Financial Planning For Resident Physicians, Item #6 Getting Help

This is the seventh article in a series dedicated to helping the resident physician take steps to put their house (financial and otherwise) in order. My previous articles on the subject may be found here.

If you’re going to get help, choose wisely.

Financial planning can get complicated. But you’re also a smart person. I believe that people with enough time and desire can learn how to do pretty much anything on their own. The question is: do you actually want to?

There’s nothing wrong with outsourcing things in life that we don’t like or don’t have the time to do. Some of you will choose to handle your financial affairs completely on your own. I salute you. Others will choose to find some help. For those who do, I have some bad news: Good advice at a fair price can be hard to come by.

If you’ve determined that seeking help and financial guidance is in your best interest, consider the following three questions:

  1. How is your advisor paid?

  2. How is your advisor educated?

  3. How does your advisor do business?

How is your advisor paid?

This is the single most important question you can ask your advisor. It will reveal a great deal about the kind of relationship you can expect to have from them.

Commissions

You should avoid financial salespeople. These are individuals who are paid on commissions for selling a product. Don’t be surprised if you get a phone call (or a lot of phone calls/emails/texts) from people who identify themselves as “financial advisors.” You shouldn’t be surprised if they tell you that one of your friends, co-residents, or an attending at your hospital recommended that they call you. They’ve been trained in these tactics because you are more likely to say “yes” to a meeting if they can say that someone you know recommended that they call you. Do yourself a favor and ask your friend if they actually made that recommendation, or if they caved to pressure from the “advisor” to give them a name and phone number.

Don’t do business with people who provide “free” advice. That should be a red flag. Free advice is provided by people who are hoping that you will buy something from them. The advice is “free” because it leads to a product sale, and the product earns them a commission. If they don’t get paid unless they sell you a product, do you think they will be able to provide objective advice?

Assets Under Management

Should you pay 1% for assets under management? Some financial advisors are paid by a fee extracted from the investments that you let them manage. For example, if you have a $100,000 account, at 1% you will be assessed $1,000 per year for investment management and hopefully, financial planning. When your account grows to $500,000 you will be charged $5,000 per year for the same financial planning and investment management. How about when your account is at $1,000,000 or $2,000,000? Do you think you should be paying tens of thousands of dollars for investment management and financial planning?

Advisors who are paid based on investments under management are incentivized to be asset gatherers. Because of this, incentives can exist that make it hard for them to provide unbiased advice. What if you want to take a large sum of money from your investment account to buy your dream home? What if you’d like to take a portion of your nest egg to purchase investment real estate? Will your advisor be able to easily provide unbiased advice when it means that their pay could be significantly reduced, even if it’s in your best interest?

For you residents, you likely don’t have any money to invest at all. But you may really want some good advice. For advisors who are paid based on your investments, this is a real problem. You might find a lot of financial advisors are willing to meet with you to “establish the relationship,” after which they will ask you how much you have to invest. Once you reveal that you’re a resident making little more than a high school teacher’s salary, they’ll offer you a smile, a few tips, and then show you the door with an invitation to come back once you have money to invest.

Hourly and Flat Fee Only

Hourly financial advisors will send you a bill for the number of hours it takes them to solve your problem. Especially for DIYers or people who are headed in that direction, but just need a professional to look things over, an hourly rate can make a lot of sense. Alternatively, flat fee only, and advisors who are paid on an annual retainer, offer their financial planning and investment management services to clients for a single, or tiered, flat fee.

Because these advisors aren’t paid on commission, they aren’t incentivized to sell you something that you may or may not need. They can help you review and obtain the best products for your given situation. Because they aren’t paid based on your investments under their management, they can offer you unbiased advice that may reduce the amount of money in your investment account, but still be in your best interests.

How is your advisor educated?

You will want to work with a “fee only” financial advisor (not commission, or even “fee based”) who adheres to a fiduciary standard of care and has some industry-leading credentials like the CFP®️. Other marks of education worth keeping an eye out for are the ChFC®️, or a master’s degree in financial planning.

Remember, credentials like the CFP®️ and ChFC®️ should be treated as minimum thresholds of education. If you advisor does not have any, you should be asking why not. Would you have surgery performed on you by someone who isn’t an MD? Would you let someone represent you before a judge and jury who hasn’t earned their JD?

Treat valid advisor designations the same way.

How does your advisor do business?

Is your financial advisor a good listener? Do they share similar life values that align with your own? Do you trust them? Do they do the work that you want them to do for you? For example, are you looking for student loan planning advice, but your advisor seems to only talk about life insurance or how they would invest your money?

Do you sense that they are honest? As I mentioned earlier, financial planning is complicated and there are new developments happening all the time. An honest advisor tells you when they don’t know something. And that’s okay because good advisors know how to find the answers.

Bottom Line.

If you’re looking for advice, make sure that you get it at a fair price. Understand how your advisor gets paid and make no mistake about it—there is no such thing as “free” advice. Determine how your advisor has been trained and be wary if they don’t hold leading industry credentials. Lastly, make sure that the way your advisor does business aligns with your values and what is important to you.

Happy travels.

Disclaimer:

These are my opinions, unless I’ve specifically cited other material. The information and ideas I’ve presented are for information purposes only. Before you implement anything, make sure you have a thorough discussion with a qualified professional who understands your situation.


Donovan Sanchez