

Since we can’t predict the future, the best way to protect yourself from outside threats is to focus on the things you can control.

Make sure that you have proper savings for your goals, the appropriate amount of risk in your investment portfolios and insurance to cover yourself against the catastrophic.

Continue your savings and investing even during poor economic cycles and continue to set yourself up for success by continuing your financial education (like reading blogs like this one!)

7.) Do you see a lot of career burnout among your physician clients? What options do you discuss for those who are experiencing career burnout, but don’t have enough assets to retire? Have you experienced any particularly interesting solutions that you could share with someone in our audience facing similar struggles?

Are they willing to scale down their lifestyle so they don’t have to work as hard to keep up with their expenses?  

I see it all around, with clients and our friends. Generally, I see that the ones that feel the most burned out are the ones that have excessive spending. They live paycheck to paycheck even with mid-six-figure incomes, have extremely high debt-to-income ratios and HAVE to work because they haven’t saved enough. They feel trapped from all sides.

Once we manage to understand the underlying problems we can set clear goals to alter their course and get them down the right path financially. This tends help reduce their stress and sometimes even causes a huge change in their work life.

8.) Do many of your clients pursue early retirement? What do you see as the biggest challenges to early retirement compared to traditional retirement?

Most of my clients view early retirement as a change in career but not a full retirement. Being a physician is extremely difficult, physically and emotionally. I see the main driver of early retirement centered around the idea of changing career choices, or even going part time but having the ability to choose when and what shifts they work.

One of the biggest challenges to an early retirement is the unknown. You can do your best to plan ahead, but changes in health, the economic environment, and other factors out of your control can throw off some of the planning that you accomplish early on. If you are able to save a lot, create a passive income and live a modest lifestyle, then an early retirement can work great. It’s always good to stay flexible and readjust your plan as needed.

My Thoughts

Ryan’s history in the industry shows how hard it is to find good advice. It’s important to ask the right questions. But industry jargon is so confusing it’s difficult to know what questions to ask.

Most “advice” targeted to low income, low net worth people is based upon building relationships that enable selling products. This creates massive conflicts of interest.

Those with a high net worth have better options, but an AUM compensation models comes with it’s own conflicts. It is also expensive. There is a reason fees are expressed as a seemingly small percentage of assets. Many people would balk if they saw what they were actually paying.

What Ryan and other flat-fee, fee-only advisors do is rare. He put the number at “less than 3%” of the industry. There is good reason for this. It is a much harder business model.

Most people don’t like to take out their checkbook to pay for advice. It puts tremendous pressure on the advisor to add value. It is far easier to charge commissions, AUM, or other hidden fees that are out of sight and out of mind.

If you want good advice, you must understand this and be willing to pay for it. Otherwise you’ll likely get what you don’t pay for. More accurately, you get what you unknowingly pay for and don’t want.

Ryan makes another great point. You need to work with someone who is the right match for your personality and situation. Understanding conflicts of interest needs to be the starting point when engaging an advisor. Unfortunately, that doesn’t guarantee competence or good advice.

Thanks to Ryan for shining a light on the industry and sharing insights based on his experience.

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Comments

  1. Great column! Following a 30 year career in senior healthcare development management I found that many physicians are not informed about investmentand financial management and easy prey for less-than-honest people in the financial industry. Refreshing to know there are people like Ryan out there. However, as a long time fan of Jack Bogle, I find that many would be wise to simply determine their risk tolerance and then invest their equity allocation in a mix of various low-cost equity index funds; and place their income producing assets in TIPs bond funds and ladders of CDs and higher grade individual corporate bonds. Apparently many have discovered this as low-cost index fund investing has grown to where Barron’s recently indicated they will become 50% of the equity market. History has proven it works, eliminates the need for a financial advisor (other than perhaps an annual check-up), and saves money by eliminating higher fee actively managed funds and the expense of an active advisor.

    • Chris Mamula says:

      Thanks for the feedback Randy. I’d agree with you if we’re equating financial advice with investment management (which many do). However, when you expand the conversation to include comprehensive financial planning, there is more opportunity to add value. One prime example, which I’m frankly surprised Ryan didn’t mention given his work with doctor’s who tend to have high student loan debt, is strategies to pay off debt quickly or have it forgiven.

      • Chris – Excellent point! I know from my tenure in academic medicine management that the average medical student today graduates with $200K-$250K in med-ed debt in addition to any undergrad debt. Then they are looking at 3-4 years of residency/fellowship training (long hours at $35K-$50K annual compensation) before they can actually begin their practices. In the end, their net worth figures range: from 43% in the $1M-$2M range; 32% in the $2M-$5M range; to only 8% in the over $5M range depending on practice speciality (i.e. pediatrician vs. orthopedic surgeon). Source: Medscape, April 20, 2016.

        • Chris Mamula says:

          I’m actually surprised the number is that low. I worked with several physical therapists graduating with $150-200k loans while entering a profession with an average starting salary in the $60k range. It’s a massive problem.

  2. You might tell your audience to look at napfa.org and garrettplanningnetwork.com to find a fee only advisor. Conflict of interest note: I belong to both. JFL

  3. No mention of the unavailability of high-quality health insurance for early retirees? This guy advises medical professionals and the topic didn’t come up? That doesn’t pass the sniff test.

    I’ve spoken to fee-based and fee-only planners on this show-stopping topic. I’ve told them that if they can’t give me any actionable advice regarding health insurance, then they shouldn’t try to advise me on anything else. Without exception, I never hear back from them.

