My Journey from DIY Investor to CFP® — and How to Choose a Financial Advisor

First, a disclosure. I have never used a financial advisor. I am a DIY kind of guy at heart and have always been that way, even for things that I would have saved myself a lot of time by using an expert, whether it's with home improvements or finance. A lot of the reason for that is that I like learning new things and am not afraid to make mistakes during the process for the sake of gaining fresh skills. And for the most part, it has all worked out.

My own history of learning personal finance started shortly after finishing residency and wanting to be a good steward of my money. I read a lot of books and searched what was available on the early days of the internet (yes, I'm old!) That taught me the foundational principles of investing that I applied and tried to maintain even through the ups and downs that life presented to me afterwards.

In more recent years, as I decided that I wanted to do something else with my life outside of medicine, I dove deeper into the financial world, first by enrolling in a master's in finance program. That was really the closest that I had been to the financial industry to that point, other than my term-life and disability insurance broker when I was in residency and some help that I got with estate planning later. (Oh, and a brief foray exploring options trading. Who hasn't done that?)

I had never really even seriously considered using a financial advisor before that. I had only heard bad things--that they generally just cost you money in high fees without giving you much in return. However, as I learned more about my second career options in the financial industry, I decided that I really wanted to become a financial advisor and work with people who were most like me--physicians and families with special needs. Doesn't that seem a bit contradictory?

So, why did I make that choice? Two reasons. One is because I learned how much there is to know about personal finance. I thought I knew a fair amount going into the formal education process of obtaining my master's degree and then the CFP and ChSNC marks. But I realized that I had previously just scratched the surface and there were still so many holes in my knowledge base to that point. After filling those in, I felt that I could provide great value to clients by saving them the same amount of time and expense that it took me to gain the education and experience. I also realized that most people aren't as interested in finance as I am and are willing to pay for help and expertise. Because of my previous life experience as a physician and a father of children with special needs, I was in a great position to understand and empathize with those with similar backgrounds and to help them create a plan that would help them to become more financially secure.

The second reason I decided to become a financial advisor is that as I began to understand the industry better, I discovered that what I previously thought about financial advisors is unfortunately often true. Many, if not most of them, do not provide enough value to the clients to justify their fees. And many, if not most of them, do not provide comprehensive planning that looks at the broad picture to fill in all those gaps and holes that I was talking about before. Rather, they are investment managers merely advising on which mutual funds to use or insurance agents hawking products that might not be necessary or in the best interest of the clients. In either case, there are significant conflicts of interest that motivate their "advice". However, I also learned that not all advisors are like that. There are some that really helped their clients and save them money in the long term, often a very significant amount. I wanted to be part of that latter (and smaller) group. This type of advisor can make a big difference for the financial health of their clients.

How does one know the difference? It is not as easy as you might think or as it should be, but there are a few important things to look for. The first important consideration is to know how your advisor gets paid.

In the financial advising industry, there are two basic types of fee structures: fee-based and fee-only. A fee-based advisor means that at least some of their compensation comes from commissions. In other words, they are salespeople--even if they don't make that apparent. They might be selling you an insurance product, an annuity, a mutual fund, or something else. They can sell it to you and still call themselves fiduciary as long as the product meets a reasonability standard, meaning that it is a reasonable investment for the client. It doesn't have to be the best investment for the client, just a reasonable one. So, it is no surprise that often those "advisors" are advising clients to buy a product that they get a commission on, as opposed to a different one that might be just as good or better, but they don't get paid for.

It is also typically not disclosed how much commission that they make on the products that they sell--just that they make a commission. So, it can be really hard for the consumer to know how strong that conflict is. Sometimes these advisors claim "free" financial planning as part of their services. Buyer beware! Nothing in the financial industry is free. If they are giving you a "free" financial plan, they are either making their money on the back end with commissions, or they are doing a very cursory review of your finances (probably not worth the cost).

The second fee model is called "fee-only". Fee-only advisors are true fiduciaries. You are paying them for their advice only. They don't make commissions on products. They should very clearly disclose their fees up-front, so you know exactly how much they are making. There are two ways that fee-only advisors bill their clients, each with pros and cons. The first is called a "flat-fee model" and the other is called an "AUM model."

