I went through much of my young adult life blissfully unaware about personal finance. Even after graduating from veterinary school with six figure loans, I did not feel the urge to seek out advice about my finances. Marriage, another major milestone, still did not move me to be smart about my money.
However, there did come a point when I was actively craving financial advice. This happened to be during a time when life was especially crazy. I had three young children under the age of 5. Our finances seemed overwhelming because we were now homeowners and living the way I assumed most young families lived. We had monthly expenses going out, we had some savings, we had some investments, but there was no actual financial plan.
MY INTRODUCTION TO AUM
This was the point where I brought up the subject of hiring a financial advisor with my husband. I had felt like our home life was chaotic, and I did not have the time or energy to ensure that our finances were trending in the right direction. At the very least, I wanted some sort of assurance that we were dealing with our finances in a responsible, positive way.
He replied that many advisors get paid according to a percentage of your assets, known as the assets under management (AUM) model. I distinctly remember being completely confused that anyone would pay a person for financial advice based on how much money they had. So are they really doing twice the work if they’re managing a $200,000 portfolio versus a $100,000 portfolio? What was the true VALUE that people got from their financial advisors if this was how they were getting compensated?
(What I learned later on was that many firms won’t even consider you as a client unless you meet a minimum asset requirement, such as $250,000 or $500,000.
It is common for advisors to charge a sliding scale AUM fee, where the more assets you have, the smaller the percentage you will be charged. For example, a firm may have a fee structure where assets under $1 million are charged a 1% AUM fee while assets over $1 million are charged a 0.8% AUM fee.)
This model did not sit well with me at all. I did not want a long term relationship with an advisor who was going to charge based on my assets. I wanted straight up advice. I literally wanted to show up to someone’s office, give them our personal finance information (like our income, expenses, and current investments), and have that person give us advice on what we can do to change or improve our financial situation. And now I was being told that this type of advisor did not exist.
Forget it, I thought to myself. I don’t have the time or energy to research this any further. I could barely think straight because of major sleep deprivation, trying to manage a household with three small children as a full time stay at home mother with a very busy spouse. It wasn’t like we were struggling financially, per se. But I knew that we could be doing better.
As someone who is always striving for organization and efficiency (this, my friends, is a daily practice), I thought that having our finances on track would bring some welcome calm during a hectic time in life. But after learning about the AUM fee structure, I was pretty sure that looking into hiring a financial advisor was going to add more stress to my life. So that was that.
BEYOND THE AUM
Fast forward to today. Life is still crazy, but with the kids being older, it’s more manageable. I am still sleep deprived, but the days of being woken up multiple times every single night is hopefully long behind me.
Ever since learning about financial independence, I have devoured information regarding financial advice. Books, blogs, podcasts, newsletters, talking to friends, speaking with actual advisors….these have all given me a more complete picture about the financial services industry, which includes entities such as banks, investment firms, financial advisory firms, and insurance companies.
Why does this topic interest me so much? Why not just go to the financial advisor down the street and get this over with already?
At the heart of it, I simply don’t like spending money unless there’s a REALLY good reason to do so. Just scratching the surface of how financial advisors got paid, I quickly realized that it’s very easy to find a bad advisor and waste a lot of your time and money. I don’t know about you, but the idea of wasting my time AND my money is about the worst combination you can come up with.
We have already gone through an experience where Mr. RLDVM was sold whole life insurance as a resident and another permanent life policy as an attending (financial mistake #5 in this post). It turned out to that these were both inappropriate policies for our situation, and once I gained more financial literacy, I knew we were being targeted for this product due to one fact alone: my spouse’s profession. This infuriates me.
I’ve been with my husband since his residency days, and even as an attending, he was spending an obscene amount of time at work. Sure, he was making a good salary as an attending. But this income was involving so much sacrifice on his end, as well as mine. I am not going to fritter away this hard-earned money to some random advisor if I had no idea what sort of value I was getting from the relationship. Especially with a weird compensation structure, like an AUM fee. We had already been burned once by someone working in the industry because we were not informed about the actual product or how this person was getting paid.
You need to bring your pet to a veterinarian for a well check? You could call around and see what they charge for an office visit (not a recommended way to choose your veterinarian, but I know people do this). You take your pet in for the exam, and then walk out after paying your bill. Your receipt will itemize all of the services that were provided by the veterinarian. Easy enough to understand the exchange of money for services.
