Are Financial Advisors Giving Physicians Conflicted Financial Guidance?

NOVEMBER 05, 2018
The Physician Philosopher
When I created The Physician Philosopher, there were two primary motivations behind it.

First, I wanted to help medical trainees and attending physicians prevent and treat burnout by utilizing the tools necessary to reach early financial independence. This purpose has been well documented

Second, I wanted to prevent physicians from being taken advantage of by those in the financial industry who have major conflicts of interest. This passion stems from my inability to get personal disability insurance as a result of bad advice from a conflicted insurance agent.

This second purpose of mine recently came under attack as I read a post on Physician's Money Digest® called "Is the Internet Giving Physicians Bad Financial Guidance?"

Today, I want to share several counter-arguments to the one laid out by the post linked above.

Initially, we will introduce the topic and the reason for my response. Then, I will outline four major conflicts of interest that are present in both the fee-based financial advising world and the insurance product industry - and how physician finance bloggers educate physicians on these conflicts and how to avoid them.

We will then end with where I think the right financial advice can be found, if needed.

Fuel to the FIRE


The author outlines several points, chief among which is that the internet is a bad place to get financial advice. He also specifically mentions one particular group he wants physicians to be aware of as a source of bad financial guidance - FIRE bloggers.

The author goes a step further and calls out the personal finance blogging community for a perceived conflict of interest.

He says it this way,

“[The FIRE blogger's] goal is to write about things that will get people to respond (share, like, and comment on the article.) So naturally the dry, boring details behind these financial concepts are neglected in favor of the more sensational.”

While there may be some small conflicts of interest in spreading the FIRE (Financial Independence Retire Early), I want to spend some time discussing the massive conflicts of interest that plague many fee-based financial advisors selling insurance products.

Let's leave it up to the readers to determine who is providing "bad financial guidance."
 

Conflict 1: Beneficence and the Fiduciary

After slamming FIRE bloggers, the article encourages readers to let professionals step in and execute their financial plan. The difficulty is that there is not enough information in the article about exactly what defines a financial expert and how to separate the wheat from the chaff.

For example, FIRE bloggers who support Do It Yourself Investing and fee-based financial advisors are not the only two options available to physicians who are seeking financial advice. In the philosophical world, this is called a false dilemma - presenting only two options when, in reality, there are more than two.

Enter here the fee-ONLY advisor (an advisor who does not sell commissioned products) who acts as a fiduciary. If you aren't inclined to minimize your fees and expenses while running your own finances, this is the kind of financial advisor you should be seeking. Why?

Just as a physician should act with beneficence, the principle of putting the patient first, financial advisors worth having around should enter into a documented fiduciary contract with their clients. A fiduciary is ethically bound to put the client first, even if it makes them less money.

The implicit message here is that many fee-based advisors who work for large brokers or insurance companies are not fiduciaries. They can and do make decisions that are best for their own wallet. This is tough to dispute, because it is so well documented.

How can you tell if someone is a fee-only advisor operating as a fiduciary?

Naturally, they should be proud to tell you, and it should be stated on their website. You can also see if they belong to associations that require it, such as NAPFA and the XY Planning Network.
 

Conflict 2: Commissioned Insurance Products

There are many hospitals in this country where pharmaceutical reps are no longer allowed to step foot on the premises. Many others have at least limited their ability to provide products or free meals. The reason? Hospitals didn't want their physicians working under a conflict of interest.

Honestly, while this kind of conflict is bad, it could be far worse.

Imagine that the physicians not only received free meals and ball-point pens, but that if they wrote a script for the drug being pushed on them - they would receive payment for doing so. Even if it wasn't the best medication for their patient.

This is how it works in the commissioned insurance product world when the products are sold by the very people who are supposed to give you financial advice. As we will discuss later, mixing investments and insurance is rarely a good idea.

How can you trust a financial advisor paid this way to sell you the right product? By educating yourself. How can you receive this education? By reading information that doesn't come from the fee-based advisor trying to sell it to you.

Often times, this information comes from personal finance bloggers who have filtered out the nonsense.

For example, as a physician finance blogger, I’d like to inform you of a few ways a physician can determine a financial advisor’s conflicts of interest in this space:
  1. Ask them to list all the various ways they get paid (note: this is different than asking how you will pay them). What percentage comes from each method?
  2. Look them up on the FINRA Broker Check database to see who their main employer is and the level of their experience. It’s possible that their only employer is insurance company, which means their main focus is bent on selling products. Not financial advice.
 

