What Is a Financial Advisor? How to Choose the Right Fit
By Dr. James M. Dahle, WCI Founder
Many doctors and high-income professionals are unsure if they need a financial advisor. Even if they know they need one, they may be so afraid of hiring the wrong one that they end up doing nothing. In this post, we'll explain everything you need to know to work with a financial advisor.
What Is a Financial Advisor?
The term financial advisor is used so broadly that it is almost worthless. It has no legal meaning, and there is no required degree, certification, or license that you must have to call yourself a financial advisor. A person who calls themselves a financial advisor may do one or more of the following tasks:
- Stock brokering
- Mutual fund sales
- Insurance sales
- Retirement plan sales
- Retirement plan design and implementation
- Financial planning
- Asset management
- Tax advice
- Student loan advice
- Financial coaching
They may also be called a financial planner, wealth manager, investment counselor, financial counselor, wealth management advisor, wealth strategist, or financial mentor.
To make matters worse, many clients need more than one of these services, but they assume that every financial planner can do it all in a competent way, preferably for one low price. The truth is that if you need more than one or two of these tasks, you will almost surely be better off hiring multiple people to do them. For the rest of this post, I am going to use the term “financial advisor” to refer to a licensed financial professional who primarily does financial planning and asset management. However, when you go to hire one, you need to know exactly what they typically do and ensure that what you are hiring them to do is what they typically do.
What Do Financial Advisors Do?
What is it that a GOOD financial advisor does? A real financial advisor helps their client to draft up a comprehensive financial plan. This is a plan that deals with their
- Cash flow
- Debt management
- Financial goal-setting
- Tax planning
- Investment management
- Estate planning
- Asset protection
The advisor will also usually assist with implementing and maintaining the financial plan if the client so desires. This generally results in the advisor then managing their investments on a long-term basis, a service known as asset management. In fact, most financial planners are really just asset managers in disguise. They get paid to bring assets under their control and charge fees on them—not to do financial planning. The financial planning is either done quickly and sloppily using a cookie-cutter strategy or not done at all. This is unfortunate since the financial planning, when done well, is generally far more difficult and resource-intensive. It also tends to add the most value long-term.
Asset management or investment management is simply the process of managing the investments. That means:
- Developing a written investment plan including an asset allocation and a tax location plan
- Reinvesting any existing investment money into the newly designed plan across the various existing accounts
- Taking new money and investing it according to the plan
- Ensuring income from the investments is appropriately reinvested
- Tax-loss harvesting
- Selling and exchanging investments as needed
- Ensuring the client's income goals are met
Financial Advisor vs. Financial Planner
We've already discussed that the term “financial advisor” really doesn't mean anything specific. But if you assume most financial advisors do both financial planning and investment management, then a financial planner would, by definition, simply do the financial planning piece. They would not do any investment management. They may help the client draft up an investing plan and tell them what to invest in, but the client would need to physically go out and buy the investments.
What Is a Fiduciary Financial Advisor?
The word fiduciary means that a professional has a duty to you to protect your money. Essentially, a fiduciary is legally required to put the client's financial interests ahead of their own. Obviously, you want a fiduciary financial advisor. Any advisor not willing to sign a written agreement to act as your fiduciary is a person to avoid. However, the term is still problematic.
First, many of those who call themselves financial advisors do not have any fiduciary duty to you whatsoever. A mutual fund or insurance representative/agent/salesperson has no fiduciary duty to you. They operate under a “suitability standard,” which basically means they just have to determine an investment or insurance product is “suitable” for you. An investment or product may be more costly or pay them a higher commission than another product that would be better for you, but it is still legal for them to sell it to you. A fiduciary standard would mean they are recommending the best possible product for you.
