How to Choose a Financial Advisor: What Physicians Need to Know

Why work with a financial advisor?

Perhaps you just graduated and have over $200,000 in medical school debt and want to strategize about the best way to pay it down. Or, maybe you are 10 years into working and would like to put more toward a retirement plan. Maybe you are looking to purchase a home or finance the trip of a lifetime. The list goes on and on, but one thing remains true; a financial professional could help you achieve these milestones … Just make sure you choose the right one to meet your needs and goals.

There are several types of financial advisors, so it’s crucial to grasp the nuances of what each type can offer you as well as the basic requirements to look for when selecting who you will entrust with guiding you toward your goals. You can work with several advisors who have different areas of specialty, for short or long periods of time. There’s no one-size-fits-all approach to finding a financial advisor. Just be sure you are aware of cost/fee structure and the types of specialized services an advisor will provide.

Consider the following as you search for the right financial advisor to meet your needs.

1. Ensure your advisor is a fiduciary.

A fiduciary has a legal and ethical responsibility to act in the best interest of their clients rather than their own (or their firm’s) interests. Put another way: fiduciaries must make financial decisions that benefit the client, not themselves. They must disclose any potential conflicts of interest and disclose personal conflicts.

When you begin your search, no matter what firm or style of advisor you end up working with, make sure to look for someone who is acting as a fiduciary.

Stephen Chang, managing director of Acts Financial Advisors, which specializes in working with physicians, and emphasized the importance of ensuring your financial advisor is a fiduciary: “You definitely want an advisor who is committed to giving you the best advice for you as the client without regard to how much money or profit they will make.”

2. Confirm that your advisor specializes in and is accredited to meet your specific financial goals.

There are many different types of credentials that financial advisors may have. Before choosing an advisor, you’ll want to ensure that you are working with a planner skilled and accredited in the area you are seeking.

“Common credentials include CFP, PFS, and CHFC,” Chang said. “You don’t have to have one of these designations to be a good advisor, and there can be bad advisors who have them, but generally, they’re good things to look for.”

Here’s a breakdown of four common types of financial advisors you may encounter.

Certified Financial Planner (CFP)

• What a CFP does: Offers well-rounded and comprehensive financial planning services to meet your varied and unique goals including saving for retirement, paying off debt, purchasing a home, saving for education, tax planning, investment advising.
• Example of services a CFP would help you with:
  • Build a plan to pay off student loans by assessing interest rates to determine the most effective repayment strategy
  • Advise on how to balance debt repayment with aggressive investing
  • Advise on how much to contribute to retirement accounts
  • Design a multi-asset class investment portfolio based on risk tolerance, goals and retirement timeline
  • Optimize your tax strategy by using tax-advantaged accounts, charitable donations to reduce your taxable income
  • Assist in building an emergency fund and understand different strategies for saving to fund a down payment for a house
• Credential: A CFP has completed the necessary training and requirements laid out by the CFP Board and agrees to abide by the CFP Board. CFP is an individual designation.

Registered Investment Advisor (RIA)

• What an RIA does: Provides investment advice, manages portfolios, and helps clients select appropriate investments based on their goals, risk tolerance, and careful attention to the markets. They focus heavily on investments and may not have all the financial planning credentials compared to a CFP, who is qualified to offer more holistic guidance.
• Example of services an RIA could help you with:
  • Design and manage a diversified investment portfolio (stocks, bonds, real estate, etc.) to manage risk, optimize returns, and achieve short and long-term financial goals.
  • Optimize an investment portfolio for tax efficiency
  • Maximize contributions to retirement accounts
• Credential: RIAs are registered with the SEC or state securities regulators. Most RIAs have Series 65, Series 66, and/or Series 7 and Series 6 licenses. Make sure your advisor is accredited. RIAs can also be verified and vetted through entities like the Financial Industry Regulatory Authority FINRA.

Wealth Advisor

• What a wealth advisor does: Helps high-net worth individuals with estate planning, wealth preservation, sophisticated tax strategies, setting up foundations, and ensuring proper generational transfer of wealth.
• Example: A wealth advisor could help with a wide range of financial strategies (beyond investments) for high net-worth individuals to grow and manage their wealth. They may include
  • Advising on legal structures like trusts for the tax-efficient transfer of wealth
  • Collaborating with attorneys and other professionals to support clients’ goals
• Credential: Wealth advisors may have a variety of certifications including CFP, CFA, PFS, Chartered Wealth Manager (CWM). What distinguishes them from other financial advisory is their focus on high net-worth individuals with a complex portfolio of assets.

