Seeking Financial Advice Part 3: Finding Your Ideal Advisor
In general, I’m a big fan of outsourcing if you have the means to do so. Outsourcing buys you time, and time is a resource that is limited to every single person on this planet, regardless of who you are.
However, I have to say I’m really surprised when people outsource their finances to someone else without doing their research. People probably put more time into choosing their next vacation spot than researching the person that they have entrusted with making very important money decisions.
At the same time, it also makes sense. When we turn to a professional, it’s because we’re not familiar with a particular topic and we need some guidance. Money definitely falls into this category for the majority of people.
When we hear the terms financial planner, financial advisor, wealth manager, etc, we assume that they are financial professionals who want the best for us and will work in our best interest. I hope that after reading Part 1 and Part 2, you’ll understand that this thinking is oversimplified and you really do need be on guard when it comes to hiring someone in the financial services industry.
While I would be absolutely thrilled that I have convinced you to DIY your own finances, I do have to remind myself that I’m a money nerd who has a higher than average interest in personal finance (for the record, I myself have used a financial advisor as a second pair of eyes to look over our financial plan). For some of you, dealing with money comes last in your list of priorities, after cleaning the toilet.
So if you have made the decision to outsource this part of your life, then it will be CRUCIAL that you spend some time researching, then interviewing potential financial advisors.
FINDING YOUR IDEAL FINANCIAL ADVISOR THROUGH ASKING QUESTIONS
Below, I have listed some questions that you should be asking when you’re on your quest for the ideal financial advisor.
To be clear, I am talking about someone that will be helping you construct a comprehensive, holistic financial plan that looks at your entire financial picture, not just one component of it (for example, investments, taxes, or insurance). You are wanting this person to help you figure out how to hit your financial goals and hold you accountable throughout the process.
ARE YOU FEE-ONLY OR FEE-BASED?
Fee-only and fee-based sound very similar, but it is imperative that you understand the difference. Fee-only means that they are getting paid directly from you, the client. Fee-based means that they are receiving a commission from products that they are selling. Guess which one has more conflict of interest?
Because this is an industry that makes money off of money, there is a reason that you should be aware of whether or not your advisor is making their money based off of commissions. You can see how easy it would be for them to recommend products that they *think* are best for you, but if you were to take away that commission, would that still hold true? Would they still make those same recommendations?
In fact, many of them may truly believe that what they are selling you is exactly what you need. But you need to realize that even well-meaning people will not necessarily know what’s best for you (by the way, this applies to other people in your life, too). Many of them have been trained or incentivized to sell products; their background is not necessarily in financial planning. This is a key difference that you cannot ignore.
ARE YOU A FIDUCIARY?
Because of the fee structure outlined above, fee-only advisors are required to work as a fiduciary. Simply put, this means that they are working in your best interest, because they don’t have those conflicts of interest that may be affecting how they advise you.
Fee-based advisors adhere to a suitability standard, which means that they are going to provide a service that they think is suitable for your situation. This language sounds pretty vague to me. I think that almost anyone can justify a situation that is “suitable.”
WHAT IS YOUR FEE-STRUCTURE? DOES IT DEPEND ON AUM (ASSETS UNDER MANAGEMENT)?
As I’ve mentioned many times, fees matter! So you will definitely want to find out how they are being compensated.
Chances are they are using the popular AUM fee model. Here’s my two cents about that.
First of all, an AUM fee structure falls under the fee-only category. The vast majority of fee-only advisors use the AUM model. So why would I tell you to consider a fee structure that does NOT use the AUM model, even though it’s fee-only?
I’ve explained the beginnings of my anti-AUM stance in this post. On the surface, the AUM fee structure seems like it’s a win-win. If your advisor is helping you increase you assets, then they should get some compensation for that, right?
First of all, many of these advisors won’t even look at you unless you have a significant amount built up already. As in $500,000 or $1 million in assets. This completely shuts out a LOT of younger veterinarians, and young people and families and general. And in my opinion, these are the people that could benefit the most from financial advice.
Secondly, when you have $500,000 in assets, are you SURE that paying a 1% AUM fee of $5,000 justifies the value that you’re getting from your advisor? And if you have $1 million, are you SURE that your advisor is giving you advice at $10,000 that is much different from what s/he recommended at $5,000?
So what’s a better fee structure? An alternative to the AUM model is the fixed fee structure, where you are paying either a retainer fee, an hourly fee, or a project-based fee. Even if these fees depended on your income or net worth (for example, the firm charges a higher hourly rate to those that earn $100,000 versus $50,000), this seems like a fairer way to charge for advice.
