Financial Advisors for Doctors: What You Need to Know About Fee Only Fiduciaries
Whether you have already made the decision to work with a financial advisor or are trying to decide whether or not to work with a fee only fiduciary, starting here to learn more about the way that business relationship works is a great next step.
Knowledge really is power, and when it comes to your finances, there should be no messing around. Earning your money was hard work. Even that debt you hold represents a dedication to your education and your future, and should be treated with respect and care.
As in any business, there are honest professionals, and there are people who will cheat you. There are also plenty of people existing in a middle gray area, where they may mean well but have their own business needs or best interests that they serve. Or, perhaps they do want to provide a service but are not as qualified as a fee only financial planner and so are not the best fit for your needs.
Trying to determine which is which is challenging. Add in the stress of knowing that making the wrong decision could cost you your life savings, and you’ll really be in trouble.
So, how is a person who is new to investing or finance even begin to choose a financial advisor (who is a fee only fiduciary) whether for a doctor or with any other profession?
Answering that question is easy: first, you learn about the different ways that financial advisors are compensated. Then, you choose the one with the fee structure and bedside manner, so to speak that is the best fit for you.
Once you have a clear understanding of how financial advisors for doctors or anyone else make their money, you’ll be better positioned to make the decision that is right for you in terms of who you choose to manage that money.
Fee Only Fiduciary – Qualifications
Before you think about how a financial planner charges, it’s important to understand the different types of qualifications you should look for.
Everyone with the Certified Financial Planner (CFP) designation has undergone extensive financial education, has sat for a rigorous national examination, is grounded in experience, and operates by a particular code of ethics. These are known as the “four Es.”
Beyond that, it helps to understand what “fiduciary,” “registered,” and “certified” mean in terms of financial planning.
Fee Only Fiduciary
A fiduciary is a professional financial advisor who has a stated and particular legal responsibility to dispense sound financial advice that is in your best interests as the client. Not all financial planners are fiduciaries. We do this on an ongoing basis, by continually following your investments and ensuring that they meet your needs.
A fiduciary can be a person or an entity such as a bank or brokerage firm, or even the trustee of a trust.
As a client of a fiduciary, you allow this person, through the act of hiring them, to make financial decisions on your behalf.
Loyalty, good faith, full disclosure, honesty, unbiased financial advice are all traits you can expect – and are legally entitled to receive – from a fiduciary. 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. Additionally, there may be varied compensation methods used in different investments. We believe in complete transparency of our fees, consistent with our fiduciary responsibilities.
Just like with many other service-based professions, such as medicine or law, financial advisors must go through rigorous training. Doing so allows them to dispense advice about securities and other financial matters to companies and private individuals.
The registration is more than a mere formality. It is an indication that the individual is bound by fiduciary duty. The American legal system requires that the person with the fiduciary duty puts the interest of the client before their own. In other words, any financial advisor working professionally is bound by an ethical standard to put your personal interests before their business needs.
These ethical standards include maintaining confidentiality of your finances and other information as well. In fact, a registered financial advisor will not even disclose to anyone that you are a client, without your permission.
“Financial advisor” is a broad term. Anyone can give you some advice and call him or herself a financial advisor. In order to become certified, that person must undergo rigorous testing, meet a national standard, and agree to abide by a stringent set of ethical standards.
To become a certified financial planner, one must meet “rigorous professional standards and have agreed to adhere to the principles of integrity, objectivity, competence, fairness, confidentiality, professionalism and diligence when dealing with clients” according to the Certified Financial Planner Board of Standards, Inc.
How financial advisors are paid
There are three general ways that financial advisors earn their living: Fee only, commission-based, and through assets under management.
A fee only financial planner earns his or her paycheck from – you guessed it – the fees they charge you. This is opposed to earning a paycheck from a commission of products, services, or a percentage of the money you invest with them. Fee-only planners are registered and as such are ethically and legally bound to work in their client’s best interest.
As the client, you know up front what the financial advice will cost you. There are no surprises. There are also no blurred lines. With a fee only planner, how much money you have at the start or finish of the time you work with them is irrelevant because they get paid either way.
This arrangement allows the planner to be focused on meeting your needs because he knows that he is being paid fairly for his services. You can rest assured that your best interests are at heart. Does this mean that commission based planners are unethical? Not at all. But earning a commission is a different type of payment structure that might not be in your best interest, and so it’s best to know your options and exactly what you’re paying for.
A commission-based planner only gets paid based on a percentage of funds you allow them to manage. The upside to this is that working on commission entices the advisor to be aggressive with growing your money. The downside is that, often, it is in the advisor’s best interest to entice you to invest more than you may be comfortable investing.
If you get to a point in your financial education where you are confident in your own knowledge but need someone to execute the investments as you direct or to take a sum of money and run with it, a commission-based planner can be helpful. In that situation, this person will be motivated to do their best to make your money grow fast. This would be good for a small sum of money with which you are comfortable taking a lot of risk.
Assets under management
AUM stands for Assets Under Management. Under this model, an advisor is paid with a percentage of the money you have invested, typically a low percentage, such as 1%, of all assets under their management (hence the name), paid quarterly. You don’t even have to write a check and never get a bill. Instead, the fees are calculated automatically and deducted from your account. You’ll see this on your quarterly statement.
For example, if you have $1 million dollars invested with an AUM financial planner, that planner will deduct 1% of the amount spread out quarterly over the course of the year, amounting to $10,000 total in fees.
