I frequently see articles about why you should hire a financial advisor, especially an asset manager. Recently, OJM, a physician-focused financial advisory firm, sent me a link to a newly-written article on the subject. I don't mean to pick on them, because I've seen dozens of articles like this one. They provide some useful information, but the main point of these articles is that # 1 You need an investment adviser, # 2 Your investment adviser should have certain characteristics, and # 3 Our firm has those characteristics. Just about every adviser has written one of these articles at some point, but they are inevitably self-serving.
This article was particularly bad in the nine reasons it gave for hiring an investment adviser. In this post, I'll go through them, point out why a do-it-yourselfer should have no difficulty at all with the outlined issues, and then list a few reasons why I think hiring a financial advisor might still be a good idea for a physician.
# 1 Active Trading is the practice of engaging in regular, ongoing buying and selling of investments while monitoring the pricing in hopes of timing the activity to take advantage of market conditions. Active traders underperform the market.
Okay, if you absolutely cannot resist the urge to day trade your investment portfolio and engage in market timing, you should pay someone thousands of dollars a year to take your money away from you so you quit doing stupid stuff.
# 2 Disposition effect is the tendency of retail investors to hold losing investments too long and subsequently sell winning investments too soon. Most people, especially investors are risk-averse—even more so when handling their own investments.
This problem is easily solved by writing down an investing plan, and following it. The truth is that selling winners and buying some of what has been doing poorly lately (or at least directing new contributions there) is an important risk-management tool called rebalancing. I don't find investors any more risk-averse than non-investors either.
# 3 Paying More Attention to the Past Returns of Mutual Funds than to Fees. Many investors, including physicians, pay too much credence to the past performance of mutual funds while virtually ignoring the funds’ transactional costs, expense ratios and fees. These types of fees can have a significant drag on the performance of your portfolio if they are not accounted for.
I agree that minimizing investment expenses is critical in a successful investing plan. However, the largest fee that an advised investor faces is the one he pays to the advisor. No mention of that here. You want low fees? Do what your advisor is now doing and pocket the the fee.
# 4 Familiarity bias is the tendency of many investors to gravitate towards investment opportunities that are familiar to them. This bias leads to investing in glamor stocks or glamor companies, investing too heavily in a local stock, or employees investing too heavily in their employer’s stock. A good advisor will work to ensure you are aware of being overly concentrated in certain areas and will seek to keep your portfolio properly diversified in order to limit exposure.
Diversification is so easy to obtain that it seems silly to hire an adviser just to keep you from putting all your money into the stock of Apple, a local bank, or your hospital corporation. It only takes 5 minutes on Vanguard.com and only costs 5-20 basis points a years to buy essentially all the publicly traded stocks and bonds in the world in a single fund of funds.
# 5 Mania/Panic. Mania is the sudden increase in value of a “hot” investment, wherein the masses rush to get in on the action. Panic is the inverse, where everyone tries to abandon a sinking ship. What is the next “bubble”? When will there be another “crash”?
The advisor's crystal ball is just as cloudy as yours. Yes, they might be able to keep you from doing something stupid (like going all in to tech stocks in 1999 or going to cash in March 2009), but simply following a written investment plan seems easier and more reliable than paying an investment adviser to hold your hand when the market does what any beginning student of market history knows it is going to do every 5 to 10 years.
# 6 Noise Trading often takes place when the physician-investor decides to take action without engaging in fundamental analysis. When investors too closely follow the daily headlines, false signals and short-term volatility, their portfolios suffer. Long-term plans require picking investments via economic, financial and other qualitative and quantitative analyses.
This reason seems to imply that through high quality analysis, the advisor can figure out what is going to do well in the future and what isn't. I think the extensive studies on the inability of mutual fund managers to beat the market can be applied as well to your neighborhood advisor's ability to do so.
# 7 Momentum Investing is the practice of buying securities with recent high returns and selling securities with low recent returns assuming that past trends and performance will continue. Chasing momentum leads to speculative bubbles with the masses inflating prices. Similar to manias and panics, retail investors are often the last ones to know either way, causing them to often jump on a security experiencing momentum at the wrong time, usually buying high and selling low—with obvious detrimental effects on their portfolio.
