Process of Making Good Decisions

Choosing a Financial Advisor: The Definitive Guide

Choosing a financial advisor might feel like a daunting task but it doesn’t need to be. You just need to know the right questions to ask, the right type of advisor (hint: it’s a flat, fee only, financial planner that works exclusively with physicians), and know when you should start working with an advisor.

Throughout your life you’re going to develop several critical relationships in your lifetime. Being a physician, you’ll have the chance to work with many types of personalities and professions throughout your career. Some of whom you’ll choose to work with and others, well, maybe not so much.  

This is a discussion about one of the most important people you do have the choice to work with – a trusted financial advisor. Your higher-than-average salary means you have to find someone who can help you navigate through several big financial decisions, including the everyday ones too.

Similar to how some of us need a little extra help learning how to cultivate relationships, it’s not any different than choosing a financial advisor. Knowing how to choose a financial advisor you want to do business with doesn’t have to be complicated, you only need a place to start. 

But for many, it’s tough to know where to start the process of selecting a financial advisor. You may be tempted to ask friends and family to tell you who you should use. Or you think you can simply search for someone on the internet and pick whoever has the best website. But when it comes to your money, you need to be much more highly selective than basing it off a website. 

Since I happen to be a fee-only financial advisor, I want to make sure you are equipped to know how the financial advising world works. Ultimately, I want you to be able to make the most informed decision possible when it comes to choosing someone to help you navigate the financial world. So let’s review everything you need to know about choosing a financial advisor. 

When You Should Hire a Financial Advisor

It’s been said that you hire a financial advisor not to necessarily grow your money, but rather to protect it. 

But what if you don’t have a lot of assets that need protecting? Or what if you want to take what little you have and help it grow into something significant? Deciding when to hire an advisor is a big step towards overall money management.  

Generally, most residents do not need to hire a financial advisor right away. Your hours are erratic, you’re not earning close to your salary potential yet, and you probably aren’t making significant monthly payments towards your student loans during this time.  It’s really not the best time for you to focus on hiring a professional. 

My advice is for you to wait until you have begun your work as an attending physician. Not only will you have a better idea of your earnings potential, but you’ll also have a better picture of your monthly student loan payments. 

The only reason you might consider hiring a financial advisor during your residency is if you’re pursuing federal student loan forgiveness through the various programs. You may need someone to help you navigate through the murky waters with PSLF since it can get pretty confusing. A fee-only financial advisor would be able to make sure you have started the PSLF process correctly and keep you on target for loan forgiveness in 10 years. 

Even if you are pursuing PSLF, you should be aware there are now services online which can help you specifically with PSLF and federal student loan repayment plans. Websites such as loanbuddy.us will allow you to input your specific student loan information and then suggest a loan repayment plan tailored to you.

The key point is, don’t feel pressured in choosing a financial advisor right away if you’re still a resident. You will have plenty of time to find one once you begin your career as an attending. 

Financial Advisors Versus Financial Planners

Now that you know when to hire one, you need to know which type of advisor you should consider. You may be confused about a certified financial planner versus an advisor, and which one you should use. 

Perhaps you’ve heard the terms “financial advisor” and “financial planner” used interchangeably. However, there are a few nuances between the two terms which you should be aware of as you start your search.

Financial advisor is a broad term that is used to identify anyone who helps clients manage their money. Financial advisors don’t necessarily have to hold any specific credentials or certifications (although many do). The term “financial advisor” generally refers to those who manage money, but it can also be a title given to a stockbroker, insurance agent, or even a banker since they are generally involved in managing money. 

If financial advisor is the general term, think of a financial planner as the more narrow definition for  someone who manages money. A financial planner can be a financial advisor too, but doesn’t always manage the finances for their clients.

A financial planner may hold additional certifications, which demonstrates knowledge within certain specialties. Some of the more common certifications for financial planners are Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), Chartered Financial Consultant (ChFC), or a Certified Investment Management Analyst (CIMA). If you see any of these designations, it means the financial planner has gone through specific testing to receive the certification.

For the most part, we use the financial advisor designation throughout our conversations and posts, since we are referring to overall money management. And as you might have guessed by now, there are quite a few ways someone can act as your financial advisor. Let’s discuss the different aspects you should consider as you choose the right advisor for your finances.

Fee-Based Financial Advisors

You may be like other people who assume all financial advisors are created equal. As long as there’s a string of letters after someone’s name, it must mean they are certified to give financial advice. What may surprise you is how different advisors can be from one firm to the next.