Flat-fee billing is what it suggests--a flat fee for the service provided. That service may be a comprehensive financial plan, an investment portfolio review, or anything else that you agree on with them. Sometimes, it is an hourly rate and sometimes a predesignated total fee based on the service complexity.

The "AUM" in the second model stands for "assets under management." This is where the advisor charges you a percentage of your total assets that they are managing or advising on. They typically require a minimum investment and then have decreasing percentages for higher number of assets under their management. With this model, your annual bill will fluctuate based on the market value of your investments and how much you decide to invest with them. Some AUM providers just do investment management and others include comprehensive financial planning.

Some fee-only advisors use a combination fee structure, which is how we do it at Targeted Wealth Solutions. We have a flat planning fee and then add a small AUM rider for those who want us to manage their investments for them.

The advantage of using a fee-only advisor is that it should be clear upfront how much you are paying to them and what exactly you are paying for. Not having the temptation of commissions makes them more likely to be a true fiduciary. But there are still inherent conflicts of interest even with these models. An advisor that charges an hourly rate has the motivation to go slower and spend more time on your plan. A flat-fee advisor is motivated to spend less time for the agreed upon service and might not be as thorough. An AUM advisor is motivated to get more of your investments under their management so that they make more on the percentage. None of these motivations means they are bad people or bad advisors. It is not possible to eliminate conflicts of interest in any type of service industry. You just need to be aware of them so that you can make the right decision for yourself based on your needs.

There are other things to consider when choosing the right advisor for you. One is their education and experience. It is surprising to me who can call themselves a "financial advisor". Using that title requires very little in education or experience. Even more confusing is the number of different letter designations in the financial industry representing different certifications. I am planning on doing another blog post about that specifically to describe what some of those mean.

Probably the safest screening tool related to these certifications would be if your advisor is a Certified Financial Planner® or CFP®. This at least tells you that they have met a certain standard of education and experience and have passed a test on their knowledge. The CFP® board also has an ethical standard and continuing education requirement. This does not mean that if your advisor is not a CFP® that they are not good advisors, or vice versa--that being a CFP® ensures that they are good. I think of it like a board certification for physicians. A board certification may not be the only criteria that you look for in your doctor, but it at least gives you some comfort to know that they are adequately trained and monitored.

You also want to pick an advisor who is experienced with your particular financial situation. Most financial advice is widely applicable to everyone but there are certain components of your life and in your plan where a financial advisor who is familiar with that area is a valuable asset.

Most importantly, you should choose someone that you feel like you can trust, that is available and responsive to your questions, and that communicates well. The client and the advisor should be partners in the financial planning process. The advisor can give great advice, but it usually requires the client to buy-in and implement the recommendation. An educated client is the best client, if you ask me. Plus, for the client, understanding the reasons behind the advice will help you ensure that your financial advisor is working in your best interest and for you to capture and see the most value in what they are doing for you.

Finally, I think that a lot of people equate financial planners to investment managers. A financial planner can certainly help manage your investments, but the value extends well beyond just trying to get you better returns from the market. In fact, most active investment managers that try to beat the market fail. Paying them a large fee to do so is a waste of money when you could do just as well in low-cost index funds.

So, how does a financial planner earn their keep? In my mind, it is by creating a comprehensive financial plan that looks at much more than just your investments. A comprehensive plan should include budgeting considerations, income/expenses, savings rates, future spending goals, risk appropriate investment strategy, insurance planning, retirement planning, tax planning, estate planning, charitable gift planning, education planning. It is finding all the gaps where even minor adjustments could result in major savings or asset growth over a lifetime. And it is preventing you from mistakes that you might make based on either lack of knowledge or just counterproductive behavioral tendencies. Think of it more as life planning. A good financial advisor can be with you through all of life's ups and downs and the myriads of things that can affect your financial future. It is an important choice and one that you should feel good about. If you do not feel like your current advisor is providing you this type of service, it is okay to shop for another one. Making the right choice for you and your family can be the difference between a great financial plan or just wasting money.