Two issues with this one. First, academic data on momentum shows that it isn't necessarily a bad “factor” to exploit in your investing plan. Second, following a written investment plan will keep you from buying high and selling low, no advisor required.
# 8 Under-diversification happens when the investor becomes too heavily concentrated in a specific type of investment. This increases their exposure by having too many eggs in one basket. It goes without saying that any long-term investment plan requires diversification. However, investors, including physicians, generally need the assistance of an advisor to diversify correctly.
We already discussed this one under # 4. You should diversify. I disagree that investors, including physicians, generally need the assistance of an advisor to diversify “correctly.” It's really a pretty simple task.
# 9 Naïve Diversification is the practice of a physician-investor deciding to diversify between a number of investments in equal proportions rather than strategic proportions. Proper diversification in the investment arena is not simply putting X asset classes in X equal percentages. Rather, a proper allocation strategy should weight your differing investments in a manner aligned with your personal risk tolerance in order to build value over the long term.
As discussed in # 4 and # 8, you should design a long-term investing plan where your money is diversified into many different assets in accordance with your goals. If you need someone to help you design that plan, you can hire someone at a fixed or hourly rate, then maintain it yourself. You certainly don't need to pay $20,000 every year to maintain that plan.
Now, here are six reasons why you might want to consider hiring an investment manager.
#1 You are an ignorant investor
One of the best reasons to hire an investment manager is because you don't know what the heck you are doing. There is no doubt in my mind that you are better off paying any kind of reasonable asset management fee (whether an hourly rate, an annual retainer, or an AUM fee) if you are not going to do the job properly yourself. While it is great to save the $1000-$30,000 you may pay an investment manager, you're not saving any money if you're just screwing around with your investments, or worse, not investing at all. Now, I think physicians are plenty smart enough to figure out how to manage their own investments. The knowledge base is far easier to learn and deal with than medicine. But if you haven't bothered to educate yourself about the process, or don't plan to do it, then hire a good advisor. It'll be worth the money. That said, hiring an advisor may only be a temporary step for you while you educate yourself through reading, watching what the advisor does, and peppering the advisor with questions about what he's doing.
# 2 You are an undisciplined investor
Another fantastic reason to hire an advisor is if you are an undisciplined saver or investor. If you can't manage to save 15-20% of your income each year by yourself, but you can do it with a coach, then the advisor is worth the fees. Likewise, if you cannot stay the course with your investing plan during a market down turn (and don't fool yourself-many educated investors bailed out in 2008, locking in retirement-spoiling losses), then you're better off paying thousands a year to get someone who can do so to manage your money. Just one big episode of buying high and selling low late in your career will pay for decades of advisory fees. This, of course, assumes that you can stay the course with the advisor's assistance (and that the advisor can stay the course!)
# 3 You don't enjoy investing
If you don't find investing at least a little bit interesting and you aren't willing to dedicate at least a little bit of time to it, then you're better off with an advisor. In my experience, about 80% of doctors don't really want to deal with their money in any meaningful way. They really just want a “money guy” they can trust. With appropriate coaching they're willing to save enough and they're willing to follow a reasonable plan. But they're simply not going to get off their duff and do it themselves. It's not necessarily laziness. They're busy and would rather use their time and limited brain energy doing something else. Those 80% are probably better off with a high-quality advisor giving good advice at a fair price.
# 4 Your investment manager is providing valuable financial planning
The real bang for your buck from an advisor isn't the investment management anyway. Investment management is not only easy, but it doesn't require much time. Aside from my own portfolio, I manage my parent's large portfolio. It takes me about 10 minutes a year. I'm serious. There just isn't that much to it. You set up a plan, and then you follow it. It seems a little silly to me that someone would charge $10K a year to do it (the “going rate” on my parent's portfolio, although they were paying far more before I rescued them from an “advisor” who was not only expensive but incompetent.)
But financial planning, now that's useful stuff. I'm talking about figuring out what to do with your student loans, how much insurance and what type to buy, how to budget and how much to save, which types of accounts to save in, deciding how much to put toward different goals, figuring out withdrawal strategies, deciding when to take Social Security, how and when to do a Roth conversion, figuring out estate planning and asset protection options etc. That's useful stuff and well worth paying a fair price for.