For this fee, you get a financial planner who understands the market, who can help you determine the best risk for your age and financial situation and financial goals, and who takes care of the actual making of transactions. You simply transfer the money to this person’s control and let them take the wheel.
The motivation for the financial planner is to help your money grow, because then their 1% grows as well.
The pros of this type of arrangement are that you start with someone who will do a comprehensive review of your assets and make appropriate recommendations. They will do the legwork to get your portfolio up and running.
The downside of this type of arrangement is that once everything is set up, you’re still paying someone that 1% to manage not very much at all.
You will likely still meet or talk with the person once or twice a year to go over your accounts and discuss any possible changes in your goals, but your financial goals are likely to be long term, and so once your portfolio is properly designed, there really isn’t much that warrants paying that kind of fee on an ongoing basis.
Potential conflicts of interest
A commission-based advisor is really a salesman. They don’t get paid if you don’t have products that earn them money, and so their best interest is to sell you investment products, such as insurance policies and shares in mutual funds and the like, because the more money you allow them to touch for an investment, the more money they make. While that may sound like a good idea – because isn’t more money everyone’s goal? – consider the motivation of that individual.
Think about it this way: let’s say you have $5,000 in a savings account, $1000 in a checking account, and some money you would like to invest. You call a commission-based advisor to ask for advice on how to make your money grow. They don’t get paid unless your money grows, right?
Except: they don’t get paid unless the money you invest with them grows. This creates a motivation for them to want to influence you to give them more money than you might otherwise wish to invest.
For example, you tell your advisor that you are comfortable keeping that $5,000 in your savings account as an emergency fund, and the $1,000 in your checking account to cover some of your monthly expenses, but you would like to discuss other assets. She then comes back to you to ask you to take half of that emergency fund to invest with her. She is confident she can grow that money in the stock market, and asks you to trust her expertise. Should you do it?
The answer is that it depends. If you are okay with risking that money and understand that the stock market, while a great way to invest money over time is also volatile and not a great place to keep money you might need in the short term – such as if an emergency happens – then you know your risks and are making an informed choice.
But, if you would prefer to work with someone who respects the boundaries you set, and who understands that your stated comfort level is to keep that money safely in a bank account, then you might not appreciate the temptation of being even gently pushed let alone pressured to move that money into an investment product.
Either way, that advisor is thinking in terms of commission and not in terms of what is best for you.
Financial investing over the long term is about balance. The key is to understand what products are out there and how different options work, as well as what the risks are of the difference choices available to you. Helping contextualize that information and offer advice on what might work better for you instead of what might garner the highest commission is generally your best bet.
This brings us back to fee only fiduciaries
Everyone deserves to be fairly compensated for their work, in particular when professional services are involved. Some financial planners charge a flat fee for the work they provide, usually based on the scope of the project or inquiry or perhaps based on a schedule, such as quarterly. The client always knows the fee up front.
This structure gives our clients a completely transparent process they can trust.
We receive no commissions and no 12b-1 fees. We’re paid to manage your investments and deliver the best possible returns.
As a fee-only advisory firm, we make no commissions on investment products. You can rest assured that our interests are aligned with yours.
Fee only planners are nearly always fiduciaries as well. You will know this from their website or other business materials. Don’t be shy about asking outright if you aren’t sure.
You can hire a fee only planner to do the following:
- recommend mutual funds or other similar investment products
- help you create a budget
- create a strategy for paying off student loan or other debt
- create short or long term financial plans.
There truly are pros and cons to each of the models of payment when it comes to choosing and hiring a financial planner. The truth is that only you know your financial situation, your capacity for risk, and your financial goals. Only you know your comfort level when it comes to the person with whom you will work when it comes to sharing such sensitive and personal information as your finances.
If you have spent some time reading through this website, you have seen that we work in a fee-only capacity. This is for several reasons.
- Fee-only is simple: you know exactly what you will be charged and what you will receive in exchange for that fee
- Fee-only is transparent: there are no surprises, hidden fees, or percentages of anything taken out of your accounts
- Fee-only allows us to focus on the services we provide instead of on what you may or may not have: we focus on the service provided, not on how much money we can get from you
- Fee-only allows us to be fairly compensated for services provided and you to be treated fairly at the same time: any professional providing a service deserves to be paid a fair fee
- Fee-only allows us to help anyone, regardless of the size of your assets or debt, without prejudice: this is the heart of what we do.
The honest truth is that there are always going to be people in any profession who are less than honest. They may try to cheat you outright or they may simply have their own business or personal needs at heart. Either way, you lose out. One of the best protections you have against this is to understand the type of professional you need to hire, and then to seek the person who best aligns with your interests, and your gut.
That’s right – just as the bedside manner of a doctor matters when choosing the right fit for you, so does choosing the person who will see all of your debts and your assets. This is the person who will make recommendations that could have a major impact on your financial security, and so while there is much importance involved in choosing someone with the proper qualifications, it matters just as much to choose someone with whom you feel good working.
We provide all of our services on an independent, fee-only (non-commission) basis, and serve as a fiduciary for you. This means that we put your needs ahead of ours. The way we believe it should be.
We don’t receive 12b-1 fees, we don’t receive commissions and we don’t sell insurance (but we can help you obtain it). This makes us different than most advisors you will meet with. We like being different.
If you are interested in finding out more about what a fee only financial planner can do to help you, give me a call. We can chat and see if we’re a good fit for one another. Whether or not you hire my firm, keep in mind that you have the right and responsibility to ask anyone who might touch your finances to be crystal clear in how they are paid and under what ethical standards they operate.