How Doctors Can Determine if they are Overpaying for Financial Advice

June 2, 2014

The different compensation arrangements physicians might encounter when interacting with financial planners, as well as what costs are reasonable.

A great financial planner can lead you on the path to financial success. But he shouldn't be charging you an arm and a leg to do so.

Here is some quick guidance on different compensation arrangements you might encounter when interacting with financial planners, as well as what you should expect to be charged.

Fee-only planners
True fee-only financial planners are paid only by you.  They do not make any commissions and have no incentive to “sell” you a product. They may be local, or work with you remotely. They do have different fee schedules.

Some will work on an hourly basis, and talk with you periodically to review your financial lives. Hourly planners may give you an asset allocation to do yourself and review it with you when you meet, either in person or on the phone. A disadvantage of this arrangement is that you usually will not get small questions answered. Not having regular communications may also lead to making mistakes between meetings. I don’t see this as an efficient or cost effective way to get help for a busy physician.

Some fee-only planners charge separately for the financial planning process and for asset management. These planners may also offer an either/or for planning and asset management.

Most planners charge an “assets under management fee.” This usually starts around 1 percent a year on up to $1 million, and then begins to drop as assets increase. The drop in fees with larger accounts reflects that investing more money is not that much more difficult. However, having a smaller but proportional fee with larger amounts of funds does reflect that complexity in planning is a factor when dealing with larger portfolios.

Note also that in the assets under management fee schedule that the adviser does "better" if your accounts grow and the investment expenses remain low. These advisers also suffer when your accounts do poorly, which is not necessarily their fault, but is an alignment of interests.

The only potential conflict of interest in this fee model occurs when the investor asks the planner how to use a particular sum of money. For example, if you ask the planner, "Should I pay off my mortgage or use the money to stay invested," the planner has a potential conflict as she is paid only for invested assets. I don't, however, see this as a significant issue with a trusted adviser.

Some planners charge based on a family's net worth rather than on assets under management, especially if much of the wealth is tied up in a business, real estate, or other illiquid investments.

What is reasonable?
Whatever the payment arrangement worked about between investor and financial planner, I think it is reasonable that the "all in" cost of investing is not over 1.5 percent annually for both the adviser fees and internal cost of the portfolio.

As assets exceed one million dollars, the blended annual fee should be dropping in most cases.  Since fee-only planners do not get paid any commissions or "shared costs" with the investment choices, they can pick the lowest cost options to achieve the investor's asset allocation goals.

An area of caution
As an aside, I have been completely amazed at how expensive stockbroker-chosen investments are. I also am impressed at how well they are able to hide these costs from clients (I see this when new clients come from a brokerage house and show me their statements). Annual costs of 2 percent are common, and I've seen 3 percent to 5 percent on several occasions.

Investors don't have a chance to do well with those kind of costs. They should understand that the brokers have the choices of up-front commissions, annual commissions, annual "marketing" kickbacks, and back-end commissions in their arsenals. All are carefully buried in your statements and mutual fund quotes. Annuities and life insurance sold by brokers and retail agents (more to come on this in future articles) are much worse.

Having a clear understanding of all the expenses and fees you pay for investments are vital to having a chance of financial success. These costs go on year after year and can add up to fortune (for you or for someone else).