If you’ve thought about getting financial advice from a professional but weren’t sure who to trust or how to start, you’re not alone – and your concerns are not unfounded.

A study from 2019 from the University of Chicago and Minnesota business schools showed that some financial advisors take part in targeting clients with high incomes but low financial literacy. They call their prospects “unsophisticated investors,” meaning that they don’t know much about their money or how to properly manage it. Who fits this picture of high income and (traditionally) low financial literacy? Doctors. 

When we think about it, who’s particularly vulnerable to this kind of predatory scheme? Physicians don’t receive any formal training in financial management, yet are often the ones who need the most help, and are therefore the most likely to receive inadequate or inappropriate financial advice without realizing it.

Most financial advisors aren’t out to deceive you. They are trained to sell products, not to focus on giving financial advice. With that said, let’s take a look at how you can find a financial advisor who has the least conflict of interest and the best chance to provide you solid financial advice as a physician. 

The Four Fs Doctors Should Look For in a Financial Advisor

When it comes to finding a truly helpful financial advisor for doctors, certain criteria need to be met that might not need to be taken into consideration in other professions. To that end, I have a list of traits I call The Four Fs, and it’s proved helpful for many physicians as a tool to find a financial advisor that makes sense for them.

Fee-Only

As the financial advisor world goes, there are two types of advisors. Fee-based advisors and fee-only advisors. In the financial world, it’s really important to separate your advice from the products you purchase, otherwise the person who is recommending the product also receives commission from their recommendation. This is called fee-based advising. 

Many fee-based advisors will tell you that the financial advice they provide to you is free. What they don’t make you aware of is how much you're paying them based on commission for their insurance products. For example, life insurance is often 50-110% of the first year’s premiums – for a $50,000 annual premium on a whole life insurance product. (You can see why there is a conflict for a fee-based advisor to want to sell you this product.) 

Fee-only advisors, on the other hand, can only give you financial advice. They don’t make a commission from selling products like whole life insurance or disability products. This reduces this conflict to zero as you take advice from your fee-only advisor and purchase insurance products from an independent insurance agent recommended by your advisor. 

For this reason, I’d encourage you to remember that fee-only advisors are the only kind of advisor you should utilize. 

Fiduciary

A fiduciary advisor is an advisor that will sign a contract with you that states they’re ethically and legally obligated to do what’s best for you. Similar to the Hippocratic Oath for physicians, the fiduciary standard is something most certified financial planners are required to agree to, but you want to find that in your financial advisor, too. 

Familiar with Physicians

Physicians have a unique financial situation that is not experienced by most people. For this reason, your ideal advisor needs to be familiar and have experience working on physician-specific financial situations. This includes student loans, specific investment vehicles like backdoor Roth IRAs and 457 plans, or how to deal with a sudden jump in income after training.

Fee Model That’s Reasonable

You should pay for the service that you are hiring someone to do, no question. What I’m saying is to make sure that fee is reasonable. It is up to you to determine what “reasonable” means, but you should know how much you are paying in order to determine if you are getting a good return on investment!

That’s why I very much recommend the flat-fee or advice-only model whenever possible. Under this model, you know what the fee is ahead of time, you pay for it separately with a post-tax check in advance of the service to be provided, and it isn’t attached to any of your current or future assets. 

The problem is that most advisors use what is called an AUM fee (assets under management), which means they charge you a percentage of your returns or a percentage of your profits. As the value of our assets increase, if we're charged 1% on $50,000, that's very different from being charged 1% on our first $1 million (a $10,000 cost for financial advice). 

This begs the question, what will happen over the years is you'll be charged more and more for a financial advisor operating under an AUM fee to perform the similar (if not the exact same) service at $1M as they were at $5 million? Is it really five times harder to manage that money? 

So let’s do some quick math to illustrate the AUM impact on your assets. If you have a $1 million portfolio, and the assets they're managing for you entitles them to 1%, that's going to cost you $10,000 a year. If you have a $5 million portfolio, it would be $50,000 a year. Even if they lower their AUM to 0.5% and it now costs you $25,000 per year, is that job 2.5 times harder than when you had $1 million?

If you're going to pay five times as much in fees at $5 million, the complexity and the needs of your advice better be five times more than when it was when you had a million dollars. Otherwise, losing 1% off your investments each year will likely amount to a seven-figure sum of money you’ve paid your advisor over a 30 to 60 year time frame. A seven-figure sum of money that would have been yours to keep if you managed your money with a flat-fee or advice-only financial advisor. 

Finally, a note on locating fees. If you really want to get clarity on how your potential financial advisor is getting paid, there's something called the ADV brochure. It's made of two different parts, and you can actually look up the fee schedule for any financial advisor that you're working with in Part 2 of the ADV Brochure. They're required by law to provide that information, and it becomes public record to anyone who knows where to look. 

If you follow these principles of The Four Fs, you’ll give yourself the best chance to limit conflicts of interest and give yourself the best chance of getting solid financial advice. One resource you can utilize is NAPFA, which is an association of fee-only, fiduciary advisors. After using this, you’re already halfway to finding two of the four requirements for a solid financial advisor you can trust to do what is best for your financial situation.

How did you choose your financial advisor? Share advice in the comments.

Dr. Jimmy Turner is a practicing anesthesiologist, physician entrepreneur, and coach for doctors. You can find him on Instagram or Twitter @tpp_md. You can also learn more by visiting his website.

Image by Denis Novikov / GettyImages