It requires far more face time and energy from an advisor to do that, of course. They'd rather just rebalance your index fund portfolio (or have the computer do it) mail you a statement or two, and have lunch with you once a quarter while chatting about interest rates and what's going on in China. But if you're getting real, high-quality financial planning thrown in for your asset management fees, well, that's worth quite a lot. However, I think it is far more difficult to find a high-quality, physician-specific financial planner than it is to find a good asset manager. That's because for some reason people aren't willing to pay a flat or hourly rate for financial planning, but they have no problem paying a much higher AUM that seems to come out of their profits. Investment management fees would come way down if people had to physically write a check (or better yet pay in cash) to their investment manager every quarter.
# 5 You wish to use adviser-only funds such as those offered by DFA
If you're going to pay an adviser anyway, you might as well get access to some of the “bells and whistles” passive funds like those offered by DFA, AQR, Bridgeway, and similar firms. I'm not saying your entire portfolio should be in those funds (I once compared a Vanguard portfolio to a DFA portfolio and came away unwilling to pay an advisor JUST for DFA funds), but I wouldn't hire an investment advisor who didn't have access to them.
# 6 You can get high-quality investment management at a fair price.
It seems silly to me to pay someone $30,000 a year to manage my assets when there are firms out there (including several advertisers on this blog) willing to do it for $1-5,000 per year. Investment management should also be shopped (at least partially) on price just like anything else. If AT&T and Verizon provide you identical services, you go with the cheaper one. Same with Jiffy Lube vs Wal-mart, or even a knee MRI when you have a high-deductible health plan. Why should investment managers somehow be exempt from this process inherent in a capitalistic society? They shouldn't. Shop around, negotiate fees, and renegotiate. It's amazing how quickly those fees come down when you mention words like “Vanguard” and “Do it myself.” Good advice is most important, but you want to get it at a fair price. The worst price, of course, is “free,” since that implies the advisor is being paid on a commission basis. That usually results in you landing in inferior investments like loaded, high-cost mutual funds, annuities, and cash value life insurance.
While do-it-yourself investors are the ones most likely to read a blog like this one, I know plenty of my readers, especially occasional readers, would still like an advisor. That's fine, but hire a high-quality advisor for the right reasons and make sure you're not paying too much for the advice.
What do you think? Do you use an advisor? If so, what are the biggest benefits you see from the relationship? Comment below!
I read your blog and other investment info constantly….and I understand the all of the principles.
However, I still have a “financial planners” help me.
Mostly as you state for reasons 4-6. However, there is also a level of trust I have that the right team is better than I alone can be when it comes to investments(especially dealing with a busy private practice).
So I would add another good reason or two. I trust the team I work with and believe they can add information or perspective that I otherwise would not have access to. Metaphorically, I did pediatric rotations in medical school and internship. I feel comfortable dealing with many of the sick issues of my children. However, I still pay a board certified pediatrician to care for them. They add perspective and experience I don’t have. They also stay much more up to date than I can on the ever changing world. So I feel it is worthwhile to pay for that service. Similarly I feel that my financial advisors are good and I am willing to pay for the service they provide for them to add perspective and also hopefully stay as up to date as possible so I can relax in my free time instead of reading tax code, investment ideas etc. I wish more financial planners would realize that people will pay for service if you make the service good and worthwhile!
I’m struggling with this exact issue.
I’ve just decided to use a financial advisor (fee-only) for multiple reasons. After educating myself on this blog and bogleheads.org, I realize that while I may understand the big picture regarding concepts of asset diversification, retirement planning and taxable account planning, I don’t have any expertise yet. Also, based on my reaction to the last market downturn (sold at the worst possible time, then hold cash for the next 5 years…), hand-holding and reassurance may be the most valuable part of their service (for me). Finally, my wife like the idea of getting a professional on board to guide our decisions.