To make matters worse, many people who call themselves fiduciaries—or even have a legal duty to act as your fiduciary—simply do not do it. This may be due to them acting unethically on purpose to make more money off of you. More likely, it's due to their own ignorance. When the only education and training they receive comes from their insurance company about the products of their insurance company, what do you suppose they are going to recommend to you? Two quotes from neurologist and financial theorist William J. Bernstein, MD, come to mind:
“Brokers service their clients the same way Bonnie and Clyde serviced banks.”
“If you act as if every broker, insurance salesman, mutual fund salesperson, and financial advisor you encounter is a hardened criminal . . . you'll do just fine.”
Even those advisors who are supposed to have a legal fiduciary duty to you, those who are a Registered Investment Advisor (RIA), or those who carry a Certified Financial Planner (CFP) designation often do not act as though they do. Even worse, many “advisors” wear two hats: a fiduciary hat and a salesperson hat. However, they never tell you when they are switching from one to the other.
So yes, any financial advisor you hire should be a fiduciary financial advisor. Just recognize that doing so requires a lot more than just asking them if they are a fiduciary. You should do that, but that should be just the beginning of your determination of whether they will actually act in your best interests.
Do I Really Need a Financial Advisor?
Given the warning above, many readers are now asking themselves if they really need a financial advisor at all. The answer for many of them is no. I function as my only financial planner and investment manager, and I have been doing so successfully for nearly two decades. I have no doubt that I am doing a better job than 99% of the advisors out there. I think it is relatively easy to do a better job than 95% of the advisors out there, because the majority of them are simply salespeople masquerading as advisors. However, my opinion is that 80% of high-income professionals would benefit from hiring a REAL financial advisor who gives good advice at a fair price.
Can I Be My Own Advisor?
Given the high costs of hiring a financial advisor, being your own financial advisor is almost surely the best-paying hobby you could possibly have. For the hobbyist, it is fun to learn about investments and to do the chores of financial planning and investment management. If the idea of rebalancing your own portfolio is appealing to you and if you have voluntarily read a dozen books about financial topics, this is probably a great option for you. However, you should be careful. Author and psychologist Phil Demuth put it best when he said:
“The main advantage of self-management is that it is much cheaper if you do the work yourself . . . Naturally, there is a price to self-management as well. For one thing, your advisor might be an idiot. If you manage your own money, you are potentially vulnerable to every crackpot investing idea that comes along. It only takes one.”
If you are going to be your own financial planner and investment manager (and there are good reasons to do so), put in the time, effort, and energy to learn to do it right on an ongoing basis. Realize this is not an either/or decision; you can hire an advisor to help you draft up the plan and then you can implement and maintain it. Or you can check in periodically with an advisor to make sure you're still on track for your goals. Just because you use an advisor sometimes doesn't mean you have to rely on the advisor for everything. Here are some reasons to consider functioning as your own financial advisor:
- It will save you a lot of money
- You won't rip yourself off on purpose
- You won't have to learn to recognize a good advisor
- You don't have to spend time looking for an advisor, evaluating your advisor, and finding a new advisor
- You won't have to spend time meeting with your advisor
- You only have to learn the stuff that applies to your life
- You don't have to prevent investment misbehavior
- You'll pay more attention to your financial life
What Are the Benefits of Having a Financial Advisor?
There are certainly costs to hiring a financial advisor. The key to knowing whether to hire one is to determine whether the value of the advisor to you is more than the cost of hiring them. There are studies out there that try to quantify the value of the advisor. These studies concluded that an advisor is worth 1.6%-3.0% per year. The studies, despite being done by otherwise reputable companies (Vanguard and Morningstar), had significant flaws discussed here in this post on The Value of an Advisor. The truth is that you really don't care what the value of an advisor is to the average investor. You care about what the value is to you, and that depends an awful lot on you.
If you don't know much about financial planning or investing and have little interest in learning, the odds are extremely high that a high-quality financial planner can add more value to your life than their cost. These are an advisor's best clients. They are adding tons of value.