Conflict 3: Whole Life Insurance

The cat is out of the bag.

Whole life insurance policies provide some of the best commission to those that sell it. Naturally, this leads to insurance agents making the product sound incredible despite its many downsides. It also explains why physicians often purchase a product that they'll later regret.

The point is this: whole-life insurance is rarely the right product for physicians, yet it is one of the first mentioned by those that sell it, because of the high commission involved. Typically, the agent makes between 50-110% of the first year’s premium. If the annual premium ranges between $10,000 to $40,000, well, I’ll let you do the math. It’s a handsome sum they stand to make.

I could outline all of the reasons that whole life insurance is almost never the right thing for a physician, but someone else has already done it better than I can.

Briefly, investments can be better and more effectively purchased at a low cost through retirement vehicles. If you run out of tax-advantaged space, a taxable account is usually still a better option. Who wants the 2-3% real returns from whole-life that only occur after you've dug yourself out of a negative return for the first ten to fifteen years?

What about the insurance aspect? Well, that can be purchased for substantially less. It's called term-life insurance.

Some might say, "But term-life only lasts ‘til you are 50-80! What if I die after that?"

Well, my friend, if you read physician finance sites, which preach financial independence you will eventually stop making payments on your life insurance anyway.

Why? You'll be self insured.
 

Conflict 4. Assets Under Management

It is well documented that I am not the biggest fan of the Assets Under Management (AUM) model where you pay a financial advisor a percentage of your assets each year. Other physician finance bloggers aren't either (here is an example from Physician on Fire).

Have a million dollars? At a 1% AUM (the industry standard), that'll cost you $10,000 per year. Have $2 million? $20,000. If you weren't paying an AUM advisor, that money could have compounded in the market instead.

The reason behind my distaste for this sort of model is that it provides some additional conflicts of interest.

For example, the advisor would be conflicted if asked about investing in real estate, paying down your student loans faster, delaying social security payments until age 70, or paying off your mortgage in 10 years instead of 30.

Why? Because none of those decisions place more money into your investment accounts that are being managed by your financial advisor. These decisions mean they will earn less, which makes it hard for them to then recommend.

Even if it is what's best for you.

Of course, physician finance blogs remain a trusted source to inform you about these conflicts. In fact, one such blog had a guest post discussing how to read the ADV brochure a financial advisor’s firm must produce. This document outlines the fee structure of the firm, and can highlight any potential conflicts based on how they get paid for investment advice.
 

Where Should a Physician Get Financial Advice?


When it comes to personal finance, physicians break pretty neatly into three groups:
  1. Those that are willing to do the homework and run their own finances.
  2. The group that knows enough to do it themselves, but wants a professional to "dot the i's and cross the t's".
  3. Those that want nothing to do with personal finance and financial planning.

The first group will thrive by reading physician finance blogs. (And, actually, all three groups would benefit from reading these sites). We preach practical investing that works. It's probably all that they will need, and if they do it themselves it is the best way to minimize fees. In the end, if they need help - they'll know what good advice looks like and where to find it by reading these blogs, too.

The second and third group could potentially benefit from professional help. My advice is to get help from fee-only advisors who sell their services based off of a flat rate. If they must use an AUM model, it should still come from a fee-only advisor with a signed fiduciary agreement.

And, when all three groups need insurance, they should purchase it from independent insurance agents that have extensive experience with physicians and are not tied to a single insurance company. Not from financial advisors trying to earn a buck by touting whole life insurance.


Take Home

The lesson here is simple: Those that live in glass houses shouldn't throw stones.

Personal finance and FIRE bloggers are out to set the record straight. Not to give "bad financial guidance" as the original article infers.

The author of the original post ends his post by saying that we should "learn as much as [we] can about the issue, but let a professional come in and execute the plan."

The Physician Philosopher website agrees that you should learn as much as possible regarding personal finance. If you can, do all of your finances on your own. We recognize, though, that's not possible for everyone. You might need a professional.

When you need professional help, it should come from a fee-only financial advisor who is a fiduciary and preferably charges flat-fees for their service. That's the best way to minimize conflicts of interest and to build a house that isn't made of glass.

The Physician Philosopher is a sinner saved by grace, husband, father to three little philosophers, author, inventor, and craft-beer lover. He happens to be a physician anesthesiologist and runs The Physician Philosopher website where he teaches medical professionals how to obtain both wealth & wellness.

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