You need to get your taxes done? Again, you could call beforehand and ask a CPA what they charge to prepare a tax return. You hand over the necessary documents. They bill you for their services. Easy.
You need some financial advice? Well, this is a tricky one for the following reasons:
- What is the definition of a financial advisor? As I’ve noted in this post, almost anyone can call themselves an advisor. This can range from an insurance salesman working on commission to a person who is licensed and credentialed. One quick way to check out a potential advisor is by using FINRA’s Broker Check resource; simply type in the name of the advisor or the investment firm, and you will get a quick snapshot that details their work history, their credentials, and any complaints that may have been made against them.
- No matter their title, the “advice” that you get from people working in the financial services industry is all over the board. Again, looking at the extremes, you can have the insurance person selling you an insurance product with absolutely no clue what the rest of your financial situation looks like (see above). The only advice you’re getting from this person is about an insurance product that may or may not be appropriate for your situation that also happens to pay them out a nice commission. On the other hand, you can have a person who will help you create a complete, comprehensive financial plan that addresses any financial goals that you have in mind.
- Fee structures are all over the map. Examples of types of fee structures are: commission based (otherwise called fee-based), AUM, income-based, one-time on-boarding fee, a flat fee monthly retainer, an hourly rate, or some combination of all of the above.
- You are paying people to manage your money. It’s a very interesting relationship, because they are making a living off of telling you what you should be doing with your own money. Do you see the inherent conflict of interest here? There are just no two ways around this. It is what it is. Your job is to figure out a way to get financial advice that is as conflict-free as possible while also providing good value for what you’re paying them.
As someone who likes everything to be simple and straightforward, this confusion around finding financial advice aggravates me. This makes me almost as frustrated as the whole student loan situation. There is little standardization or oversight in this industry, and for busy people who honestly don’t have the time to thoroughly research this through, it is a huge roadblock to getting good financial advice.
VETERINARIANS NEED GOOD ADVICE!
Why is this especially harmful to veterinarians? Because as a group, this profession is starting their career deeply in debt with a modest income compared to other health professionals with similar schooling. Unfortunately, no one wants to give financial advice to people that don’t have much in assets, which describes much of the younger generation of veterinarians. Even mid-career veterinarians may not have much in terms of wealth because they may still be balancing their loan payoff with other financial obligations.
In addition, over 85% of graduating veterinarians are women, and it has been well documented time and again that women face more financial hurdles. In short, veterinarians need access to good, fairly priced financial advice.
THE FIRST STEP
So the first step when you’re hiring a financial advisor? Understand what you are hiring them for.
It seems silly to say this, but if you do not have some clear goals in mind when you’re meeting with a financial advisor, you are setting yourself up to work with someone that is simply trying to sell you some products in order to make a commission. Don’t be this person. You have worked way too hard for your money to just leave it up to chance that you found a good, honest person for financial advice.
And just to be clear, this is not meant to bash those who work in the financial services industry. Everyone needs to make a living. I’m willing to bet that for many people working on commission, they really do think that they are selling you the best products for your situation. But if they have only been trained to sell you a product with absolutely no knowledge about the rest of your financial situation, beware. The only time you use someone that works on commission is if you are confident about WHY you need their services, and you understand how this fits into your overall financial portfolio.
So why do people hire advisors? Here are some examples:
- They need help with their investments/retirement planning
- They are going through major life changes (marriage, divorce, kids, job loss, death)
- They need help developing a financial plan
- They need more clarity on how to achieve certain financial goals
- They need an objective intermediary if they cannot agree on finances with a spouse
- They want to be held accountable for their money decisions
- They want a second opinion
These are absolutely valid reasons to hire a financial advisor. I think that the vast majority of people would benefit from using one, even hardcore DIY types. But it is up to you to do some homework first before making this decision.
So I’ll let this sink in for now. Don’t just hire some financial advisor who has an office down the street from your house. Don’t just hire a financial advisor who is your neighbor, friend, or family member. These people are nice, they are well-meaning (I hope), but honestly, you really need to look out for yourself first and understand how this industry works and makes its money before you sign on the dotted line.
You’ve worked way too hard for your money. Don’t make the costly mistake of getting bad financial advice.
Here is Part 2 of the series.
What has been your experience with financial advisors? How knowledgeable were you about the industry before you hired one? Please comment below!