The term “financial advisor” feels inherently safe.
It connotes a sense of knowledge and experience in finance, enough to advise other people about it.
After 4 years of college, 4 years of medical school, and who knows how many years of residency/fellowship, the last thing most doctors want to do is to learn all this “finance stuff”. Most doctors don’t seem to understand just how important (and potentially costly) it is to not learn about it.
Trust me. I understand. After all this learning medicine and residency training and being beat down for so many years with an exhaustive amount of knowledge… we just don’t want to learn anymore. We just want to someone to “take care of it”… someone who knows more about this stuff than us who will do a better job than us. So financial advisor right…? Ez-pz right?
But do they know more? And is it in our best interest?
First of all, who can call themselves a financial advisor? Is there a rigorous 4 year post-graduate degree, internship program, certification, and/or credentialing or something? Is there an “FA” designation to describe this degree so I know this person has the experience needed to “advise me”.
You might be surprised to know that virtually anyone can call themselves a financial advisor. Unfortunately, there is no single certification or “FA” designation that everyone must get. The fact is, anyone can call themselves a financial advisor as long as people trust them enough to handle their money for them.
There are a lot of different certifications which financial advisors may acquire, such as:
CFP® – Certified Financial Planner
CFA – Chartered Financial Analyst
CIC – Chartered Investment Counselor
ChFC – Chartered Financial Consultant
Of these, I think that the CFP and ChFC certifications are probably the most rigorous, requiring the most amount of studying and dedication. The individuals with these certifications are the most likely to be full-time financial advisors and not do much else, and should -hopefully- be the most knowledgeable.
Ok great, so then I should just go find a CFP or ChFC and let him/her take care of it then right?
I am not against financial advisors — I repeat — I am not against the idea of financial advisors or having a financial advisor. However, I am against having a financial advisor and having no idea what he/she is doing with your hard-earned money. Especially when we are considered “whales”.
Whales. Whales? Yes. Whales. Wait… what do you mean Sensei?
To many financial advisors, bankers, and other money-managers, that is what we doctors are. We are golden whales making a ton of money every year. In fact, we make so much money that we wouldn’t notice if we lost of some of it every year. In fact, we probably wouldn’t notice even if a lot of money disappeared every year, as long as it was slow.
I don’t like losing money for no reason. Do you?
Wait, what do you mean losing money?
It is common for financial advisors to charge something called an AUM fee. AUM stands for Asset Under Management and the fee ranges from 1-2% a year. You may think, oh 1%? That’s cheap, take my 10k or so and I just pay $100? That’s the best deal ever. Wrong. It’s $100 now… but what about 30 years from now. Maybe you have $1 million total AUM (hopefully this number is higher, but just for the sake of math we’ll use $ 1 million). However, he/she still gets the 1% which is now $10,000 or $20,000 if he/she charges 2%.
… WHAT? WHY? HOW? That doesn’t seem right…
It’s not right. However, it’s how it has been done for a long, long time. You also need to remember he/she gets this money REGARDLESS of how your funds do. And this is on top of the load or expense ratio of the funds he/she chooses. As you can probably tell, all these fees add up quickly.
Wait what, regardless of how my funds do?
Yes, you saw right.
He/she gets 1-2% of your entire net worth every year whether you made any profit or not. It’s honestly crazy. But what is even more crazy is that people are still ok with doing this.
I think people like to delude themselves into thinking that they made the right (albeit ridiculously expensive) decision. A colleague of mine was referred to an “excellent financial advisor” and had a meeting with him. This financial advisor essentially told my friend that his AUM was 1%, and even went on to state that it was “more than fair.”
My colleague is a smart guy and quickly realized that 1% is a huge amount of money, especially if this particular financial advisor had an “in” with his current group. However, you need to wonder, what about all the other older members of the group…? Are they are all still happily paying an annual AUM fee of 1%? Most of them are older guys prepping for retirement likely with $3-5 million in net worth. So this guy is getting 30-50k from each of these guys for doing… pretty much nothing.
Anyone can be a financial advisor.
CFP and ChFC are probably the most rigorous certifications.
Don’t be someone’s whale.
Do not pay AUM.
More on financial advisors next week.
Spoilers: They aren’t all bad.
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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How do you avoid paying AUM? What investment companies do you recommend that don’t charge AUM?
There are actually two follow-up posts to this one which may help answer your questions. You can find them here and here.
However, the short answer to your question is to use a fee-only financial advisor for consultation purposes and the initial set-up of your finances. Then check-in with them every few years to make sure you are on track. The other method is to simply do it yourself, perhaps with the initial help of a fee-only financial advisor to get you started on the right foot. I try to provide a basic framework on this website to start with. However, the best way to stay up-to-date with things is to read a finance book once a year. In a future post I will list a few good finance books that are aligned with “The Philosophy“. In another future post, after I get some of more information out of the way (Asset Allocation, Rebalancing, etc), I will create a post I call the Simple Doctor Plan which should provide a general roadmap of “Life After Med School” finance-wise. Of course, with any “guide”, everyone’s situation will be different, but I will my best to create a good framework.
Thanks for the comment. If you have any more questions/concerns or advice for improving this site, please let me know.
Thanks for your advice!
PS. I was a radiology resident at Maryland
Ohhhhh… hey Fred. Hope things are going well for you. Thanks for stopping by. If you know of anyone who might benefit from my blog, please let them know. Also, if you have any input for me, please send me an email.
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