Loving this blog…ED doc in CA
I would stress the financial planning aspect. Investment management is a tiny portion of a starting physician’s or a dentist’s finances – they have no assets, yet they have high taxes and a high cash flow, so doing tax planning and comping up with a top-down financial/investment plan (that includes such things as debt repayment and consolidation, insurance planning and tax planning) can be valuable. Initially, financial planning would take most of the time, and down the road, once enough assets are accumulated, investment management becomes increasingly important.
There are several other things to keep in mind. The value of a good adviser lies in their ability to put it all together while charging a fair (ideally, flat) fee for their services, and also their ability to use their knowledge to help the doctor/dentist make the best financial decisions across the board, not just with their investments. An adviser has to be accessible throughout the year, and not only that, but they also have to offer proactive planning services so that things get done correctly and on time instead of having the client come to them after the fact and trying fix the clients’ mistakes.
At some point, retirement plans become a very important tool for those who own their own practice, so that is a key area where a good adviser can add value by helping the practice owner select the right plan, as well as provide investment management and fiduciary services to their plan.
Comprehensive planning is where most advisers fall short. Typically, most charge asset-based fees, so the resulting advice is riddled with conflict of interest and is usually far short of what is necessary for practice owners:
http://litovskymanagement.com/2012/08/no-aum-fees
It takes a significant amount of time to develop and implement a quality financial plan across multiple areas, and for those who don’t have time and/or inclination, hiring the right adviser can save time and money, while those who are able do everything themselves have this blog.
If a financial advisor doesn’t understand taxes then they are almost never worth hiring.
I only skimmed the 15 advisor +s/-s, as there is little doubt, the average investor has no ability to stick with their plan over a reasonable length of time that includes a correction and bear market. Of course, most of what you need to know to develop and stick with a goal-focused investment plan is available in a number of good books. But the map is not the territory.
A good advisor who creates and manages well-designed, goal-focued investment plans along with the discipline to stick with them during even the toughest of times is well worth their ongoing costs. You could always pay less, and get far less. You could pay more and get a lot of stuff a good CPA and attorney can do for a one-time fee. The right serves at reasonable costs, however, are the sweet spot of the financial advice industry and are very valuable.
After reading this website, I see no need in paying adviser fees. However, WCI: What is your opinion of paying thousands each year for tax preparation? (I assume you also do your own taxes? And your parents’ surely take longer than “ten minutes”…)
My parents do their own taxes. Have for years. Audited once or twice over the decades. I just do asset management for them (i.e. I helped them design a reasonable index fund portfolio and rebalance it once a year.)
I do my own taxes for various reasons, but if I were going to pay someone to do my now complicated return, I’d expect to pay something in the $600-1000 range. “Thousands” seems excessive.
So I am thinking of signing up with a financial adviser (wealth managers as they call themselves.) He only invests in index funds. Diversifies your index funds over US and some percentage around the world. He doesnt believe in market timing or buying stocks as he feels you cant be right time after time. Another big asset they do is Tax Loss harvesting. Where they will sell for eg SPY and buy S/P 750 in case of a big drop. I dont know how much they charge, will know this Thursday. I think its 1% of your portfolio.
They are locally based, with my surgeons using them for last 20 years and come with great recommendations. What do you think, are they worth the fees?
1% is a pretty standard rate. If you’re going to pay that, you need to at least make sure there is some provision that it will decrease as your assets increase (i.e., managing a 10 million dollar portfolio does not require 10x more work than a 1 million dollar portfolio, so paying a flat 1% in both cases makes no sense for the consumer).
Although 1% is a common rate, you can easily do better. I’m too lazy to check but I think Ferri and FPL both charge less and have a similar philosophy to what you’ve described. You should check them out before making a commitment.
I use a Fee Only Advisor from Garrett Planning Network … you can Google their site for a list of advisors. My investments are Vanguard Index Funds with an allocation model based on my age/risk tolerance. My charge is $220/hr and I use about 5-6 hours per year. Most of this time is NOT for investing but to discuss my ideas/goals and discuss financial planning issues for my family. My advisor has an MBA, decades of experience, and is married to an OB/GYN to boot! (He clearly understands some of the unique issues related to physician life cycles.) Given I have a 7 figure account, this is a true bargain ie. $1200/year vs $20,000/year. I guess I could do without him, but I like having a fiduciary with whom I can bounce ideas. He gained my trust when he said that “when it comes to investing, you get what you DON’T pay for!” I would say that if you want someone else to handle things, drive a good bargain for yourself and keep very close tabs on what they are doing.
