Physician’s Ultimate Decision Guide on Choosing a Financial Planner – Part 2: Knowing What Type of Physician Client You Are
Choosing between wildly different financial planners can be an overwhelming experience when you don’t know what’s out there. It’s far more efficient to answer some focusing questions on both you and your potential financial planner. Let’s start by figuring out what type of physician you are:
Type 1: I would gladly pay money to delegate management of my finances to a professional I trust so I don’t have to deal with it myself.
Type 2: I would gladly pay money for a professional I trust to teach me what I need to know so I can confidently manage my finances on my own.
If you’re a Type 2 physician, you can further subcategorize into whether you are looking for a short-term/project-based relationship, or a long-term/ongoing relationship:
Type 2: I would gladly pay money for a professional I trust to teach me what I need to know so I can confidently manage my finances on my own.
- Type 2A: I would like to work with that professional over a limited time frame, with our shared goal being to part ways when I have gained the knowledge and confidence to manage things independently.
- Type 2B: I would like to have an ongoing relationship with that professional such that I always have someone trustworthy to run things by or consult when my goals or situation change.
Take a few minutes and honestly assess which type you are at your core. If you have a spouse or partner, talk to them about it as well as you may be different types. This will be important to reconcile as you choose a financial planner that will work with both of you. Part 3 of this series is for Type 1 Physicians. Part 4 of this series is for Type 2A Physicians. And Part 5 of this series is for Type 2B Physicians. But first, make sure you read about the qualities ALL physicians should look for in a financial planner regardless of their type:
Best Financial Planner for ALL PHYSICIAN TYPES:
A financial planner who:
- follows a Fiduciary standard in all interactions with their clients; and
- operates under a fee-ONLY model.
Fiduciary Standard
Imagine a fee-for-service adult cardiologist who advises a patient AGAINST getting a stress test because it’s clearly not clinically indicated/violates Appropriate Use Criteria. A cardiologist would benefit financially from ordering and performing the stress test but is placing the interests of the patient ahead of their own. This is an example of following a fiduciary standard – you are legally obligated to put your clients interests ahead of your own, and you can be sued you don’t.
You might think that the fiduciary standard would be expected or mandatory in the financial industry as it is in medicine. Unfortunately, that’s not the case. When I took my Series 65 Investment Advisor licensing exam, the standard I was tested on is the far weaker Suitability Standard. If a financial product or recommendation is suitable for a client, it’s okay for me to recommend it, even if it is not necessarily the BEST option for the client at the time. A very common example is when a financial planner recommends a product that would pay them a significant commission over an arguably better option earns them nothing. So long as the product is arguably reasonable for the client, they have not violated any rules.
Planners who follow a fiduciary standard choose instead to reject that weaker standard and always choose the option that is in the client’s best interest. In theory, financial planners who have their own Registered Investment Advisors (firms registered with their state or the SEC) are held to a fiduciary standard as are those who have the Certified Financial Professional™ (CFP®) credential. In practice, there’s very little teeth as plenty of financial planners have no problem telling prospective clients they are fiduciary when they’re not, and enforcement of this rule is negligible. But at the very least, a financial planner should be willing to provide a statement in writing stating that they operate at a fiduciary standard for ALL (not just some) interactions with a client and are legally liable if they don’t. If they’re not, run away.
Fee-ONLY model:
Speakers at medical conferences usually start with a Disclosure slide that shows any income received by pharmaceutical companies or biomedical companies that may reflect a conflict of interest. Financial planners are under no such expectation to reveal sources of income besides client fees – common examples include commissions from the sales of investment or insurance-based products. However, many financial planners choose to be fee-ONLY – this is the equivalent of saying “I have no disclosures to report.”
Fee-ONLY financial planners are generally considered the highest compensation standard that minimizes conflict of interest. When you work with a fee-ONLY financial planner, you know that the only money they make in their business is through fees they earn from working with clients like you.
Be careful – many financial planners will advertise themselves as fee-BASED, hoping nobody will notice the difference. Fee-BASED is a meaningless designation as it means the planner charges fees but can also be compensated by sales commissions or other sources of income that introduce conflicts of interest. To be fair, I know and have learned from outstanding fee-BASED financial planners. One reasonable justification they provide for their fee structure is a) the only way to buy products life like and disability insurance is through an agent who earns sales commissions, and b) by selling these products to the client directly, they are providing direct value by removing barriers to a client getting the insurance they clearly need. (This is true. A fee-ONLY planner would not be able to sell them the insurance policies, and a client would need to buy them through someone else.)
My personal take – it’s a valid argument, but one should never ignore the power of perverse incentives to encourage negative behavior of well-meaning people. We see it all the time in health care, and finance is no different. A great fee-ONLY planner can easily guide a client to an appropriate insurance product on their own even if they can’t sell it directly. I 100% recommend sticking to a fee-ONLY financial planner.