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How a Physician Can Find a Reliable Financial Advisor


You may not believe it, but the term “financial advisor” is a free title. Unlike “physician,” there is no legal requirement, nor educational qualification.

You may not believe it, but the term “financial advisor” is a free title. Unlike “physician,” there is no legal requirement, nor educational qualification. In practice, though, there are generally three types of people who use this title: insurance agents, stockbrokers, and registered investment advisor (RIAs). The first step to find a reliable financial advisor is to understand the distinction.

Insurance agents
They could work for major insurance companies like New York Life or MetLife, or they could be independent agents that represent multiple insurance company products. They earn their keep on commissions from the insurance companies. They are under no obligation to disclose how much they make or how they make it. They are the insurance companies’ agents; they may call themselves financial advisor, but work for you they do not.

They could work for major Wall Street brokerages like Merrill Lynch and Morgan Stanley, or they could work for independent broker/dealers. Regardless, their job is to be middlemen who facilitate transactions. They earn their keep when transactions happen. They are at best intermediaries, at worst counterparties. In fact, “counterparty” is the word Lloyd Bankfein used to describe Goldman Sachs in relationship to their clients. They may call themselves financial advisor, but their job is to make money off you, not for you.

Registered investment advisor representatives (RIAs)
They are the only ones who are licensed to give financial advice. Insurance agents and stockbrokers are not allowed to give advice other than incidental to the products they sell. RIAs are regulated by the Investment Advisers Act of 1940. By law, they must disclose their fees and any other compensation in their Form ADV filing.

Unfortunately, many RIAs also have insurance and broker licenses; this allows them to earn commissions, but as RIAs they must disclose them. A small minority of RIAs are so-called “pure RIAs” who avoid all forms of conflict of interest. They don’t have broker or insurance licenses, so they can’t earn commissions. These RIAs are also called “fee-only financial advisors.” In my humble opinion, physicians should only work with fee-only RIAs. They are required by law to put your interest first and their compensation structures align their interest with yours.

To check if a financial advisor is an RIA and the compensation arrangement, go here. You may also ask him or her to furnish a Form ADV Part 2 disclosure brochure.

My next post will teach you how to read a Form ADV.

For more on Michael Zhuang and our other bloggers, click here.

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