Let’s start with fee-based advisors because the majority of financial advisors you speak to will fall into this category.

A fee-based financial advisor is simply a financial advisor who is compensated both by you as well as other sources of revenue. A fee-based advisor can receive compensation from commissions, selling products, bonuses, and referral fees. 

It may not be a newsflash to you that fee-based financial advisors can earn money from several different avenues. But you need to consider how this can create a conflict of interest for your relationship if you choose to work with a fee-based financial advisor. It would be virtually impossible to eliminate any conflict. If someone can receive an additional commission by selling you a product, then you can’t help but wonder if they have your best interest in mind or if they only want the additional revenue. 

Since the majority (more than 97% of all advisors in fact!) of financial advisors fall into the fee-based category, you should be aware they are making much more off of you than a small percentage fee. 

Because fee-based financial advisors are not held to a fiduciary oath (we will discuss this more in the next section), then their only obligation to you is to recommend products that are suitable to you. Think of the giant financial planning firms with commercials all over the television. Not only are they advertising their investment services, but also life insurance, disability insurance, long-term care, and annuities. It may sound like a “one-stop-shop,” but it’s creating a conflict of interest for you. 

Other providers, including brokers, may have a “suitability” obligation, meaning they can recommend a product that is appropriate at the time of purchase, but they have no ongoing responsibility to monitor the investment. 

One thing I want to make sure I point out here is that not all fee-based financial advisors are greedy, commission-hungry sales representatives. There are many fee-based advisors who are out there to help you grow your portfolio. However, because they are able to sell products to you, there will be a natural conflict of interest. With this type of setup, conflict is unavoidable, even if the advisor is genuine in their conversations with you.

Referral Fees 

A common source of income for fee-based advisors is through referral fees. When you’re a financial advisor, you will need to be able to refer your clients to many different professional specialties. For instance, clients will have questions but only a CPA, a realtor, or an attorney can answer. An advisor will need to be able to refer their client to the right person. 

Many fee-based advisors receive new client incentives when they refer their clients to someone else. The fees aren’t a flat dollar amount either. It can come in the form of a commission, bonus, or prize.

So how do you know if you’re the client, that you’re getting the best referral? How can you be sure you’re not being referred to someone because they are offering your advisor the best referral fee?

The answer is you can’t. You can’t be sure of your advisor’s intentions when they are receiving additional money from referring your business to one of their buddies. This is common practice in many professions, but when it comes to your money, you want to know you’re working with the right professionals. 

Fee-Only Financial Advisors

Fortunately, there is an alternative if you are looking to work with someone who can eliminate as many conflicts of interest as possible, and that’s when you choose to work with a fee-only financial advisor. 

Where it can get even more confusing is knowing the difference between a fee-based financial advisor and a fee-only one. The names sound almost exact, but there is a major difference between the two – the compensation.

A fee-only financial advisor is someone who acts as a fiduciary for your account, meaning, they will put your best interests first. A fiduciary is someone who has taken the fiduciary oath and vows to put your financial needs at the top and not make additional commissions off selling products to you. 

Because of this additional oath is taken, a fee-only advisor believes in being as transparent with fees as possible. There isn’t room for a hidden agenda or a way to pull a “gotcha” on you. Everything – including fees – should be discussed upfront and put in writing.  

As a fee-only financial advisor, they can also act as a liaison with other specialists such as an attorney, accountant, realtor, or insurance agent. Since these are all important aspects of your finances, it’s important for you to be referred to competent people who specialize in these areas. 

Fee-Only Advisors Fee Structure

Fee-only advisors can be paid hourly, monthly, with a retainer, a percentage of assets (AUM), or as a one-time flat fee. When working with a fee-only advisor, the fees are discussed upfront so you know all of your options. 

In addition to offering investment services, there are options to help with budgeting, savings, total money management, and student loan repayment. Fee-only advisors are able to look at your finances from a holistic point of view. You can be sure your financial plan will be comprehensive because it’s based on what’s best for your circumstances, goals, and dreams. 

Fee-only advisors are obligated to be upfront and as transparent as possible with any fees. With my financial advising firm, Physician Wealth Services, you will be directed to another professional based on what’s best for you – not because of any referral fee being received or because I’m buddies with a certain person. 

I encourage you to ask an advisor how they get paid, what are all the sources of income that they can get from your relationship working together. I know that in my practice, I try to have as much transparency and to have as little conflicts of interest as possible, and you should expect the same as a client.