Just be aware, your advisor can mix and match all of these fee structures (AUM, commission, hourly, retainer), so understand exactly how you will be getting charged for their services. A good advisor will be very upfront about their costs and have no issues with how they are charging for their services. If you come across an advisor that balks or seems uncomfortable about the subject, move on.
To me, fee-only is just the beginning. I want everyone to get really good financial advice, regardless of their net worth. None of these fee structures is perfect, but the fixed fee-only model seems the most fair. Advisors that use this fee structure are in the minority, but they’re out there, and the idea is gaining more popularity as time goes on.
WHAT ARE YOUR CREDENTIALS?
Veterinarians have the widely known DVM (or institution/country equivalent) designation that is a clear sign to anyone that we have gone through rigorous training in order to obtain our degree. There’s a level of competency and professionalism that comes with your DVM. There is also an expectation that you maintain this degree by staying licensed within your state.
The closest equivalent in the financial world would be the CFP (certified financial planner) designation. However, there are over 100 designations in the finance world, which can lead to a lot of confusion. Having a CFP means that at a minimum, the advisor has taken gone through a curriculum of comprehensive financial planning, passed an exam, and worked a certain number of hours in order to have gained the necessary experience to work within this field. They are also required to obtain continuing education. I discuss some of the other designations in this post.
Regardless of their credentials, you will definitely want to look up your advisor on FINRA’s Broker Check. You will see their credentials, work history, certifications, and if they have any red flags in their profile.
WHAT IS YOUR INVESTING PHILOSOPHY?
First, figure out your own investing philosophy. Otherwise, how will you know if this person is a good match for you? If you don’t know your investing philosophy, then your advisor is going to pick one for you. This may come at great cost to you, without you even realizing it.
I am a big fan of passive investing since I like to be pretty hands-off with investments. So for me, if they pooh-pooh index funds and passive investing, then I am likely dealing with someone that will show me complicated graphs and try to convince me that they will do better. This sign of overconfidence is a warning sign. If they were that good, they would be making a lot more money on Wall Street. Even these top of the line professionals, who are living and breathing the world of finance and investing and making millions of dollars, can’t beat the market on a long-term basis. And most of us should only be investing for long term results anyway.
HOW LONG HAVE YOU BEEN WORKING AS AN ADVISOR?
Remember your first job out of school? How competent did you feel? Probably not very.
No matter how great of an education we received, nothing quite prepares you for your first job out of school. It’s like all of that knowledge flew out the window and you’re having to learn a new language. Applying our book smarts to the real world is an uncomfortable transition, but it’s completely normal.
Experience matters. Just because you have credentials, like a CFP, doesn’t mean that you’re going to be really awesome right out of the gate. There is a huge learning curve, as there should be. There’s an art to practicing veterinary medicine, and similarly, there is an art to advising people about their money.
When it comes to your money and investing, it’s also important to note that advising people during good times is very different from advising people in the middle of a recession. If you’re working with someone that has already advised people through a recession or two, then you can feel confident that they were able to weather that storm and properly advise you when (not if) the next one hits.
ARE YOU COMFORTABLE ADVISING ME ON MY STUDENT DEBT?
Most advisors are not. Don’t get student loan advice from an advisor unless they have a clear understanding of what the current student loan landscape looks like. Student loan debt is in a completely separate universe in terms of how debt is handled. Picking the wrong strategy can be financially devastating.
I wrote a whole post talking about student loan repayment advice and who you should seek out for this advice. Don’t assume your financial advisor is the best person for this job.
WHAT KIND OF SERVICES DO YOU OFFER?
Financial planning involves many different components: budgeting, investments, tax planning, estate planning, retirement, student loans, insurance.
When I talk about financial advisors, I’m envisioning someone that can take a look at the BIG picture so that all of the pieces of the puzzle are working together to better your financial situation.
However, this doesn’t mean that one individual can take care of all of these components for you. An excellent financial advisor will know when an area is out of their scope of expertise, and they will refer you to another professional that can better advise you on a situation. They may have someone in-house, like a CPA who can focus on taxes. Or they may need to refer you to an estate-planning lawyer. This is similar to the general practitioner who will outsource their complicated cases to a specialist.
WHAT IS YOUR AVAILABILITY?
Can you contact them any time that you have a money question? Or are you limited to meeting a couple times a year? Will you be working with just one person, or a team of people? Make sure you have the right expectations, otherwise, you’re setting yourself up for disappointment and frustration.