If you know something about financial planning and investing and are willing to learn more but sometimes need motivation and assistance doing the actual chores of investing, an advisor can certainly add value. It's not going to be nearly as much as someone in the previous situation.
If you're a financial whiz and just want someone to do the chores of investing for you like you hire someone to mow your lawn, it's going to be tough for that person to earn the fee they are likely to be charging under most compensation models.
The primary benefits of a good advisor are the following:
- Knowledge: They actually know how to do financial planning and investing. This is valuable knowledge, and if you don't have it as an investor, you would be wise to hire someone who does.
- Motivation: When it comes to financial planning, there are some things that have to be done. Accounts have to be opened, professionals have to be met with, goals have to be set, phone calls have to be made, money has to be earned, and budgets have to be made and actually followed. An advisor can provide that motivation.
- Hand-holding: Many investors have trouble sticking with an investing plan in a market downturn. Just avoiding selling low during one severe market downturn late in the accumulation phase of your investing career may pay for decades of advisory fees. If you can't stay the course without an advisor and the use of an advisor allows you to do so, that's extremely valuable.
- Chores: To be a successful investor, there are certain chores that must be done. Buy and sell orders have to be entered into a computer by somebody. Calculations have to be made. Spreadsheets and records have to be made and maintained. Portfolios have to be rebalanced. Someone has to check if it is time to tax-loss harvest and then actually do it. Forms have to be filled out and sent in. Somebody has to do this stuff. When you hire an advisor, they can do the lion's share of it for you.
Note that I did not put the ability to predict the future, time the market, or beat the market on this list. While that is a reason that some people hire an investment manager, it's a bad idea. Nobody does these things consistently in the long term, so spending your time looking for someone to do it is a fool's game. Lots of advisors justify their fees with suggestions that outperformance will more than make up for their costs. Don't count on it. Hire an advisor to help you avoid doing anything stupid rather than to try to beat everyone else. You're far more likely to get scammed if you're looking for that, because only dishonest and incompetent advisors will even suggest they can do that—and nobody will promise it to you in writing.
When Should You Get a Financial Advisor?
If you need a financial advisor, the earlier you get one, the better off you will be. For a typical doctor, that time is usually during residency. A graduating medical student or intern has three major financial chores:
- Get disability insurance (and life insurance if anyone else depends on their income, too)
- Ensure they have a solid student loan plan
- Learn to live on a budget
You'll need an independent insurance agent for the first chore and may need a student loan specialist for the second. But if you can accomplish all three of those without a true financial planner, then you probably do not need an advisor yet. However, by the time you are approaching the end of residency, it's time to either start acting as your own financial planner and investment manager or to hire one. You certainly want a solid financial plan in place by the time you graduate from your training so you can hit the ground running when you start earning those attending paychecks.
How Much Does a Financial Advisor Cost?
My mantra when it comes to financial advisors is to get good advice at a fair price. A fair price is a four-figure amount per year. Yes, financial advice is expensive stuff. It will cost less than your mortgage but maybe more than your groceries. Certainly more than your cell phone bill.
How Do Financial Advisors Make Money?
Financial advisors are paid using one or more of four methods of compensation. These four methods can be broadly divided into commissions and fees. Fee-based means they charge commissions and fees. Fee-only means they charge only fees. It's important to know the difference, as I only recommend you get advice from fee-only advisors. There is another model out there you may hear about called “advice only.” This is a fee-only method where an advisor only gives you advice; they don't get paid to offer you any services. They just tell you how to do things. This is a lower level of service than many prefer, even if it is a very pure way to pay your advisor.
Each method of payment has its own conflicts of interest, and it is important to understand what they are.
Under this model, an advisor is paid when and only when they sell you something. This form of payment is called a commission. It isn't necessarily evil; this is how lots of salespeople get paid, and every product and service out there has to be sold by someone. When you buy a car from a dealership, that salesperson is trying to make a commission from you. However, the difference between going to a car dealership and a financial advisor is that you don't expect an honest answer to questions such as the following:
- Should I buy a car?
