4 Reasons to Get a Financial Advisor

Do doctors really need a financial advisor?  As with most things, the answer is “it depends.”   For as much hate as financial advisors get in the personal finance space for physicians (much of it quite well deserved), it would be wrong to say that there are not good financial advisors out there. Yet, the question remains, is a financial advisor worth the cost for physicians?

Is a financial advisor worth the cost?

I am a proponent of Do-It-Yourself investing in order to minimize investing costs and to produce the biggest “bang for our buck.”  However, let’s get real for a second. Some people simply do not want to manage their own personal finances.  Or they, at a bare minimum, they want a financial professional to look things over and ensure they aren’t doing anything they’d later regret.

We will go over the four reasons for considering an advisor below, but first I want to describe the gold standard of advising.

The Gold Standard for Financial Advising

The gold standard for financial advising has accomplishes three fundamental goals: (1) getting the best financial advise (2) with the least conflict of interest and (3) at the best price. Here are the four parameters that will get you to that goal:

• Fee-only model (i.e. they recommend, but do not earn money from commissioned insurance products)
• Fiduciary (i.e. they are legally/ethically bound to do what is best for the client)
• Familiar with physician finance (i.e. physicians have complex and unique financial situations they should understand)
• Fee model that is reasonable

In my opinion, the first three are non-negotiable. They are necessary to accomplish our three goals mentioned above.

A Comment on Fee Models

Over the years, I’ve come to see that fee models have a lot more nuance to them. In other words, a good fee model versus a bad fee model is not as black and white as many in the physician finance blogosphere would lead you to believe. The truth is that every fee model provides a conflict of interest or a negative incentive.

For example, a flat-fee model (the one many propose has the least conflict) encourages the advisor to spend the least amount of time on your portfolio possible. If they make the same flat-fee no matter the amount of work they do, their incentive is to be as efficient as possible, which means they may not spend the amount of time that is needed. An hourly rate, on the other hand, has the opposite incentive. The incentive in this fee model is to spend as much time as possible, because – like lawyers – they get paid when they are on the clock.

Assets Under Management models are the most common you’ll see. This is where the advisor gets paid a percentage of the assets they manage for you. For example, a 1% AUM fee on a $1 million portfolio would see the advisor getting paid $10,000 annually. Many would say, “Look! Incentives are aligned! I do well, they do well!” The problem here is that they also continue to get paid even when you don’t do well. They also are incentivized to tell you to put money into the assets they manage as opposed to paying off debt like student loans, a mortgage, or an auto loan.

That said, none of these are inherently “better” than another. You just need to know how much it costs and to understand the conflicts/incentives that are produced from each model. Here are four reasons you might consider paying for an advisor:

1) Behavioral Finance Coach

People often ask me, “Have you seen what the market has done today!?!”  I usually say that I have not, which often surprises people given my interest in personal finance. Then I explain to them that studies have shown that the more you look at your portfolio, the more likely you are to see it go down, and the more likely you are to sell in a down market – which is a financial catstrophe. This is called myopic loss aversion.

While some may have a strong stomach for market turmoil, others might not. In fact, many investors sold their assets in 2008/2009 during the market downturn. In hindsight, you’d call such a person foolish as the market then went on one of the most unprecedented bull market runs in history. However, at the time, the fear was very real for people, which led many to sell assets in a down market.

If you do not fit squarely into the group who can look at market history and stay in the market when it dips, dives, or turns – then a financial advisor will be worth their weight in gold. If an advisor simply prevents you from selling (and actualizing losses) during a depression or correction, they will recoup their cost and much more.

In this way, they can be your behavioral finance coach and prevent you from making grave mistakes.

(2) Third Party Intermediary

For those of us that are married or have kids, we know the feelin when you explain something to your spouse or child until you are blue in the face – just to get an awkward confused look in return. That’s when, not five minutes later, someone else explains the same thing (usually using the same words), and it “clicks” for your family member. This usually results in us saying, “That’s what I just said!”

It is a frustrating experience, but it should help us realize the number of times we have seen how beneficial it is to have a third party help us figure things out.  Sometimes it simply takes a fresh face or voice to have it all make sense. It is the same reason that even professional athletes have a coach. Many of us have a hard time reading a label from inside the jar.

This doesn’t mean we are inadequate.  It’s just the way humans work.

The same phenomenon happens in money when a financial planner sits you and your spouse down to discuss the life you want to live.  Having a fresh perspective that is relatively unbiased can prove helpful while swimming through these choppy waters.

If you and your spouse are having a tough time getting on the same page financially, this is one of the other great reasons to pay for a financial advisor.  They can serve as a referee, counselor, and supporter all at the same time. A financial advisor can also provide direction in the event of a spousal death, which is a time you want to think the least about financial pressures.

 (3) Dotting the i’s and crossing the t’s

I have a friend at work that loves talking money. He knows a good bit about it, and really enjoys investing. However, when it comes to personal finance, he and I differ in a couple of major ways.

The first is that he invests in individual stocks in his taxable account (whereas I’ll only invest in passive index funds in mine).

The second way that we differ is that he uses a financial advisor. The first time he mentioned his advisor, I was a bit surprised given his financial literacy and knowledge.  He explained that he wanted to ensure everything was being done appropriately.

I’ve mentioned before that most people break pretty neatly into three groups when it comes to finances.  The second group wants professional help to “dot the i’s and cross the t’s.” This group describes many doctors reading this. If you want someone to fill any gaps that may exist and point out any obstacles you may not see, a financial advisor can be worth the cost.

(4) The Financially Illiterate

There is a large swath of people (including many physicians) who want someone else to run their money. They want nothing to do with the technical decisions of their finances. This group is in the most dangerous and precarious situation, because they know almost nothing about personal finance or money. For this reason, this group absolutely must find an advisor that meets the gold standard above.

The right financial advisor for the financially illiterate is worth far more than this person will ever pay. That said, the wrong one can have the opposite impact that leaves you with a whole life insurance policy you likely don’t need.

If you are reading this site, you likely do not fall into the financially illiterate group. However, you are very likely a friend of a bunch of people who do fall into it. Do them a solid and help prevent them from getting fleeced by the financial industry.