WHO IS YOUR IDEAL CLIENT?
Do they work primarily with millennials? Or people who are entering retirement? Or somewhere in between?
Our financial picture varies considerably depending on age and life circumstances. This is why you don’t want to automatically use your parent’s financial advisor. They may have done a great job with your parent’s money (although if you really dig deep into what they’ve been charging your parents all of these years, maybe not so great), but the generational issues that you’re facing are completely different from your parent’s generation. You want to find an advisor that is comfortable with people in your life stage.
DO YOU WORK WITH MANY VETERINARIANS?
There is something comforting about working with someone that just gets you. Veterinarians are in a class of their own when it comes to our high debt to income ratio, the unique stresses and challenges of the profession, demographics (with women making up the vast majority of veterinary graduates), and the way that the workplace is structured.
If they work primarily with veterinarians, go ahead and ask how they got started. What was it about the profession that made them seek out this particular clientele? It’s always nice to hear the backstory about how and why your advisor chose to go into their line of work.
To have an advisor that understands all of the nuances of this profession is not only comforting, but it may also be very helpful as they may be able to guide you through parts of your financial plan that are specific to the profession.
ARE YOU LOCAL? OR ARE YOU IN A DIFFERENT TIME ZONE?
Many advisors can now work remotely, which means that you can choose the best advisor from anywhere around the world if you choose to go that route.
Personally, I really like face-to-face contact. The handshake, just the mere presence of someone right next to you, is different from a talking head on a screen or having a conversation over the phone.
But with technology, we don’t need to limit ourselves. Think big and look outside your community for the best financial advisor.
DO WE HAVE CHEMISTRY?
OK, so this is not a question that you’ll be asking your advisor directly, but you’d better ask yourself this question.
You may have found the perfect advisor on paper, but if you don’t feel like you’re connecting, then that can put a damper on the entire relationship.
Yes, this is a relationship. You are sharing information with this person that you may not even be sharing with your spouse or other family members. If you don’t have that chemistry, then you’re less likely to engage with someone with whom you don’t have that connection.
THE BAD NEWS FOR VETERINARIANS
I will tell you right off the bat, the chances of you finding a financial advisor that checks off all of your boxes is pretty much zero.
Based on my questions above, here is what I think the ideal financial advisor would look like for a veterinarian: a fee-only, non-AUM fiduciary CFP who has worked in the veterinary field for many years with experience advising through at least one recession. This is someone who is very comfortable advising on student debt. On top of this, this FA would be available 24/7 and living in my hometown so that I have the option for some face-to-face contact. They would charge reasonably for their services. Of course, we would have great chemistry.
I didn’t even cover gender preference. Let’s be real. Some of us prefer working with one gender over another. If you’re looking specifically for a woman, then note that women make up less than 20% of financial advisors.
Good luck finding that unicorn.
SO WHAT’S THE NEXT BEST STEP?
Go through each of these questions carefully. Highlight the traits that are really, really important to you. Then go ahead and narrow down your search based on those traits.
If you’re really concerned about finding a fee-only advisor and keeping your costs low, then check out the following resources to help you narrow down your choices.
The National Association of Personal Finance Advisors (NAPFA)
If you’re more concerned about experience and familiarity with the veterinary profession, then finding one will likely be through word of mouth. Once you find one, chances are the advisor will be fee-based, not fee-only. The reasoning is that the trend to provide comprehensive financial advice (not just investment advice) using a fee-only structure is relatively new, so those that have been in the industry for a while came in during a time where fee-based was all that was really available.
To be clear, I do not believe that all fee-based advisors are to be avoided. Just take extra precautions when you use their services; they must be very clear in how they are compensated and what they are providing for their services.
There is a HUGE need for financial advice for veterinarians. And unfortunately, I think that this profession is getting ignored because of the ever increasing debt to income ratio.
Take a look at the common AUM fee structure. Who would want to serve the young people in this profession based on that fee structure? They would much rather have the older veterinarian who never had to deal with crippling student loans and has built a successful independent practice. This veterinarian is going to have much more in assets than the new grad.
I will continue to do what I can to increase financial literacy and wellness for veterinarians. This includes advocating for financial advice that is fair and honest. Don’t be afraid to ask questions, and you’ll know you’ve found the right advisor when you’re satisfied with their answers.
Do you have any thoughts about financial advice for veterinarians? Do you feel like veterinarians are getting the advice that they need? Comment below!
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