- Should I buy a car from you?
- Is this car a good deal?
The answer to all of those is always going to be yes, yes, and yes. It's like asking a barber if you need a haircut. It's fine to buy insurance from an insurance agent, and it's fine for them to earn a commission for selling it to you. But paying insurance commissions is a terrible way to pay for financial advice. If the agent is getting paid to sell and not to advise, they're going to sell and not advise. Even the best, most moral person on the planet cannot resist that conflict of interest.
Some investments are also sold by commission. Unfortunately, these are usually the worst investments. The worse the investment (or insurance product), the more the company has to pay the agents to get the product sold. So, the agents are incentivized to sell you the worst possible investment and insurance products. This is a bad setup, and I don't think it can result in high-quality financial advice. Commissions on mutual funds are called loads, and you may be presented with the option to pay the load up front, pay the load when the investment is sold, or pay the load as you go along. What they won't tell you, of course, is that you don't pay any load at all if you buy index mutual funds and ETFs directly from Vanguard, Fidelity, Schwab, or iShares.
#2 Asset Under Management (AUM) Fees
The other three methods of paying an advisor are fee-only methods. If commissions are my least favorite way to pay an advisor, an AUM fee is my second-least favorite. An AUM fee is simply a percentage of your investments that you pay to the advisor each year. While this is good in that it incentivizes the advisor to grow your assets, it's bad in that it incentivizes the advisor to recommend against anything that might reduce the size of your nest egg under the advisor's management—such as paying down your student loans or mortgage; investing in real estate; or, heaven forbid, spending on something fun. An advisor paid on AUM tends to become an asset gatherer. They're not paid to perform; they're paid to gather. They gather assets by talking you into earning more, saving more, and referring your friends to them.
An AUM fee is a perfectly acceptable way to pay for financial advice. It might even be the most common method of paying for advice among real, fee-only advisors. The AUM fee dilemma comes in when you start becoming more wealthy. The industry average AUM fee is around 1% per year. If you have a $100,000 portfolio, that works out to be $1,000 per year. I told you above that a fair price for financial advice is a four-figure amount per year—$1,000-$10,000. Obviously, $1,000 is a screaming deal. However, what about when you have a $10 million portfolio? Now that 1% AUM fee is $100,000 per year. That's a massive rip-off.
With an AUM fee, you have to do the math. As your assets grow and your fee starts to approach $10,000 per year, you need to start negotiating a lower fee. And when I say lower, I don't mean 0.9%. I mean, maybe 1% on the first $500,000 and then perhaps something like 0.25% after that. If your advisor is not willing to bring those fees down significantly as your assets grow, you need to find another advisor that will. Better yet, you can find one that charges by using one of the next two methods we will discuss.
If you don't get those fees down, your financial advisory fees can actually cost you millions of dollars. Consider a doctor saving $50,000 per year and earning 8% a year before fees. If that doctor is paying 2% a year in advisory fees, the nest egg will grow to just $4 million instead of $5.7 million. That financial advisor cost $1.7 million! If the doc had simply paid $5,000 a year for advice (and invested only $45,000), they would have ended up with $5.1 million. One percent or 2% seem like small numbers, but those small numbers add up over time. You could even end up paying more for your financial advisor than for your house.
With an AUM fee, they charge you a fee for investment and then throw in the financial planning for free. That can also result in substandard financial planning.
#3 Flat Fees
Flat fees are a great way to pay for both financial planning (i.e., a few thousand dollars to develop a financial plan) and for asset management (a few thousand more per year to manage the assets). The downside? The advisor has no incentive to get you to save more or to get your money growing faster. They are also incentivized to spend as little time with you and your accounts as necessary. The upside is that you know your costs upfront and the advisor knows their revenue upfront, so there are no mysteries or surprises. You also tend to get a very fair fee, which is why I like this model.