If $1200 a year sounds good to you, then its a bargain. I only care about investmet costs and buy vanguard indexes. I use a ratio I’m comfortable with and reallocate each year accordingly.
Buy I agree, you get what you don’t pay for. Having to beat that extra 1% a year for active management is sure sign of failure compared to an index fund.
Whitecoatinvestor has done a service for all physicians for this blog. It is selfless work.
A friend just bought a life insurance policy to fund his kid’s college account. I was so appalled you have no idea.
Not everyone is able to manage their own accounts. For 5 hours a year, you won’t get much proactive tax planning help either. Many times they get 1099 income which requires the use of either Solo 401k or a SEP.
There are many aspects to investing aside from asset allocation in tax-deferred accounts. There is also after-tax investing, which is often done incorrectly.
High tax bracket physicians and dentists can also benefit form municipal bond portfolios, which require active management.
I disagree that municipal bond portfolios require active management. Vanguard’s tax-exempt bond funds are well-run, very inexpensive, and provide exceptional diversification at low cost. The data on passive being better than active with bonds is even stronger than that with stocks.
Let’s start with the fact that Vanguard’s muni bond fund is actively managed. It has to be since maturing bonds have to be replaced by others, and because the market is pretty tight, big Vanguard fund can’t be too picky. That’s why its yield is only 1.68%. I can easily put together a portfolio with much higher yield because I don’t have to invest billions (that’s one downside to muni bond funds by the way – their yield is pretty bad because lots of money is chasing a limited supply of bonds). They also have to take lower quality bonds (which I don’t, while still getting higher yield).
Also, you don’t have any control over the maturity of your portfolio, while a custom one can easily be tailored to one’s needs. Why have a 5 year maturity when one can have a 12.5 year maturity while getting a 2.5%-3% yield on average?
You can lose principal in muni bond funds. I’m talking about investing as much as $1M or more into these portfolios, so for that purpose you don’t want a muni bond fund. And asset-based fees start adding up for larger portfolios (even for Admiral shares).
Another downside of a muni bond fund is unpredictable income stream.
That said, I might recommend using muni bond funds as a diversifier in an after-tax portfolio (rather than spread the investments over multiple accounts).
I agree though – doing it yourself, muni bond fund might do OK for smaller amounts, yet I just don’t see which goals it can meet. With an individual bond portfolio one can do a lot of different types of planning, including higher education investing, income planning and keeping assets that you might not need for a while, but which you need to remain relatively safe.
The main idea is that type of planning dictates the type of investment selected, not the other way around, so individual muni bonds are much more versatile than a muni bond fund.
While I understand this is a big part of your business, I’m not convinced there is a lot of benefit there. If you want a longer maturity, use the Vanguard Long-term fund. (16 year maturity with a 2.7% yield. If you want 12.5 year maturity, mix the intermediate and long-term fund until you get it. Of course, the longer the duration, the more interest rate risk you’re running, one reason keeping maturity/duration short may be wise.
You lose principal in individual muni bonds just like a bond fund does. If rates climb, the bonds drop in value whether they’re in your individual portfolio or Vanguard’s fund. If you don’t sell, the value will climb back to the face value at maturity. Same thing if Vanguard doesn’t sell them.
There is precious little free lunch in bond investing. Higher yield usually comes with higher risk.
If you have enough money, I suppose you can get a diversified porfolio of muni bonds individually, but I sure wouldn’t pay much for that service.
Maybe we ought to do a Pro/Con post on this one. What do you say?
Individual munis with 17 year maturity yield as much as 3.6% (and that’s better quality than Vanguard’s), so the risk is actually lower. This is part of the investment management services, not a standalone service, so it is included into my flat fee. Believe me, if I could use muni bond funds to do what I need to do, I wouldn’t use individual munis, as it is pretty tough fishing for good deals on an open market, but it is worth it hands down for those who have a lot of free cash that they don’t want to risk.