Certified Public Accountant (CPA)

• What a CPA does: Helps you with accounting, taxes, auditing, tax planning, and optimization.
• Example: A CPA can advise clients on strategies to maximize tax deductions, credits, exemptions, and to minimize liabilities. They may focus on estate tax planning, inheritance tax planning, job change tax implications, tax return preparation, tax projections, and payment calculators.
• Credential: Passing the CPA exam. CPAs are licensed at the state level.

3. Ensure that you understand and agree with the fee structure

There are several types of fee structures you may encounter when shopping for a financial advisor. Make sure you understand the various fee structures and evaluate which one makes sense for you given the size of your portfolio and length of the arrangement you have with the advisor. Here are some of the common fee structures you may encounter from financial advisors.

Fee-Only

A fee-only advisor typically charges their clients based on the services they provide, rather than on commissions or returns from those services. This avoids conflicts of interest. The fees vary widely based on geography, the advisor’s years of experience of the advisor and the range of services they offer. They may include:

• Flat fees, such as paying a set price for a distinct product like a financial plan, which can range from $1,000-$3,000.
• Hourly fees based on the time spent providing services. These can range from $200-$400 according to Nerdwallet or $120-300 according to Investopedia.
• Retainer fees for continuous access to financial planning services, often structured as a monthly or annual retainer. An annual retainer can range from $2,000-$7,500 according to Nerdwallet or $6,000-$10,000 according to Investopedia.

Percentage of assets under management (AUM)

This represents an annual charge based on the total assets managed by the advisor, which increases as the portfolio of the client grows. Rates vary, but can range from .5%-2% annually.

Example: Your financial advisor manages your portfolio valued at $20,000 and charges a 1% yearly AUM fee. Your portfolio increases in value 6% yearly for 5 years, therefore growing to $26,766.31 before accounting for the fee. The gross earnings (without accounting for the fee) would be $6,766.31. Because of the 1% AUM yearly fee, you pay a total of $1,105 in fees, bringing the final portfolio value down to $25,525.63 with net earnings of $5,525. If the amount in fees ($1,105) had been invested, you would have earned an additional $135.55, so the total cost of the fees was $1,204.68 (fees + potential earnings on fees if they had been invested). In summary: You still come out ahead, but the fees can be significant.

In reality, a financial advisor would be managing a more diversified portfolio of stocks, bonds and other asset classes, so the AUM would reflect the total value of the portfolio which may fluctuate based on the market.

Fee-Based

Fee-based advisors charge commissions on selling clients financial products rather than charging a flat fee for services. Sometimes clients may end up paying both fees and commissions, which can lead to increased costs. This model may pose conflicts of interest if the advisor is trying to sell something not in the best interest of the client due to commission potential. The fee structure is complicated and sometimes criticized as it is less transparent than other types of payment structures.

Example: A financial advisor may charge a 3%-6% commission for investment products, a 10% commission on insurance packages and a 5% commission on mutual funds making the total amount you are paying in commission hard to track.

Performance-Based Fees

Advisors may charge a fee based on the performance of the investments they manage. For example, an advisor may charge a base fee (e.g., 1% AUM) and an additional performance fee (10%) if the portfolio exceeds a certain benchmark or return.

Combination Fee Structure

Some advisors may use a combination of the above structures, charging an hourly fee for initial consultations, a flat fee for financial planning, and an AUM fee for ongoing investment management, along with any applicable commissions on product sales. Be sure to negotiate with your advisor when you agree upon a fee structure.

Bottom Line

Choosing a financial advisor may be wise, but don’t make the decision lightly. Do your research ahead of picking an advisor. Check their qualifications, fee structure, and expertise in the area you are looking for support with. You may have heard horror stories about people losing money based on choosing the wrong financial advisor, but with the proper information, you can easily avoid falling into that trap.

Join the Discussion

What has been helpful for you if you’ve worked with a financial advisor? What was not helpful? If you had a bad experience with a financial advisor, what happened and what advice would you offer to others so they can avoid running into a similar issue?