#4 Hourly Fees
A few advisors also work on an hourly basis. These tend to be strict financial planners, although some will also charge you hourly fees as they implement and maintain your investment plan. While this hourly rate is often more than you make, this can still be the least expensive way for you to obtain advice. These fees tend to range from $200-$600 per hour. But even if you use 20 hours, that might still only be $8,000 per year, less than you would pay on a $1 million portfolio at 1% per year. The incentive is for them to spend more time than they need to with you, but that's not different from your accountant or lawyer.
What Are Typical Financial Advisor Fees?
Typical financial advisor fees vary by the method of compensation.
#1 Commissions: 3%-9% of the money invested in loaded mutual funds, 50%-110% of the first year's premium for life insurance products, 1%-8% of the money invested in an annuity.
I don't like seeing you pay for advice via this method at all.
#2 AUM fees: 0.5%-2% per year ($5,000-$20,000 on a $1 million portfolio, $25,000-$100,000 on a $5 million portfolio)
I want you to do the math and ensure the total paid is less than $10,000 per year.
#3 Flat fees: $1,000-$5,000 for a financial plan, $2,000-$15,000 per year for investment management
Again, I want to see you paying less than $10,000 per year.
#4 Hourly fees: $200-$600 per hour
Expect to pay more in the first year but certainly less than $10,000 per year in an ongoing way.
Are Financial Advisors Worth It?
Again, you have to compare the cost you are paying to the value you are receiving. For the right person, even a relatively expensive advisor may be worth it. But many hobbyists will conclude that even an advisor charging a very fair price cannot provide them with enough value to justify the fees. There is no fee low enough for bad advice either. Frankly, most who call themselves advisors aren't giving good advice, and of those who are, the majority are charging too much for it. If you can get the same advice and service elsewhere for less, I would encourage you to do so.
What to Look for in a Financial Advisor
Once you have decided you need (or want) a financial advisor, you want to make sure you are getting good advice at a fair price. We have discussed what fair price means above. That is actually the easier of the two tasks. The more difficult one is to make sure you're getting good advice. In many ways, by the time you know what good advice looks like, you know enough to do it yourself. There are six aspects of a financial advisor that you will want to explore. While you may be looking for the best and most perfect financial advisor, chances are good that you won't find one, especially if you also want one that lives and works in your local area.
#1 Appropriate Method of Payment
Believe it or not, your first task is to choose an advisor who charges via an appropriate method. In other words, a “fee-only” advisor. You're trying to avoid hiring a salesperson masquerading as a financial advisor. You might think this would be an easy task. It really isn't; 95% of those who call themselves financial advisors are actually salespeople, at least part of the time. You don't even have to talk to an advisor to figure this out. If you can't figure it out from their website, check out their government-mandated disclosure form, the ADV2. What you're looking for is in Section 5. Might as well check out sections 4, 8, and 9 while you're there.
#2 Services Offered
The next aspect to consider is what services the firm is offering. The idea here isn't that a firm offering a certain set of services is better than another firm. The idea is to match what you need done to what the firm offers. If you just need financial planning and the firm primarily does investment management, that's not a very good match, and it is going to lead to frustration. Likewise, if you really want help with your student loan management and tax strategy, a firm that does not do those things in a meaningful way is not going to be a good fit.
You would be surprised what some financial advisors believe about the correct way to invest, especially given the amount of evidence out there supporting the use of a fixed-asset allocation that's periodically rebalanced and composed primarily of low-cost, broadly diversified index funds. If I were hiring a financial advisor, I would want that person to be familiar with the academic literature and to actually be doing what it recommends. If they're using a bunch of actively managed mutual funds or, even worse, picking stocks themselves, I don't want anything to do with them. The same goes if they're recommending market timing, massive use of leverage, options trading, or a heavy dose of alternative, difficult-to-understand investments. Some advisors like to use complex portfolios. It makes what they are doing seem harder and more mysterious, but that doesn't mean it helps you reach your goals any faster. If your advisor likes to make you think investing is difficult and complicated, that may not be the advisor for you, especially if they actually believe that. Still, it's hard to say which is worse: incompetence or deceit.
