3 Biggest Problems w/ Financial Advisors

All right, let's talk about financial advisors. There are three issues with financial advisors when it comes to interacting with white coat investors. And it's unfortunate because I think something like 80% of doctors and other high-income professionals out there want and probably need to use a good financial advisor. But there's three problems. The first one is that financial advisors are bad. They're calling themselves financial advisors, but they aren't actually financial advisors. They're salespeople in disguise most of the time, or they're ignorant. They just don't understand finance. It's not that they're deliberately trying to hurt you. Some of them are, but it's simply that they don't understand all the ins and outs. They don't understand not only the doctor-specific stuff, but they don't understand the basics of finance. I can't believe how many financial advisors I run into that think they can pick stocks well enough to beat the market or that are using actively managed mutual funds. The data on this stuff is very clear, number one. Number two, you can lower your risk as a financial advisor by using index funds. You've got a certain amount of fiduciary risk there if you're trying to beat the market. And so while there's plenty of uninformed investors out there that think the role of a financial advisor is to beat the market, it's not actually what you should be doing. You need to be talking them out of that if you're a financial advisor. So that's problem number one, is that most financial advisors just suck. They don't give good advice. So the most important thing from a financial advisor is that you get good advice. Problem number two is that financial advisors charge too much. And sometimes that's due to the way they're paid. Some are paid on commissions, which usually means you're getting bad advice because it's so conflicted, even a good person can't overcome it. But the second most common method is an asset under management fee, which is fine if you have less than a million dollars. If you have more than a million dollars, you have $5 million. Paying 1% of your assets under management is a ridiculous ripoff. If you're paying your financial advisor 50 grand a year, I can find you somebody that's going to charge you 25% as much or less. It's going to give you probably better advice. So that's the second problem, is people just paying too much for financial advice. And I can't blame the advisors, right? They're running a business like anybody else. You charge what the market will bear, but you're the market. So don't bear too much. If you can get somebody that's going to do great investment management for you for $8,000 a year, why would you pay them $25,000 a year? You shouldn't. Same thing with the financial planning side. And often you're better off splitting those two things up. If you're paying more than a few thousand dollars for a financial plan, you're probably paying too much. Typically, the right price for financial advice is a four figure amount per year. It's going to be more than $1,000. They're not going to be able to at least that. It probably ought to be less than $10,000 unless you're in a particularly complicated situation or getting a particularly high volume of service from them. That's probably about the most you ought to be looking to pay. Certainly by the time you're in the $20,000, $25,000, $30,000, $40,000, $50,000 range, you're paying too much. And a lot of people are doing that ignorantly because their portfolio grew over time and they just kept paying 1% of assets under management every year. So problem number one is bad advice. Problem number two is paying too much even for good advice. And problem number three is that white coat investors want everything in one person. And there are very few financial advisors that offer every service you need. For example, you may need a financial planner to help you draft up your financial plan, help you even create a budget, maybe help you manage student loans. And there's specialists in that as well. You've heard of student loan advice that we talk about on here all the time, studentloanadvice.com. That's practically a specialty in and of itself. But beyond financial planning, you probably also want someone that's going to be an investment manager. They're going to manage your assets. And those are actually two separate things. Financial planning and asset management, not the same thing. Often people try to do both of those. And you know what usually happens is they give short shrift to financial planning. For some dumb reason, people are willing to pay more for investment management than they are for financial planning, even though the financial planning is probably more valued. But people also want advice on their taxes and maybe tax preparation as well. And they're like, oh, I can't get that from my financial planner too. No, you can't. Most of the time you can't. You're going to need somebody else. And then, you know, for example, if they own a practice, maybe they want a 401k or other retirement plan for the practice. Well, that's another type of financial advisor. It's not the same people doing all these things. So that's the other big disconnect is you got to know what services you actually want and hire somebody that's actually good at those services. And it may be that you need two, three, four different people to help you and all of them want to be paid. Even if you're just paying for tax preparation, by the time you have a complicated return, if you're filing in multiple states or you've got a bunch of K-1s or something, you're doing a corporate return as well, you're going to be paying thousands just for tax preparation. That doesn't even really include much tax advice. And then you add on $5,000 or $10,000 for investment management, maybe a few thousand for financial planning. Now you're going to pay somebody for your practice retirement plan. You can spend quite a bit of money on financial advice. So you can obviously see here that this is expensive stuff. We just got done doing our survey of white coat investors out there. And we know most of you are making somewhere in your household incomes only $250,000 to $500,000, somewhere in that range. So if you're paying $15,000, $20,000, $25,000 for financial services every year, that's a huge chunk of your income. That's a huge chunk you're spending. Most of you are actually spending less than $200,000 a year. So this could be like an eighth of your spending if you've got all those people. So you can see the impetus to actually become financially literate. The more financially literate you are, the less you have to pay to other people to do these things for you. It's entirely possible for you to be your own financial planner. It is entirely possible for you to be your own investment manager. I have done both of these for myself, my entire career. It is not undoable. Many white coat investors out there are doing it. You can file your own taxes and do your own tax strategizing. I did my own taxes for many, many years, like a couple of years ago. And I just couldn't figure out which states I had to file in for all my K1s. And you probably got your limit too. And when your return gets so complicated, you'll decide to hire somebody else for it. And that's okay. But realize that there's some money you can save there. Plus, you'll learn a lot about your taxes. If you are self-employed, you don't have any employees, you can even handle your own retirement accounts. Opening up a solo 401k, not that hard. Even if you add on a personal defined benefit plan, still a do-it-yourself project until you have employees. At that point, you really do need to hire a professional to assist with that. But here's the deal, right? Financial advisors, it's a little bit of a love-hate relationship, right? Sometimes you do need them, but there's plenty of them out there who are just ripping you off, giving bad advice, charging too much for advice. So the more you learn how to do yourself the better, whether you work with an advisor or whether you don't. The financial advisors on our recommended list, which you can check out, and I highly recommend you do, whitecoatinvestor.com, go to the recommended tab, go down to financial advisors or just go directly to whitecoatinvestor.com slash financial dash advisors. And you can see that list of people we recommend. But here's the deal, right? Even those people are going to charge you money and they give good advice and they charge a fair price or we don't put them on the list. But if you can do it yourself, you can save a lot of that. Just make sure you're doing it well yourself. You're far better off paying somebody thousands of dollars a year and having it done right than not doing it right. So if there's any doubt in your ability to do it, get some help. There's people on there that offer all kinds of different services. Some of them are trying to help you be a do-it-yourselfer. Some kind of want to do it all. They want to be a full service person. That's the kind of client they're looking for. So you need to make sure you get a good match there. The hosts of the White Coat Investor Podcast are not licensed accountants, attorneys, or financial advisors. This podcast is free entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.