Choosing the Right Financial Adviser: A Fundamental Decision for Long-Term Financial Security

Choosing an investment adviser can be an extremely important decision for the long-term financial security of any clinician, given that such an adviser may be managing retirement investments and guiding financial decisions throughout one’s professional life and beyond. In this article, we will address a few of the factors dermatologists should consider when making this decision.

Is it Worth It?

Many individuals may be wondering whether it’s worth having a financial adviser at all. According to the data, the answer is “yes.” There are a number of studies that attempt to quantify the value professional advisers can offer, but the better-known ones come from Vanguard and Morningstar. Both examine a myriad of factors related to financial management for individuals with and without professional advice. The Vanguard study estimated that advisers can add 3% in net returns—calculated retroactively on an annual basis—while the Morningstar study concluded that an investor can expect an annual return increase of 1.59% by working with an adviser.

What are the options?

Once the decision to work with a professional adviser has been made, there are several options to choose from, each with its own business model, strengths, and weaknesses. Below is a brief overview.

Brokers and Banks

A broker-dealer is generally a person or firm that is in the business of buying and selling securities and functions as a broker or dealer depending on the transaction. Well-known examples of firms of this type operating nationally and internationally are Merrill Lynch, Morgan Stanley, and UBS. Regional brokers include the likes of Raymond James and Edward Jones, while bank-based advisers are affiliated with such institutions as Wells Fargo and Bank of America. In addition to being large, banks and broker-dealers are not fiduciaries and are required to abide only by the suitability standard described below.

Fee-Only Financial Planners

A fee-only planner provides services for a set hourly fee ($200-$500 per hour) or annual retainer ($1500-10,000).Although this type of adviser is generally a conflict-free fiduciary, it is typically a small shop, with little in the way of personnel or resources for research. Some are even one-person firms with no succession plan for the long term.Moreover, because they may not be licensed to buy and sell securities, they may only be able to help investors craft a plan, which they will have to implement themselves.

Registered Investment Advisers (RIAs)

A registered investment adviser (RIA) is an individual or business engaged in investing that is registered with the Securities and Exchange Commission (SEC) or with state securities authorities. RIAs must adhere to a fiduciary standard of care (see below) and are not usually tied to a particular family of funds or investment products, so they can recommend nearly any investment without financial bias. Furthermore, instead of holding assets themselves as brokers and banks do, RIAs use independent custodians to hold client assets. Finally, RIAs charge a simple, transparent fee based on the percentage of assets managed.

Other options

Other advisers and companies, like hedge funds, private equity firms, and venture capital/angel investor funds, have significant expertise in their investment “sleeve” but are not generally a suitable option for a dermatologist’s overall investment strategy or for comprehensive wealth management.

Fiduciary vs Suitability Standards

Fiduciary and suitability rules pertain to the professional ethics and loyalty standards an adviser is held to. Unfortunately, many investors rely on advisers without understanding how the adviser is obligated to work with them.

Broker-dealers are regulated primarily by the Financial Industry Regulatory Authority (FINRA) under standards that require them to make suitable recommendations. Instead of having to place the clients’ interests ahead of their own, the broker-dealers’ suitability standard requires only that they reasonably believe their recommendations are suitable for clients. A key distinction between the two pertains to loyalty: A broker’s duty is to the broker-dealer he or she works for, not to the client they serve.

The term broker is also a concern because many firms have realized its negative connotations and have begun referring to their sales force as “financial advisers” in television commercials, print ads, and other marketing materials.

In contrast to large broker-dealers, a fiduciary adviser has a fiduciary duty to his or her clients, which means that he or she has a fundamental obligation to provide suitable investment advice and always act in the clients’ best interests.

When choosing a financial adviser, it is essential to research the options carefully, as there may be significant implications for clinicians depending on the type of professional they employ.

How Fiduciary and Suitability Obligations Can Affect Investments

Dermatologist A contacts his broker wanting to purchase $50,000 worth of US growth stocks. The broker invests the assets in Fund XYZ, which charges a sales load of 5.75% and has operating expenses of 0.68% annually. The client will immediately pay a one-time fee of $2875 on the trade, in addition to the recurring fund management fee. In this case, the suitability standard has been met.

Dermatologist B contacts his RIA with the same request. The adviser purchases an ETF with a gross expense ratio of 0.18% and pays a commission of $8.95 on the trade. This client pays the RIA a management fee of 1% of assets, which on $50,000 equals $500 per year. The adviser has met the fiduciary standard.

Under this very realistic scenario, it would take Dermatologist A approximately 9 years of commitment to the given fund to recoup the very high front-loaded fees.

Conclusion

For the reasons outlined above, many dermatologists will ultimately decide to work with a financial professional. Understanding how advisers earn money and to whom they owe loyalty (clients or their own firms) is a key first step to finding the right professional who can help one achieve long-term financial goals. The authors welcome questions.

David Mandell, JD, MBA, is an attorney and the author of more than a dozen books for health care professionals, including Wealth Planning for the Modern Physician. He is a partner in the wealth management firm OJM Group (www.ojmgroup.com), where Bob Peelman, CFP, is a partner and Director of Wealth Advisors. They can be reached at 877-656-4362 or mandell@ojmgroup.com.

Wealth Planning for the Modern Physician and Wealth Management Made Simple are available free as hard copys or e-books and may be downloaded by texting DERM at 844-418-1212.

Disclosure

OJM Group, LLC (OJM) is an SEC-registered investment adviser with its principal place of practice in the State of Ohio. SEC registration does not constitute an endorsement of OJM by the SEC nor does it indicate that OJM has attained a particular level of skill or ability. OJM and its representatives are in compliance with the current notice filing and registration requirements imposed upon registered investment advisers by those states in which OJM maintains clients. OJM may only transact practice in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements. For information pertaining to the registration status of OJM, please contact OJM or refer to the Investment Adviser Public Disclosure website www.adviserinfo.sec.gov.

For additional information about OJM, including fees and services, send for our disclosure brochure as set forth on Form ADV using the contact information herein. Please read the disclosure statement carefully before you invest or send money.

This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice or as a recommendation of any particular security or strategy. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly, information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.