#4 Professional Approach
If I were going to hire a financial advisor, it would be a professional, someone who has decided that this is what they are going to do with their career. I don't want someone who was selling used cars last year and will be selling appliances next year. I want someone that will be with me for the long term and will be keeping up to date with the field. Plus, they will have acquired sufficient credentials to convince me that they are serious about their career. In my opinion, there are four serious credentials in this field that I find meaningful:
Chartered Financial Analyst (CFA)—This is a difficult-to-obtain designation, requiring the passage of three difficult tests, approximately 750 hours of study, and three years of experience. Few financial advisors have this designation; it's far more common among mutual fund and pension managers. But when they do have it, I find it impressive.
Certified Financial Planner (CFP)—This is the most common of the meaningful designations. It requires the passage of a test that takes about 200 hours to study for as well as three years of experience.
Chartered Financial Consult (ChFC)—Think of this as a CFP for insurance agents. When someone goes from the insurance field and wants to add financial planning and/or investment management to the services they offer, this is the designation they often get. The curriculum is a little longer than the CFP curriculum, but there is no requirement to pass a test. It has a three-year experience requirement, but just like the CFA and CFP, that requirement can be met with a sales job. The downside of an advisor with this designation is there is a very good chance they are paid on commissions, at least partially. So you really need to dive into the method of payment of an advisor with this designation.
Certified Public Accountant/Personal Financial Specialist (CPA/PFS)—Think of this one as a CFP for accountants. When an accountant wants to add financial planning and investment management to their practice, they get a PFS. The curriculum is very similar to the CFP. There is an exam and a similar experience requirement for the designation. I like the idea of a financial advisor having a tax background, so I think this is a pretty good pathway into the financial advising field.
Remember there is no guarantee that someone with one of these designations is a great financial advisor. There are plenty of salespeople out there with CFPs. But all else being equal, I prefer to see one of these meaningful designations, as it suggests they are taking a more professional approach to their career.
If all else is equal, I prefer an advisor with more experience to one with less. A little gray hair goes a long way. Just like patients worry when they realize their doctor is only 25 or 30, perhaps you should too when your advisor is fresh out of college. I prefer to see advisors who have been giving financial advice at least during the last bear market or two. They are likely to have a more skeptical, conservative approach to the latest asset bubble. That said, many older financial advisors started working under a sales model or an overpriced AUM model and are still doing it. Be sure to check on that first.
Aside from the fit between the services offered and the services needed, you also want a solid fit between you and the majority of the advisor's clients. If all their clients are multi-millionaires in their 50s and you are 31 with $300,000 in student loans, that isn't a good fit. Likewise, if all their clients are small business owners and you are an employee physician, that might not be a good fit either. You also want someone you get along with well, since you're going to be spending a lot of time together and since they are certainly going to become intimately familiar with a lot of relatively private details in your life. They do not necessarily need to live near you. Especially in today's Zoom age, there's no reason you can't work with an advisor by phone, email, text, and videoconference. In fact, chances are good you'll get better advice and a lower price if you're willing to consider advisors from all over the country. What are the odds that the best advisor for you lives in your city? Probably not that high.
Financial Advisor Requirements
The actual requirements to be a financial advisor are surprisingly minimal. It's a pretty low bar to get over. While the term financial advisor has no legal meaning, most people using the term have, at a minimum, a license to recommend securities. These licenses require the passage of tests, but the material that is tested on these tests has more to do with legalities and compliance than it does any financial knowledge useful to the clients. These tests/licenses include the following:
- Series 6 License: This is a securities license. The test is administered by Financial Industry Regulatory Authority (FINRA). This one allows an advisor to sell mutual funds and annuities. It is a 100-question, 135-minute test that candidates typically study about 50 hours for.
