Q. Is there any value to hiring a financial adviser?
Explore This IssueACEP Now: Vol 36 – No 02 – February 2017
A. Many emergency physicians wonder if they should spend their hard-earned money on financial advisory fees. The answer to this question, like much in life, is, “It depends.” The key is comparing the value received from the adviser to the price you pay the adviser. When hiring a financial adviser, it is absolutely critical, despite the difficulty of doing so, that you get good advice at a fair price.
Many doctors hire a financial adviser because they are too busy and would rather pay someone else to deal with the hassle. The impression might be that it isn’t worth the doctor’s time and is similar to hiring someone to take care of the lawn and clean the house so you can spend your time making the big bucks practicing medicine. Unfortunately, the truth is that doing financial planning and managing your investments is likely the very best use of your time.
Consider a typical financial advisory relationship for a doctor. Perhaps the doctor is paying an “industry standard” 1 percent of portfolio assets to the adviser each year and has a portfolio worth $2 million, so the cost of the advice and service is $20,000 per year. Particularly after the initial financial planning and setup of the investments and investment accounts, the adviser may only be spending five to 20 hours a year dealing with this physician’s investments. By doing that without an adviser’s help, the doctor would be “earning” (saving) $1,000–$4,000 per hour, and that’s an after-tax figure! I know many emergency physicians make good money, but I don’t know any doing that well. Perhaps the most important reason many physicians choose to be their own financial planner and investment manager is the substantial cost of hiring someone to do it for them, especially considering the ease of doing so compared to learning to practice medicine safely. You see, whereas an emergency physician needs to know almost everything about emergency medicine and a competent, experienced financial adviser ought to know almost everything about financial planning and investing, if you are functioning as your own adviser, you need only understand the portions of personal finance, investing, and the tax code that actually apply to you, which is a small fraction of what an adviser needs to know.
Just because real financial advisers are very expensive, many advisers are actually commissioned salespeople in disguise. Chances are good that competent, low-cost advisers can provide more value than their cost, especially early in your career.
Even after the plan has been designed and implemented, the adviser serves another important function: helping you stick with the plan.
First, consider the costs. There is little reason to pay the “industry standard” or “average” level of fees given how many good advisers out there are willing to do it for less. Many advisers working under an Asset Under Management fee model will work for less than 1 percent, especially as the size of your portfolio grows. However, you can also simply pay an hourly rate for your initial financial planning and investing plan design and then a flat, relatively inexpensive (a few thousand dollars per year) ongoing asset-management fee. If you are spending a five-figure amount on advisory fees each year, chances are very good you can lower your cost while maintaining or even improving the quality of your advice, service, and after-fee investment performance.
Second, consider the many ways in which an adviser can add value. The most useful thing an adviser can do for you is to help you develop an initial financial and investment plan. That means educating you on what matters when it comes to finances, helping you better define your goals, and generating a written plan on what you should do with the money you have now and will earn in the future in order to maximize your happiness and reach your goals. Even after the plan has been designed and implemented, the adviser serves another important function: helping you stick with the plan. Investors, especially physician investors, are notorious for performance chasing and behavioral biases that cause self-inflicted financial catastrophes, such as buying high and selling low. In addition, the adviser can function as a financial coach, reminding you of your goals and encouraging you to save enough of your income to reach them. Of course, the adviser also takes care of the necessary portfolio chores, such as opening accounts, typing buy and sell orders into the computer, and generating periodic reports about asset allocation, investment performance, and progress toward goals. Finally, an adviser provides an important backup function. For most couples, one person is far more interested in personal finance than the other. The presence of an adviser provides a bit of insurance that if something happens to the interested partner, the financially naive partner will have someone to ensure the finances are managed in some reasonable way.
Each of these functions that a competent, low-cost adviser can provide has significant value. However, that value is different for every investor. For an investor who already has a written financial and investing plan and has the interest, knowledge, and discipline required to maintain the plan, that value is likely to be much lower than the substantial cost. However, an investor who has none of those things can easily justify paying significant fees to a financial adviser as money well spent.
Even the least competent physician investor who desires to fully rely on a full-service financial adviser needs to learn a few things. These include understanding what a fair price is for advice as well as learning what high-quality financial advice and portfolio management look like. I know of no better way to find out whether your adviser is giving you good advice than to go get a second opinion from another experienced, fee-only adviser at a separate firm. That second opinion may be the best financial advisory fee you will ever pay.
In summary, a competent, low-cost adviser can provide substantial value, but whether that value is more than the price depends both on the price and on how ready and willing you are to function as your own financial planner and investment manager.