I do owe you a pro/con article on this. Just been a bit overwhelmed lately, since it is pretty close to the end of the year, so may docs are trying to get their retirement plans established before the end of the year.
The logical follow-up question is that if you are so good at managing munis, why aren’t you running a muni fund? Better quality…higher yield….lower risk….
Good point, but the whole idea behind what I do is planning and customizing everything to my clients’ needs. One size fits all fund is the opposite of that. Vanguard is great at what it does, and for many people I highly recommend Vanguard munis (they truly are the best funds given what’s out there – I’ve done a lot of research on that).
By the way, starting a fund (any type of fund) is a lot of hard work, and nobody in this business that I know of will actually manage an individual bond portfolio for a flat fee. It might cost as much as $100k or more to start a mutual fund, so naturally such funds have to charge a lot in asset based fees, and to justify their fee they have to be aggressive (and highly risky). I know several managers who don’t have a fund but instead manage custom-designed portfolios of corporate bonds – I wouldn’t trust them with my clients’ money.
Munis bonds are not easy by the way, that’s why I specialize only in the high end market (highest quality bonds). It may be possible to get even higher yields if going with lower quality ones (and that does require a lot of research and knowledge that I don’t claim to possess), as well as a lot of money to diversify properly. That’s what Vanguard does by the way – most of their bonds are of lower quality, but because they have a lot of them, the fund is relatively higher rated.
I’ll be working on an article on this interesting topic. I don’t claim to possess all the answer – just trying to find opportunities that might benefit those who can take advantage of them.
Thank you for sharing your experience. I’d love to pass your advisor along to your fellow readers who ask me for referrals. Ask him to contact me if he is interested in advertising on the site.
Just came across this blog while trying to find financial help for residents. The short of it: my husband is a 4th-year ortho resident currently interviewing for fellowships. We have roughly $300k worth of loans that are in deferment until after he’s done, and have no other debt besides this. However, finances are not either of our “thing” and we are overwhelmed trying to figure out how to handle certain things. 100% want to get an Advisor and saw you mentioned the Garrett Planning Network. Would you mind saying who you work with? None of our friends use an advisor and I’d feel much more comfortable with a direct recommendation. Thanks in advance!
You clearly just came across this blog if you’re asking me what advisor I use! You’re talking to him. When I find an advisor who knows as much as I do about this stuff and is willing to take care of my money for a tiny sum, I’ll hire him. Until then, I do it myself. It saves money, I know it’s done right, and it’s fun.
That said, most doctors do not and probably should not be their own advisors and that’s perfectly fine. I like the hourly rate model for financial planning and think highly of the advisors I know so far in the Garrett network. You can find my recommended list of advisors here: https://www.whitecoatinvestor.com/financial-advisors/
I did, I’m sorry! First time on here 🙂 I’m all for DIY, but in this case, I think I’d prefer to leave at least the majority to a professional. Came across a list of books you recommend and plan to read a few in addition to possibly hiring someone.
In terms of the list of financial advisers you recommend, do you have one in particular you’d call out? In general, I want to come up with a plan for how to pay off my husband’s loans as quickly as possible, while also trying to save for a down payment on a house/retirement (of course), in additional to other things.
Thanks, again! Your blog is amazing.
I like all of those advisors, but I’ll send you an email.
While 1% might be standard, I’d never pay it when there are so many good advisors in the 0.3-0.75% AUM range and the $1000-5000 flat fee range.
Can you point me towards some of these good advisers? I am a little overwhelmed with going back and forth between self vs managed. I would love to hear about some managers that you trust and recommend.
I have a list I keep here: https://www.whitecoatinvestor.com/websites-2/
It’s not as long as I wish it was. There is no perfect advisor, but I think if you take a look at that list (and go to their sites) you’ll see what very good advisors look like. Once you realize people are doing this for 0.5% a year, it’s hard to pay 1 or 2% a year for it.
Hi Dr. Khan,
The choice of adviser depends on the type of services you are looking for. If you want just basic hourly advice, you might want to hire someone who charges hourly. If you want advice that is proactive and if you need someone who can help you plan and implement your investment strategy, then you might want a flat-fee adviser who charges a single fee that does not depend on the level of assets you have.