- Series 7 License: This is the general securities license. Also administered by FINRA, the Series 7 allows the advisor to sell individual stocks, bonds, options, and futures. It is a 135-question, 225-minute test that candidates typically study about 90 hours for. Think of Series 6 and 7 as an either/or—an advisor does not need both in order to be in business.
You have to be sponsored by a registered firm to take either the Series 6 or Series 7 exam. If a candidate does not already have a job with a sponsoring firm yet, they may take a test called the Security Industries Essentials (SIE) exam, which covers some of the material on the Series 6 and 7 exams. This exam is not required to be licensed, though. It is an 85-question, 105-minute exam that candidates typically study about 35 hours for.
- Series 3 License: This is an optional license but is required if you want to sell real estate, commodities, or insurance. It is a 120-question, 150-minute test that candidates typically study 70 hours for.
- Series 63 License: Every state requires a Series 63 license in addition to either the Series 6 or Series 7 license. It is a short test (75 minutes) on regulatory minutiae, but it is required to do business within that state. It is a 60-question, 75-minute exam that candidates typically study about 35 hours for.
- Series 65 License: This license is required by states for fee-only advisors only. Commissioned salespeople are not required to have it. It is also about rules and regulations like the Series 63, particularly those specific to fee-only advisors, and may be waived for those with a CFA or CFP. It is a 140-question, 180-minute test that candidates typically study about 60 hours for.
- Series 66 License: This license allows an advisor to register as a Registered Investment Advisor (RIA). This allows them to act as a fiduciary. It is a 100-question, 150-minute test that candidates typically study about 60 hours for.
The bottom line is that someone interested in being a financial advisor can be licensed to do so with as little as 50 (Series 6) + 35 (Series 63) = 85 hours of studying. About two weeks of full-time work. Even a maximally licensed advisor only had to study for 90 (Series 7) + 70 (Series 3) + 35 (Series 63) + 60 (Series 65) + 60 (Series 66) = 315 hours. About two months. Don't mistake this training for the equivalent of an MD. Even if you tack on a CFP (200 hours), you're still really only talking about three or four months of studying. Including classes in Biology, Chemistry, and Physics, a typical doctor spent five times as long just studying for the MCAT. There is no college degree requirement (although many do have a degree in a finance-related field), and there is no requirement for practical experience to actually be licensed. Firms are required to do a background check before hiring a new advisor, so the likelihood of an advisor having a criminal record is actually pretty low.
How to Find a Financial Advisor
Where can you find a good financial advisor? Well, that question is actually pretty easy to answer, thanks to the work we have done here at The White Coat Investor. We have maintained a list of recommended financial advisors for years now. Aside from the initial vetting we do (most applicants are turned down) via an application process, they are continually vetted by the white coat investors using them. If we get multiple complaints about an advisor, they are removed from the list. Yes, each of the advisors on the list pays advertising fees to be there, so we have a conflict of interest. But we have plenty of advisors; there is no need for us to lower our standards to get more on the list.
All of the advisors on the list are fiduciary, fee-only advisors. However, they all charge by using different methods. Some charge AUM fees, some flat fees, and some hourly fees. Many use a combination of two or three of them. Do not assume that just because they are on our list that we think their fees are fair for clients at every level of assets. Particularly with the AUM-charging advisors, as your level of assets rises, we still expect you to negotiate those fees to ensure you are still paying a fair price.
We cannot guarantee that we have someone on that list who is local to you. Since the COVID-19 pandemic, we've all learned to work well with people via Zoom, so hopefully, this is not a problem. But if it is really important to you that you have someone you can sit down across the table from, you may have to look beyond the list. You should still find the list useful because it will show you what a good advisor looks like and how they charge for their work. You can even use our application process while doing your due diligence on an advisor. FINRA also maintains a list of advisors. The Garrett Network keeps a list of hourly rate-only advisors. Blogger Harry Sit helps investors to find an advice-only advisor for an additional fee.