Rise of the Robo-Advisor

I want to briefly touch on another aspect of financial advising you may not have come across yet. It’s a service generally referred to as a robo-advisor. As the name implies, it’s an automated service, versus interacting with a real human. It’s an impersonal, direct way of investing, made possible by the internet.

A robo-advisor service uses an algorithm, which is based on a series of questions you answer. You’ll be asked about your level of risk tolerance and other general investing questions. While I don’t recommend this type of service for physicians (since you need a more detailed plan and have several factors to consider besides your salary) there is a benefit of this service for those looking for a low-cost alternative.

As financial management companies become more digitally sophisticated, this type of investing will probably continue to gain popularity.   

Using a robo-advisor could be something to consider for those who are in the beginning stages of investing. This type of service might be useful if you are only looking for the bare-bones investment experience. If you choose to go this route, think of it as a cookie-cutter, no-frills approach to managing your assets. It would work best for those who have very little in assets and can’t meet the account minimums required by some advisors. 

Using a robo-advisor means you have a 1-800# you call for help with technical questions only. They may tell you that you have access to a financial planner, but in reality, the person will not have any access to your personal information. 

Imagine treating a patient without being able to review their labs. You would have a hard time diagnosing them because you wouldn’t have a complete picture of what’s going on. The same goes for using an automated money manager – someone can help answer your questions, but only based on a limited amount of information. 

Choosing a Financial Advisor You Can Trust

An advisor is someone who you need to feel comfortable asking direct questions. They should also be asking you about your goals in life and with finances. Similar to how you have your own bedside manner and approach to caring for patients, an advisor has their own approach as well. Finding one who you can trust is a big task. 

In addition to having a list of questions to ask of a potential advisor (which we will expand on in the next section), you should be aware of the resources available to you to help you find someone you can trust. 

The Fiduciary Oath and Financial Advisors

You should hear the word “fiduciary” quite often as you’re doing your research in choosing to work with a financial advisor. If it sounds like a legal term to you, that’s because it actually is. More than a legal term, a fiduciary is an oath that has been taken on behalf of clients. 

A fiduciary is a financial advisor who has a legal responsibility to dispense sound financial advice that is only in the best interest of the client. This is different than an advisor who is selling specific products and potentially making additional commissions off products they sell to you.  Not all financial planners are designated as fiduciaries, but you should look for one that is. 

A fiduciary can be a person or an entity such as a bank or brokerage firm. A fiduciary can even be the trustee of a trust. It is an advisor who is continually following your investments and ensuring that they meet your needs, and your needs only.

If you are a client of a fiduciary, you are allowing them to make financial decisions on your behalf and in your best interest. By hiring a fiduciary, you will know they are working to ensure your financial goals are met, regardless of which products you need to round out your portfolio. 

When you work with a fiduciary, you are legally entitled to full disclosure, honesty, and financial advice free from bias. Choosing a financial advisor who is a fiduciary is one of the most critical steps in finding a financial advisor you can trust. 

Putting the Fiduciary Guarantee in Writing

Any fee-based financial advisor should be willing to put their fiduciary guarantee in writing. As you know, putting something in writing is a way to reinforce how much you stand behind something. 

You could draw a parallel between the Hippocratic Oath and the fiduciary guarantee. Both are a personal code of conduct that indicates your duties and obligations. Your advisor should be willing to share their obligations in writing and you are within your right to ask for it. 

Additional Resources for Choosing a Financial Advisor

Another great resource for help in choosing your financial advisor can easily be accessed through the internet. There is a form referred to as the Form ADV and can be accessed on the advisorinfo.sec.gov website. 

The Form ADV is a mandatory disclosure document which all advisors must have on file with the SEC (Securities Exchange Commission). If the financial advisor you are selecting doesn’t have a profile or doesn’t disclose their information to you, then this should be a major warning to you.  

Questions to Ask When Choosing a Financial Advisor

You know the difference between an advisor and a planner, a fee-based and fee-only advisor, and you’ve decided you definitely don’t want to go the robo advisor  route. How do you go about choosing which fee-only financial advisor you want to work with?

It’s time for you to ask several questions of these potential advisors so you can make the most informed decision. It’s your chance to get to know them and their investing philosophy.

You may feel slightly awkward at first, but once you start asking questions you’ll quickly realize how different each advisor can be. We’ve put together a list of questions to help you get the conversation flowing. This will help you determine if you would be working with either a fee-based or fee-only advisor if you are unsure based on your initial review.

