A Doc's Guide to Choosing the Best Investment Advisor

By James M. Dahle, MD

You're going to trust this person with your life savings, so make sure you choose wisely.

It’s difficult to find unbiased information about choosing an investment advisor, but most physicians don’t even bother looking for the information that’s out there. They simply do what I did as a young resident: They take the recommendation of a colleague without checking the advisor’s qualifications. It took me more than a year to realize that my “advisor” was really just a commissioned salesman selling me high-expense, low-performance investing products that mainly served to transfer money from my pocket to his. That’s when I decided to become a lot more informed. . . and you should, too.

At the most basic level, what you’re looking for in an investment advisor is good advice at a fair price. Unfortunately, the vast majority of advice out there isn’t good advice, but self-serving recommendations from commissioned salesmen. Even among educated advisors with a fiduciary duty (meaning they do what is right for you even if it makes them less money), the cost of the advice is often such that it will delay your retirement by years. Here’s what you need to know to recognize a competent advisor and an appropriate price to pay for the advice.

What do they know?

Unlike doctors, who go through years of education and years more of supervised practice before beginning an independent professional life, anyone can become a financial advisor in less than a week with no significant educational requirements. There are dozens of designations that look impressive after an advisor’s name, but there are really only four that matter:  CFP, ChFC, CPA/PFS, and CFA. Even these four have minor educational requirements compared to most professions (see below for details). While there are good advisors who don’t have any of these designations—and plenty of bad advisors with them—obtaining one of these designations seems like a pretty low hurdle for someone to jump over in order to prove they’re serious about their field. 

Experience is also an important factor in choosing an advisor. Just as your patients didn’t really trust your recommendations when you were a fresh July intern, there’s no reason for you to hire a 22-year-old financial advisor who is still learning the ropes. Find someone with a little gray hair, but more importantly, someone who’s managed clients’ money through at least one bear and one bull market, and preferably two or more of each. 

It’s also helpful to have an advisor who’s familiar with the unique needs of physicians. If your advisor doesn’t know about student loan programs like Public Service Loan Forgiveness, investing strategies like The Backdoor Roth IRA, and asset protection strategies like titling property as Tenants By the Entirety. . . keep looking.

Just as doctors try to practice evidence-based medicine, a good advisor is also familiar with the evidence behind successful investing. The evidence for passive investing (obtaining market returns at the lowest possible cost) rather than active (trying to beat the market) is overwhelming. If your prospective advisor isn’t familiar with it, keep looking.

What do they charge?

There are four basic ways that advisors are compensated. The first is with commissions. Advisors paid by commission are really salesmen pushing high-expense mutual funds and insurance-based investing solutions. In general you should avoid advisors compensated this way.

Some advisors are paid on an hourly basis, which is a great way to receive financial advice since you only pay for the advice you need. Fair hourly rates range from $100-500 per hour. However, it can be difficult to find an advisor willing to be paid this way.

The most common compensation formula is for advisors to charge a percentage of the assets under management (AUM). One percent seems to be an industry standard, but there are plenty of advisors who charge less. A one-percent “drag” on your investment returns can be very significant when compounded over the decades of your investment horizon, reducing the size of your retirement nest egg by 15 to 20 percent. If extended into your retirement years, paying that high advisory fee can mean winding up with 38 percent less! Since there are competent advisors willing to work for 0.4 to 0.8 percent per year, it seems silly to pay 1 percent or more. 

Perhaps the best way to pay for investment advice is to pay a flat annual fee, eliminating the bias that results from an advisor who wishes to increase the AUM even when it’s not in your best interests. Investors paying a flat fee generally pay much less to have a large portfolio managed. Reasonable fees range from $1000 to $10,000 per year.

A competent, low-cost investment advisor can almost literally be worth his weight in gold. Spending the time up-front to do appropriate due diligence will help you choose the right advisor the first time.

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What the Letters Mean

CFP -Certified Financial Planner

Exam Required

Estimated 200 hours coursework/exam prep

Experience: 2-3 years

ChFC-Chartered Financial Consultant

No Exam

Estimated 200 hours of coursework

Experience 3 years

CPA/PFS – Certified Public Accountant/Personal Financial Specialist

Must be a licensed CPA

Estimated 100 hours coursework/exam prep

75 hours of coursework

Experience: 2 years

CFA-Chartered Financial Analyst

3 Exams Required

Estimated 750 hours exam prep

Experience: 4 years

James M. Dahle, MD is the author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing and blogs at http://whitecoatinvestor.com. He is not a licensed financial advisor, accountant, or attorney, and recommends you consult with your own advisors prior to acting on any information you read here.