As a doctor, you will get many offers for financial advice. See what you should know before deciding on an adviser.
Q: As a fairly new (2 years in practice) family physician, I’m receiving many solicitations from brokers and financial advisers. Can you explain the differences between the various kinds of advisory services and the pros and cons of each?
A: The first question to ask yourself when hiring financial expertise is what exactly you want the adviser to do. Answering that question often requires you to do at least a little self-education first. Common financial tasks for which new physicians often hire professionals include developing a financial plan, managing investments, buying insurance, developing an estate plan, providing advice on lowering your tax bill, preparing your taxes, developing an estate plan, and developing an asset protection plan.
After you’ve determined what services you are seeking, you can hire the appropriate person to provide them. You would buy disability insurance from an insurance agent, have your investments managed by an investment manager, have your taxes done by a certified public accountant, use the services of an appropriately specialized attorney to draw up an estate plan, and so on.
Many physicians benefit from using a financial adviser, but at the same time, it’s important to understand the ways in which financial advice may be biased. A useful way to determine the probability of bias is by understanding how the adviser gets paid.
Let’s look at investment management services as an example. A commissioned sales agent (whether using the title of broker, insurance agent, financial planner, or financial adviser) is incentivized to sell products that are good for the agent and his or her company but not necessarily good for you. An investment manager paid as a percentage of assets under management is incentivized against anything that would cause you to withdraw money from your account-such as investing in an account the agent doesn’t manage, paying off debt, or simply spending it on something you do for personal pleasure.
An adviser paid on an hourly rate is incentivized to spend more hours than necessary on your account. An adviser retained for an annual fee or flat fee is incentivized to spend fewer hours than necessary on your account. In one state-Utah-the state medical association has an advisory service exclusively for physicians, and the advisers are paid a salary so as to minimize these common conflicts of interest.
My opinion is that, in general, it’s best to hire a fee-only asset manager, whether you pay for his or her services as a percentage of assets under management, an annual retainer fee, or an hourly fee.
The author is founder of the blog whitecoatinvestor.com and is an emergency department physician. Send your money management questions to firstname.lastname@example.org. Also engage at www.twitter.com/MedEconomics and www.facebook.com/MedicalEconomics.