Typically, someone who charges a low asset-based fee (below 1%) would not do any real planning for you. They also rarely manage accounts that you don’t move to their firm’s broker dealer.
We typically do investment management (using low cost index funds), but also include debt repayment/consolidation, tax planning, insurance planning, estate planning and higher education planning. Many docs have 1099 income, so we also help them with retirement plans (whether individual or for a practice). There are just too many moving parts to most doc’s finances, and without continuous and ongoing engagement it it is difficult to provide good value. While it is possible to find someone relatively cheap, the end result is that one gets what they pay for as far as the value for their money.
You have to be careful assuming you “get what you pay for” in financial services. In many ways, you get (to keep) what you DON’T pay for.
Exactly true. That’s why I highly recommend your blog to everyone who wants to do it themselves. Those who would rather spend the time making more money or relaxing can benefit from working with a good adviser who knows what they are doing (and who is a fiduciary, which goes without saying) 😉
1% does seem a bit high, but if they are providing services, such as tax-loss harvesting, and also the fact they are local (if it is important to you), maybe worth it, but definitely not more than 1%.
However, this 1% depends mainly on the size of the portfolio(s) they will be managing. If the portfolio size is above a $1 million, again probably not worth it.
I would ask them to list all the services they provide for the management fee they charge.
(Also, TLH is not performed every year so you may be paying for a service every year that you may only use a few years)
I would shop around a bit more before committing.
Please see my post above for a link to an article about why we don’t charge asset-based fees. There shouldn’t be ANY asset based fees charged by advisers, period. This is really a breach of fiduciary duty because it creates multiple conflicts of interest. We typically provide all inclusive services (that include financial planning and investment management) for a flat annual fee that does not increase as the assets grow – that is the only way to have compounding work for you, not against you. The cost of asset based fees is staggering – you might be overpaying hundreds of thousands without getting anything in return vs. a flat fee.
I would stress the financial planning aspect. Investment management is a tiny portion of a starting physician’s or a dentist’s finances – they have no assets, yet they have high taxes and a high cash flow, so doing tax planning and comping up with a top-down financial/investment plan (that includes such things as debt repayment and consolidation, insurance planning and tax planning) can be valuable. Initially, financial planning would take most of the time, and down the road, once enough assets are accumulated, investment management becomes increasingly important.
There are several other things to keep in mind. The value of a good adviser lies in their ability to put it all together while charging a fair (ideally, flat) fee for their services, and also their ability to use their knowledge to help the doctor/dentist make the best financial decisions across the board, not just with their investments. An adviser has to be accessible throughout the year, and not only that, but they also have to offer proactive planning services so that things get done correctly and on time instead of having the client come to them after the fact and trying fix the clients’ mistakes.
At some point, retirement plans become a very important tool for those who own their own practice, so that is a key area where a good adviser can add value by helping the practice owner select the right plan, as well as provide investment management and fiduciary services to their plan.
Comprehensive planning is where most advisers fall short. Typically, most charge asset-based fees, so the resulting advice is riddled with conflict of interest and is usually far short of what is necessary for practice owners.
It takes a significant amount of time to develop and implement a quality financial plan across multiple areas, and for those who don’t have time and/or inclination, hiring the right adviser can save time and money, while those who are able do everything themselves have this blog.
Much as I enjoy this site, I think the author is confounding what an individual can do in theory and what that same investor is likely to do in practice. The advisory firm he criticizes is identifying counter-productive behaviors that are absolutely typical of retail investors. Having a written investment plan will not prevent you from selling out at a market low, if your emotions overcome you. That is just one example of what a capable advisor can do.
All thinking about investing should start with index funds, a basic diversification strategy, and periodic re-balancing. I’ve been working with individual investors since 1978, and I am convinced few individuals will reliably follow that sensible strategy through full market cycles.
What follows is not intended as a commercial, but as context. My firm had 240 clients when the market broke down in 2008. By March 31 of the next year, fewer than ten had sold out fully, sold out partially, or even reduced their risk profile by selling some of their stocks. I am certain that no randomly selected group of Vanguard investors demonstrated a fact-pattern remotely similar. Given the market’s full recovery since the March 2009 low, the economic value of staying the course, for every individual who did so thanks to their relationship with an advisor, is certainly more than 100% of their March 2009 value.