    • Chris Mamula says:

      Larry,

      Given our many exchanges on this topic in the past, I’m not sure what you want people to tell you. You probably have as good of a handle on the situation as any financial advisor, blogger, etc. The situation is what it is. All you can do is make the best of it given your personal circumstances. The best advisor in the world can’t create a solution that doesn’t exist any more than an MD can create a cure for a disease that is currently incurable.

      Best,
      Chris

      • Well, I guess I expect someone who’s aspiring to be a journalist on the topic of early retirement, to always ask the people he interviews about their thoughts on health insurance. Always. It’s so incredibly fundamental that to ask seems negligent to me. Especially when you’re talking to someone linked so intimately to the healthcare industry. You let him answer the question “What do you see as the biggest challenges to early retirement compared to traditional retirement?” with some vague navel-gazing babble when the correct answer to the question is “Health insurance”.

        • Chris Mamula says:

          When I interview people, I ask questions and listen to their answers in an attempt to learn. If I felt I knew all the answers already, there would be no point in asking questions. Like you, I feel health insurance is the biggest challenge to an early retiree. As you know, I’ve written extensively on the topic. However, it is not the only challenge (see my post from last week) early retirees face. For some people such as those who retire from the military or others who work in the public sector and have health insurance as a retirement benefit, it may nt be a challenge at all. Even for you and I, it is a challenge for different reasons. I’m worried if I’ve saved enough given the difference between the cost of subsidized insurance and the full cost if subsidies go away. For you it is a challenge b/c the ACA doesn’t function well in your locale, so you’re not comfortable with the options available even though you have enough saved.

          For many physician’s or other high earners who are also good savers, they may have the ability to save enough to pay full price for health insurance, so it may be not the issue it is for me. Issues like giving up a big piece of identity may be a bigger challenge for doctors and other high earning professionals. I don’t presume to know, so I ask questions.

  4. Elizabeth Stephenson says:

    Can you address what someone should do when they have inherited a portfolio from their parents with mostly individual stocks, some dividend producing and a number in the S&P 500. There are no index funds. I have basically inherited their stockbroker who does not have a fee unless a stock is bought or sell. She does not show much interest in index funds and the more I read about them I would like to go that path. I just retired and want to know how to find a fee only advisor who is not connected to a company trying to sell their products. I need help on a plan. That broker and firm has been in our family for many years.

    • Chris Mamula says:

      See exchange with Jim above for some good starting points.

    • Hi Elizabeth, I would run away as fast as you can. A stock broker isn’t a financial planner and many, by nature of the industry and profession, you could call greedy. I would immediately tell them to stop making decisions on “your behalf” without involving you.

      Better yet, set up an account at Vanguard or Fidelity, ect., fill out the transfer paperwork, and start the process without saying anything to the broker. You just retired, you need a financial planner who has a fiduciary duty to you, not a stock broker.
      If you have $500K you can get free advise from Vanguard and your costs are dirt cheap. If not ask a FEE ONLY financial planner to design a portfolio for you using Vanguard funds (or Fidelity ).

      With many economists and analysts predicting a market correction it’s even more important to do something soon, and resist the brokers’ persistent efforts to keep your money with her.

  5. This is a helpful perspective.
    I teach physicians about personal finance and investing. I contend that financial stress is part of the burnout problem. I like my job a lot but some of that is I can work part-time. I’m FI and debt-free so I don’t feel financial pressure. It is validating to see that Ryan agrees.

    • Chris Mamula says:

      Agree it was an interesting and useful perspective for people pursuing early retirement. I suffered with burnout myself as a physical therapist, which is why I asked the question. I bought into the idea of early retirement and tried to save as much as possible to retire as quickly as possible. I ended up if not hating, then really disliking my job. I know if I would have realized the power my financial situation gave me and cut back sooner, I would not be FI and able to retire. But I would have probably liked my working years a lot more. It’s something worth considering for others in a similar situation.

  6. Connie Van Kurin says:

    I agree with everything Chris Mamula says. I took “early” retirement at 62 to take care of my ill husband. I had worked all my life so this seemed early to me. He is correct about the feelings you will have. At first I loved not having to get up at a certain time & get ready for work. The day was mine, but after about a month I felt so alone. Where do I go? What do I do? My husband was not ill enough that I had to be there all the time, just that we didn’t know how much time he had left. I started volunteering, but nothing seemed to work out. I missed having to go to work. Fridays no longer meant anything to me. I occasionally spoke with former co-workers but felt I was no longer a part of them. I just tried to stay busy with caring for the house & enjoying my husbands company. My husband died two & a half years into my “retirement” so now I was faced with returning to work, at 65, or just staying retired. I decided I had enough money to live on so I started volunteering again . This has proven to be my answer, since I love what I am doing. I am 3 years into volunteering & I love it. I have somewhere to go, I can choose when to go & I’ve met some wonderful people. I hope anyone thinking about early retirement, at any age, considers volunteering, Note to Chris Mamula: I have a cousin named Richard Mamula, he lived in Florida & South Dakota. His fathers name was George. I just wondered if you were related. Thanx for the article I really enjoyed it.

    • Chris Mamula says:

      Thanks for taking the time to write Connie. Our situations sound quite different, but this illustrates some common challenges that come with retirement including issues with identity and purpose, even if you have a solid handle on the financial aspects. My sympathy on the passing of your husband and congratulations on finding something new that makes you tick.

      To your question, to my knowledge I have no relatives that share my last name other than an aunt and uncle in Western PA.

      Best,
      Chris