Remember, a fee-only advisor is the recommended strategy, and you also want to choose someone you can easily work with. The only way to determine this is to start by asking lots of questions. 

What Type of Client Does Your Firm Typically Work With?

For physicians, asking which type of client the advisor specializes in is possibly the most important question. You want to work with someone who understands your complex situation with your career choice. Not only will you consistently earn a higher-than-average salary until retirement, but you are also likely saddled with debt. You need someone who understands your desire to pay down debt as well as maximize your high salary. 

Only work with an advisor whose client base comprised of 100% physicians. This way you know they are going to be experts in the challenges you are facing with managing your finances. 

What Ties Do You Have to the Medical Community?

In addition to choosing someone who understands the unique financial positions of a physician, you need to find out why they are motivated to work with physicians. Take time to ask them how they are connected to the medical community. Did they grow up with a physician in their household or a family member who is one? Are they married to a physician? Did they have a former career that had them working directly with physicians?

The point to this question is twofold. First, you’ll find out quickly if they’re connected enough to understand the lifestyle of a physician. Sure, there’s a nice salary for a doctor each year. But there’s also student loan debt, possibly pursuing PSLF, irregular schedules, investment opportunities and the list goes on. Unless someone has a close connection to the medical community, it’s probably hard for them to understand all the factors which have to be considered over your lifetime.

Second, this question will allow you to pinpoint their motivation for working with physicians. If there isn’t any kind of personal connection, then it’s safe to assume they are probably only attracted to the higher salary and knowing that you didn’t receive any formal training in personal finance. In this case, you would want to run as far away as possible. You want to work with someone who is genuinely understanding of your particular financial situation. 

How Do You Get Paid?

The commission and/or fee structure is also one of the most important questions you need to ask when choosing a financial advisor. As you now know, whether the advisor is fee-based or fee-only is a critical component in choosing someone to manage your money. By choosing a fee-only advisor, you can be certain the products being recommended are based on your needs, and not a certain commission.

If you’re unsure if this advisor is fee-based or truly fee-only, then asking this question of payment directly will get you the answer you need. Many advisors are upfront about their fees, so this should be a straightforward conversation. Remember, when a fee-only advisor will only get paid by the fees which they’ve disclosed to you upfront. There won’t be any hidden fees, commissions, bonuses or referral fees given to a fee-only advisor. 

What Licenses Do You Carry?

Asking about the licenses will let you know the advisor is allowed to give you financial advice. The specific licenses will also give you clues as to any additional products they might be licensed to sell. For instance, if the advisor also has an insurance license, most likely they would be interested in selling you insurance products. 

Again, if the advisor is licensed to sell products to you, then there will be a conflict of interest. You are always better off with a fee-only financial advisor.

How Do You Ensure Your Clients are Protected From Fraud?

Cybersecurity and data protection are real concerns. Your advisor should be as concerned as you are in keeping your information safe. Don’t be afraid to ask what specific steps they take to make sure your information is kept out of the wrong hands. 

In addition to security, you should know if your advisor has a plan in place in case of an actual data breach. If you think this is a little extreme, remember back to the data breach cases with Equifax and Target. If it can happen to large corporations who spend millions each year on cybersecurity, then it’s not out of the realm of possibility for your financial advisor. 

There should be plans in place to keep your data as safe as possible and your advisor should have some knowledge on this topic. 

Do You Contact Your Clients Before Making Changes in Their Portfolio?

The question of how your advisor makes changes to your portfolio is one only you can decide what the right answer will be. People have different preferences when it comes to this. There are those who want their advisors to manage all aspects of the portfolio, including purchasing the funds which they think are in the client’s best interest. 

Others prefer to be informed before any changes are made. This is completely up to you. So, ask your advisor how they typically handle portfolio changes and make sure it’s in line with what you want in an advisor/client relationship. The advisor should be open to discussing this with you and devising a communication plan between you two. 

What Happens if You Pass Away or are Unable to Work?

You know all too well in your profession as a physician how quickly life can change. Have you ever wondered what would happen to your money and portfolio if something were to happen to your advisor? Although an unpleasant topic to discuss, it is worth bringing up with your advisor in case the worst happens. 

You generally only think of this question in the context of yourself or your family members. It’s not often you have to ask someone who you are choosing to do business with. But it’s especially important to know how your assets would be handled.