So to Dr. Kahn above, my thought is that the service you describe is likely to be worth more than the 1%, compared to how you would do on your own, the investment strategy is sound, and the referral source you describe sounds like a solid recommendation.
As mentioned in the article, if an investor can’t stay with the course without an advisor, and can with the advisor, then the advisor is providing a very valuable function worth paying for.
I agree there are some who think they can stay the course who will find out in the next bear market that they cannot. But to say all of us should hire an advisor just in case they’re one of those who can’t stay the course doesn’t seem like the right solution. Staying the course seems like the right solution. A little education and discipline is all it takes for many doctors to write up a reasonable plan and stick with it. I don’t know, it doesn’t seem that hard to me, but I also write about finances many times a month.
I think the average investor should have a Financial Advisor, but I’d be more worried about them picking the right one 🙂 Once you know what to look for in a good FA, you’ll realize that you could just do it yourself.
What do you think about the innate obsession with physicians to outperform each other? It’s amazing how hard my wife and her friends work and you can’t just turn that off. I think docs along with other super successful people just can’t accept average returns because they have never been just average. That’s another good reason docs should hire an FA who can bring them back to reality.
The desire to outperform is a function of both self-interest (better performance = more $ in pocket) and ego. Doctors probably have a bit more ego on the line, though I could probably line up engineers, lawyers and C-suite executives to compete on ego.
You have hit one particular nail on the head with work ethic. Knowing plenty of docs, I firmly believe the essential differentiator between physicians and others is not smarts, but work ethic. Docs always work harder, period, and don’t stop.
The fact is that chasing superior performance leads to under-performance. The reasons are behavioral/psychological, not cognitive/informational. In other words, factors where docs have advantages don’t help.
My experience is that physicians are, by and large, poor investors.
If by average, you mean “market” returns, then docs would be a lot better off being average than trying to beat it.
I agree that by the time you know what a good FA looks like, you probably know enough to manage your own investments. It’s just not that complicated.
The problem is that you don’t know ahead of time that an advisor will prevent you from selling at the wrong time and im not aware of any real evidence that they do or that even a reasonable percentage of advisors do. As noted above, even advisors who think they are good don’t prevent this all of the time. My experience has been that if you are nervous during a market downturn and call them more than once then they will either put you into an insurance product or sell at the wrong time blaming it on you.
Sorry, missed a key part of your comment. If the advisor tells you to “sell down to the sleeping point” (Wall Street conventional wisdom for “get scared, sell low”), he is pretty useless. If he then sells you an insurance product, he is a commissioned sales clown, not a professional advisor.
Any advisor should be a credentialed, fee-based fiduciary. CFP, CFA, CIMA, CPA/PFS, and registered with the SEC as an RIA.
Fiduciary standard is essential. Does not guarantee good advice, but really important as a threshold requirement.
Excellent point. Hard to know if an advisor will counsel wisely and effectively at inflection points, but hugely valuable if they do.
A central value of an advisor is to keep you on course when markets get scary or bubbly. Not all will do so. But helpful to know what you are looking for — effective counsel, capture of returns, not continual out-performance.
Good comments. I agree with them.
A month ago all residents and fellows (~700) in our hospital got invited to a seminar by a financial planning company that “specializes” in physicians. When I wrote to them listing boggleheads and this website as the main resources along with simple 3-4 index fund portfolio I got two e-mails about how physicians should rely on financial advisor for planning purposes since these financial planners know what is best for us.
I once offered to speak to a residency program for something like $400, and that included 30 free copies of my book (value $750 at list price) and was turned down. I had a medical society ask me to come across the country to speak for free but promised the opportunity to “plug my book” to the 50 people in attendance. Even if every person in that room had bought 3 of them it wouldn’t have paid for my expenses, much less my time. Just like good medical education, good financial education has to come primarily out of the goodness of doctors’ hearts because “ain’t nobody payin’ for it.” The financial salesmen will not only come to speak for free, but they’ll often buy lunch too! That’s why they’re the only ones docs are hearing from.