The conflicts of interest within medicine are pretty easy to spot when you know what to look for. Let’s just say the financial industry is set up a little differently. By Jeffrey Steiner, DO, MBA
It is not unusual for me to get asked personal finance questions in the hospital hallways, the lounge, and in the operating room. Occasionally a group of us will be talking about personal finance, and someone will proudly say, “I don’t have to worry about money, I have a money man.” (Enter the sound of a record skipping.)
They usually go on to say how they get their taxes filed for them for free, have a great portfolio of investments, and an investment in some life insurance. Having a financial advisor is viewed as a “flex” by some physicians to show that they have arrived financially.
I personally have no problem with a physician hiring a financial advisor. Some physicians do not want to manage their personal finances, because the thought of adding another thing to their list of things to do is overwhelming and stressful. It sounds like a great idea on the surface - Just hire someone to take care of your money and you can take care of patients.
The issue I have with physicians hiring financial advisors is that most physicians who hire financial advisors are naive when it comes to the financial industry. Physicians have a huge target on them because of their lack of financial knowledge, their busy schedule and their current (or future) large income.
Put simply the financial industry is built to separate physicians from their money.
There are three main things to investigate if you do decide to hire a financial advisor so you know their conflicts of interest and how to avoid them.
#1: What financial standard does the advisor use?
This first point is a little confusing to physicians. We are trained to always put the patient first with all our medical decisions. It is drilled into us from the first day of medical school. We also memorize the “gold standard” of treatment and look for the stand of care.
In the financial industry, there are actually two standards: the suitability standard and the fiduciary standard.
- Suitability Standard - This is the less stringent standard that guides financial advisors. It states that a financial advisor may recommend, sell, and implement financial strategies which may not be in your best interest. As long as the product or strategy is suitable, they can do it.
- Fiduciary Standard - This is the most stringiest standard that states the finical advisor will only do what is in your best interest. Period. They take a fiduciary oath much like our hippocratic oath.
What would this look like if we had the same system in medicine?
Medical Suitability Standard - Every patient coming to the operating room for appendicitis would get a central line, arterial line, and a TEE probe dropped because the anesthesiologist would get paid more. It isn’t in the patient’s best interest, but it may be deemed as “suitable”.
Medical Fiduciary Standard - Patients coming to the operating room for appendicitis would receive the level of care that is appropriate for their situation.
#2: How does the financial advisor get paid?
Financial advisors have a myriad of different ways to earn a living in the financial industry. You need to understand how they are paid. “There is no free lunch.” If your advisor says they give you free financial advice, they are finding a way to get paid through some other means.
(For these examples, let’s assume you are early in your career and you have $250K in an investment account, $250K in a retirement account, and a $500k home.)
- Commission Based - Financial advisors get paid a commission to sell you a product or service. You are not directly paying the advisor. There is a huge conflict of interest to sell you the product that will earn them the highest commission.
- Assets under Management - Financial advisors get paid a percentage of the assets they manage for you. Usually this is somewhere around 0.5% to 1.5% a year on the investments they manage for you. That does not sound like much, but it adds up. If you are paying someone 1% of your assets a year, then on a portfolio of $500k you are paying them $5,000 in fees. That is $5,000 every year. Plus, they may be having you buy products where they also get a commission for a “double hit”.
- Assets under Advisement - This is absolutely the worst financial arrangement. You pay the financial advisor a percentage of all the assets they advise you on which includes your retirement accounts and your home. So instead of paying the financial advisor on just your $500k brokerage account, you also are paying them to “advise” you on your $250K retirement account and on your $500k home. So instead of paying “just” $5,000 a year, you are now paying $12,500 a year (every year) for the privilege of having them advise you. And that is just this year. Next year, you will be paying even more, because your assets will go up in value.
- Fee Only - This is the least conflicted fee model. You pay the financial advisor for the advice they give you. There are three main types of Fee Only structures:
- Hourly fee - you pay by the hour that they work for you. The more time the financial advisor works for you, the more it will cost you.
- Project based fee - you pay for the cost of a project. You will know how much you are paying for a project like a financial plan, or a yearly rebalance of your assets.
- Flat fee - you pay a flat fee for the advisor’s time and they provide everything you need for a flat fee which is billed to you monthly, quarterly, or annually.
- Other Income. This gets a little tricky. Some advisors may get paid a referral fee for sending you to their lawyer or having you use their financial software or opening an account at their “preferred” financial institution. They will not always tell you about these conflicts, but they are there. If you really want to know all their income sources, then request their ADV-2a document. This is the Holy Grail of financial disclosures, because it will list every single way the advisor gets paid.
#3: Do they routinely work with physicians?
Physicians have a unique financial situation.
Many have relatively large medical school debt (the average medical school debt - $215k, and it is not unusual to have some anesthesiology residents in $350-$450K range). They also lack retirement savings due to prolonged schooling. Then there is the anticipation of a large salary increase when you graduate from residency.
Navigating these issues take some knowledge and experience for financial planners. Where many financial planners who work with physicians fall flat is with medical school debt treatment. Many of these planners are paid under a commission based or assets under management system, so they largely ignore student loan debt. (Because it does not earn them any money.)
Do You Need a Financial Advisor?
It depends. You can manage your personal finances with a little self-education and some planning. In reality, personal finance does not need to be either complicated or time consuming. Most physicians do not have overly complicated personal finances and do not need an “expert”.
If you really do not want manage your personal finances yourself you should hire a financial advisor with these three criteria:
They are willing to sign a Fiduciary Oath.
They charge a Flat Fee.
They have a long track record of working with physicians.
The ASA Committee on Young Physicians is pleased to present this monthly article series on personal finance. These articles are not written by hedge fund managers or real estate tycoons but by practicing physicians. Some have business degrees and some do not – but every contributor is an anesthesiologist who has some guidance to offer the rising generation of attending physicians. It is not the intention of the committee to offer definitive financial advice, but rather some pearls of wisdom to consider while developing a personal fiscal plan.