How to Choose a Financial Advisor
The key to choosing a financial advisor is to know what you're looking for. It's a lot like picking a doctor in some ways. You want the “Three A's”:
There are lots of excellent advisors I know that aren't on my list simply because their practices are full. They don't want more clients, and they certainly aren't going to pay us to send them more. The greatest advisor in the world isn't going to do you any good if you can't get in to see them. Likewise, while their competence may be the most important thing, nobody wants to work with a total jerk who doesn't seem to care about them.
I would start with our recommended list of advisors, but feel free to add anyone you like to the list. Just be very careful adding a family member or friend. While they may be fine, they're particularly hard to fire if you don't like how it's going. While there is a rank list at the top, remember those are the premium listings, not necessarily a rank list of the best advisors. Every advisor on that page meets our criteria of giving good advice at a fair price. Read the listings of each of the advisors, particularly the “additional information” page.
If you are already a millionaire or multimillionaire, you may not want to consider the advisors who primarily charge via AUM fees, since you'll have to negotiate those down to make sure you're paying a fair price. You will still find plenty of advisors charging hourly fees and flat fees. If you are really just looking for short-term services, i.e. an advisor to help you set up a financial plan and then teach you enough to do it yourself, realize that most of the advisors on that list do not offer that service/philosophy. Only a few do. The more you know what you're looking for, the faster this process will go.
Try to cull your list down to five or fewer advisors. Now compile the list of questions you want to ask them. You can find many of the answers on their website and their ADV2. A quick email may find the rest. Now you should have a very short list of advisors to actually interview. Pick the one that you seem to fit best with, and be sure to send us feedback about them after you've worked with them for a while.
Questions to Ask a Financial Advisor
Consider asking all of the following questions to your potential advisor. Add questions of your own to the list. Some questions have correct answers; others do not. I have tried to include the “correct” answer where applicable.
How do you make money? Correct answer: Only from fees paid by clients, but it may be AUM, flat fees, or hourly.
Will you be acting as my fiduciary? Correct answer: Yes
Do you have any of the following designations: CFA, CFP, ChFC, CPA/PFS? Correct answer: Yes
How many other clients do you have in a similar situation to mine? Correct answer: More than a dozen
What is your investing philosophy? Correct answer: Should emphasize passive investing, keeping costs down, low turnover, long-term perspective.
What services do you offer? Correct answer: Should match the services you are looking for.
What percentage of your clients own whole life insurance? Correct answer: Should be in the single digits
What percentage of your clients do Backdoor Roth IRAs? Correct answer: Should not be in the single digits
Have you ever had any disciplinary action from regulatory authorities? Correct answer: Should match what the ADV2 shows. This is really an integrity question. Most advisors can honestly answer no, so a yes answer needs to be carefully investigated.
How often will we meet, and what reports should I expect from you? Correct answer: Should match what you are looking for. Some clients expect more communication than others.
May I see sample portfolios from a couple of your clients? I would like to see the portfolio from five years ago and from now. Correct answer: The portfolios should be mostly composed of index funds, and there should not be wholesale changes from five years ago.
May I see what is in your portfolio? Correct answer: It should look somewhat similar to that of the clients.
May I speak to your last two clients that left or were fired from the practice? Why did they leave? Correct answer: They left because they felt they no longer needed an advisor, not that this advisor was too expensive or was giving bad advice. This is a GREAT way to do due diligence, but the clients may not be willing to participate, and you can't really hold that over the advisor's head. If you can get this information, take advantage.
I hope this article helps you know how to find the best financial advisor for you. If you would like to start your search with a vetted list of the best physician-focused financial advisors out there . . .
What do you think? Do you have a financial advisor? What made you choose them? What questions would you ask a potential advisor? Comment below!