How to determine whether to go it alone or hire an advisor to handle wealth management
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Key takeaways:
- Physicians working on their own finances should be educated on how to do the job like a professional.
- Personal interest in investments may work against a physician’s investment performance.
One of the most important questions physicians will need to answer is whether they will hire a financial advisor to help them manage their wealth or do it themselves.
Certainly, there are pros and cons to both the do-it-yourself (DIY) and advisor models. In this article, we will analyze a few of the top pros and cons of each option.
DIY on finances: Pros
A physician could choose to DIY on any area of wealth planning, from preparing taxes or using a self-service option like LegalZoom for legal documents, to creating a basic financial model or researching and selecting one’s own insurance policies without an agent.
Of course, the high-level arguments for and against DIY investing apply to nearly every area of wealth planning. Here, though, we will focus on investment management only.
Reducing fees: Reducing fees is nothing to scoff at. Fee drag can make a difference to the overall performance of your investments. If an orthopedist chooses an advisor, it is imperative to understand how the advisor is compensated and how planning will be affected.
Enjoying the education associated with self-directing: We only have one life. If orthopedists want to spend their free time working on their finances — whether that is preparing their tax returns, choosing their investments, analyzing insurance policies, etc.— they should do that. Of course, they should also spend the time to become educated enough to do the job as well as a professional — or they risk putting their finances and family in a worse position than if they did not DIY.
Not having someone they trust with that element of planning: Trusting one’s financial advisor, attorney, CPA, insurance agent or other wealth professional is crucial. Trusting them means not only is the physician confident that these professionals have their client’s best interests at heart, but also that these advisors are competent in their professions. If orthopedists are DIYing because they have not found advisors they can trust, they should ask colleagues, do research for nationwide experts, perform due diligence and ask for references. Do exactly what one would tell a patient looking for a physician in another specialty.
DIY on finances: Cons
It takes time, so there is an opportunity cost to DIYing. In other words, would a physician be better off putting his or her time to its highest and best use — treating patients or building a practice — and then spending a portion of that income to hire an advisor with the particular expertise needed?
At a high level, let’s examine a few numbers. Some physicians work around 200 to 250 days a year and their income can range from $250,000 to $1 million-plus annually, so they can earn between $1,000 to $5,000-plus per day.
If we estimate that the work involved in actively managing a portfolio — including researching public and private investments, assessing portfolio risk, trading and rebalancing, harvesting tax losses and locating tax-efficient assets — it would take 1 day to 3 days per month. This equates to a time cost of between $12,000 and $180,000 annually for physicians in the above income range.
Obviously, this range is extremely large, with the highest-income physicians incurring the greatest opportunity cost. Even for the lowest-income physicians (who still are earning much more than the average U.S. household), the cost of their time almost always exceeds what they would pay a professional to handle these tasks.
DIYers are generally not going to have access to either (a) cutting-edge technology/benefit of scalability or (b) alternative and private investment offerings that professional advisory firms can leverage.
The lack of technology can impact trading performance and cost, eating into investment gains, while the lack of alternative and private opportunities means losing out on private debt, private equity, private real estate, hedge funds, venture capital and more that many professional investment firms can vet and offer to their clients.
Perhaps most importantly, money triggers emotions, which can be dangerous for the DIYer. Theoretically, no one has a greater interest than the orthopedist in protecting and looking after his or her own investments. However, that personal interest may be the single greatest factor working against one’s investment performance. Most investors are risk-averse biased creatures prone to giving too much credence to noise, trends and the herd mentality. In the legal profession, there is an old saying (often attributed to Abraham Lincoln): “An attorney who represents himself has a fool for a client.” Does this adage also apply to finance? In many cases, it does.
Joint consideration for joint assets
If DIYing for oneself is challenging, consider the additional complexity involved for married couples or other partners with joint assets. They each need to not only overcome their own personal biases, but they must also navigate their spouse’s ingrained beliefs and reach agreements on financial matters that impact them both. No wonder financial issues are among the most common causes of relationship stress.
For those who are married or in long-term relationships where finances are commingled, consider these questions:
- What are the odds that both you and your partner have similar attitudes about money, wealth, debt, retirement, etc.?
- Even if you have similar attitudes, what are the odds that your financial goals are aligned?
- Even if your attitudes are similar and long-term goals aligned, what are the odds that you agree on all of the needed tactics to reach those goals?
- Even if your attitudes are similar, long-term goals aligned and agreed on all tactics, what are the odds that your risk tolerance is the same?
It is highly unlikely that any two people will always approach all areas of wealth planning in the same way. While these differences can be overcome through communication and patience in a DIY situation, many couples find that a neutral third party (ie, a professional advisor) can help reduce tensions and navigate a planning path.
Conclusion
At some point in nearly every physician’s financial life, he or she will ask this question: Will I do this myself or work with a professional advisor?
Both approaches have pros and cons and we have laid out a few of the important considerations here. We welcome your questions.
Reference:
Wealth Planning for the Modern Physician and Wealth Management Made Simple are available free in print or by ebook download by texting HEALIO to 844-418-1212 or at www.ojmbookstore.com. Enter code HEALIO at checkout.
For more information:
Sanjeev Bhatia, MD, is an orthopedic sports medicine surgeon practicing at Northwestern Medicine in Warrenville, Ill. He can be reached at sanjeevbhatia1@gmail.com or @DrBhatiaOrtho.
David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group www.ojmgroup.com. He can be reached at 877-656-4362 or mandell@ojmgroup.com.
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