If your advisor were to pass away unexpectedly, you need to know not only what happens to your accounts, but also who would have access to them. You want to make sure your advisor has a plan in case something unexpected does happen. 

How Do You Describe Your Investment Philosophy?

Every advisor will have their own investment philosophy. You might know your own beliefs yet, but it’s important to know which set your advisor adheres to. There are some advisors who are more aggressive. They try to make big returns, even if it involves more risk. Then you have others who are more conservative. They most likely view investing as a long-term process, rather than trying to achieve short-term gains. 

After interviewing a few different advisors, you’ll begin to get a feel for which financial philosophy resonates most with you. Once you do, make sure your advisor is willing to take your own personal investing philosophy into account when making financial decisions on your behalf. 

It’s equally important when your advisor tells you about their philosophy that it’s easy for you to understand. You want an advisor who doesn’t talk down to you. You’re looking for someone who is happy to teach you about finance so you can learn more as time goes on.

What is the Best & Worst Financial Decision You’ve Ever Made?

We’re all human, and your financial advisor won’t be flawless when it comes to financial decisions. You should ask them what’s the best and worst financial decisions they’ve ever made. This might give you some insight into their risk tolerance or how they bounce back from financial blows. It will help you get to know them, find out what makes them successful, and most importantly, learn how that will impact the ways in which they manage your money.

Not only does this question give you additional knowledge of their background, but it’ll show them you’re serious about hiring someone who is willing to learn from their own mistakes. 

I’m Not Located in Your State, Can You Still Work With Me?

A common question I receive at Physician Wealth Services is whether our team can work with you, even if you’re located in another state. In our case, we registered with the SEC and our team is available to work with clients nationwide. But it’s a good idea to check with the advisor to make sure they can work with you no matter where you are located. 

Make sure the advisor is not only willing to work with you no matter where you live, but also can be available around your irregular schedule. If you’re working with a firm that specializes in physicians, they will understand this and your location and schedule should not be a barrier. Sadly this is not the norm, so make sure you get the details before signing the client agreement!

No matter which questions you end up asking, or how you phrase each of them, the important step here is to make sure you are getting the information you need.  Think about the amount of money you could potentially be investing over the next several years.  You wouldn’t hand over the keys to your car to someone you can’t trust. You wouldn’t invest your money in a school you don’t believe provides the best educational experience. The same goes when choosing a financial advisor.

Don’t be afraid to ask direct questions so you can make sure this is someone you can work closely with and has your best interest in mind. 

Questions a Financial Advisor Should Be Asking You

In the same manner you approach your selection when choosing a financial advisor, your advisor should have questions specifically for you. If a potential advisor doesn’t seem interested in understanding your personal situation, then it should be a major red flag for you to find someone else. 

Of course, not every advisor will have an extended checklist of what they want to cover with you – but there should be some questions to gain a better understanding of your goals and financial philosophy. 

Look for an advisor who wants to know more about you personally, as well as your financial attitudes. 

You will want to work with someone who tries to understand your concerns about finances and achieving your goals. Are you worried most about budgeting? Paying off student loans or qualifying for the PSLF? Perhaps you’re most concerned with managing your physician’s salary while juggling all your obligations. An advisor will want to know the financial concerns that are keeping you up at night.

The advisor can gain a better understanding of your goals by asking you why you decided to reach out to them (versus all the other advisors available). They should also want to know what you want to accomplish by working together. 

Simply put, the question shouldn’t be, “How much money do you have? How much money do you have to invest?” The question should be, “What’s your value of money? What are you trying to do? What are your dreams? What do you want to accomplish?” If you have a financial advisor who is willing to ask you the more thoughtful questions, then chances are they are going to be someone worth working with for years to come. 

Choosing a Financial Advisor With Your Best Interest In Mind

As you can tell from the various designations and definitions, there can be quite a difference from one advisor to the next. How your advisor is paid and the services they are going to provide shouldn’t be shrouded in mystery. It should be a very clear and transparent process as you narrow down your list of potential advisors. 

Doing your research upfront to make sure the advisor is registered, confirming they are a fiduciary, and gathering your list of questions is your best bet to get started. And definitely don’t be afraid to ask them to put their fiduciary guarantee in writing. 

You may not be 100 percent certain about all the goals you want to accomplish with your money over the next several years. But you should always be certain that your advisor is going to have your best interest in mind as you create a plan for your finances.  A trusted financial advisor should be one partner you have complete confidence and trust in as you navigate through your financial planning.  

 

Ryan Inman