The Ideal Financial Advisor

Too busy or uninterested in DIY investing? Take a look at the types of qualities that make up an ideal investor so you can find one for yourself.

Recently someone in LawyerSlack posted a comment in the financial channel:

I really just want to give somebody money and then they hand me back more money.

I’m glad someone finally said it. Most lawyers have no interest in digging deep into the nitty-gritty of managing their finances. And why should they? After three years of professional school, navigating the challenging legal market and then starting a career in the law, it makes a lot of sense that they’d rather focus on their legal career than sorting out the difference between an HSA or FSA and understanding topics like tax-loss harvesting.

So if you want to give somebody money and then receive more money back, how do you do it without getting ripped off?

It’s not wrong to pay for financial advice but you need to make sure that you’re getting good advice at a fair price. Is there a perfect answer or person (or robot?) for this question?

Unfortunately, I haven’t found the perfect financial advisor yet but if you’re looking for one, here’s some thing to consider.

The Do-It Yourself Solution

When the poster said that he wanted to give money and then be handed back more money in return, he was probably assuming that managing his money is a headache that he’d rather avoid. That might be true but perhaps the entry level question should be “Do I need to hand my money to someone else or, if I put in a small amount of work, can I do this on my own?”

If you can do it on your own for less work than the work it takes to learn about and manage a financial advisor, it might be less of a headache to just take on the project on your own.

As you likely know, I’m not paying anyone to manage my money. And while you might be thinking that makes sense because I’m writing a whole financial blog about investing, you might be surprised to realize that you don’t nearly need to have the interest level I do in order to manage your own finances.

For example, I still keep up with student loan repayment options and student loan refinancing even though I no longer have student loans. That’s only because of the blog. Otherwise, it just wouldn’t matter to me.

Likewise, you only need to buy disability and life insurance once in your life. It’s pretty much the same with mortgages. Once you have one, there’s really no need to keep up with the latest and greatest product.

So when it comes to your own particular financial situation, you only need to know the things that are relevant to you. You can safely ignore the rest, particularly if you keep everything as simple as possible.

The other thing to consider is that you can make a lot of financial mistakes as a do-it yourself investor and come out relatively unscathed on the other end.

If you’re just getting started, you likely have a pretty small portfolio. If you make mistakes now with a 4 figure portfolio, you won’t really end up costing yourself that much money in the long run. Plus, you’ll have the benefit of going through a few bear markets so that by the time you’re in your 50s you’ll know what to do when a bear market comes and takes a significant bite of your real seven figure portfolio.

The other thing to consider is that financial advice certainly isn’t free. The industry average 1% fee for assets under management will cost you plenty over your investing career. If a lawyer invests $50,000 over 30 years while paying a 1% AUM, they’ll end up with a portfolio that is a full $1 million lower than if they hadn’t paid the fee. That means you can make up to $1 million in mistakes on your own before you’re reaching the same amount that you’d pay for good financial advice. There may be something to the oft-repeated “I went to law school because I was bad at math” but lawyers aren’t THAT bad at math.

But maybe you’re still not convinced to do-it yourself. So what should you be looking for in the person you want to hand over your money?

The Ideal Financial Advisor

I haven’t yet found a perfect financial advisor with a perfect business model. There are certainly good people out there with good businesses. They will charge you a fair price for good advice but nobody working in finances or writing about finances can be free of conflicts of interest (including me). But here is what an ideal financial advisor would look like to me:

#1 Fiduciary Duty

I want a financial advisor that’s first responsibility is to do what’s best for me and not what’s best for him. Many people are surprised that not all financial advisors are required to maintain this fiduciary standard and instead can meet a much lower “suitability” standard.

#2 Someone With Up-To-Date Industry Knowledge

While financial advice isn’t rocket science, there are important developments that warrant paying attention in the field. If your financial advisor isn’t familiar with REPAYE or the latest troubles with PSLF, they’re not going to be giving you the best advice. Additionally, a financial advisor that is up-to-speed on the latest developments probably reads a blog like Michael Kitce‘s regularly and could intelligently discuss the weaknesses of the Trinity Study or the efficient-market hypothesis.

#3 Works With Clients Just Like Me

It’s great if you’ve found someone that you know is trustworthy that has been recommended by friends or family, but does that person regularly work with lawyers? I’d want to work with someone that has a thorough understanding of PSLF or who has walked several clients through the various student loan refinancing companies and is familiar with the pros and cons of each. Additionally, I’d want someone that has guided hundreds of people through the Backdoor Roth IRA and can fill out a Form 8606 blindfolded. Lawyers have a few different things going for them that require a certain specialized knowledge. You don’t want to be a part of that person’s handful of doctor and lawyer clients, you want to be the same as everyone that person deals with on a daily basis. I’d want a financial advisor that was familiar with investment options only available to accredited investors and had regularly reviewed financial products sold by the American Bar Association. Then I’d feel comfortable they understood what it’s like to walk in my shoes!

#4 A Well-Articulated Reasonable Investment Strategy

Any advisor I would work with needs to be able to explain his strategy clearly and it needs to be reasonable. Every advisor and investor has a slightly different approach. Some prefer to tilt their asset classes while others prefer simplicity above all else. Maybe the financial advisor you’re working with wants to devote part of the portfolio to alternative investments like commercial real estate or hard-money lending.

All of these nuances are fine. All paved roads lead to Rome. But the financial advisor’s strategy needs to be easy to explain and understand and it needs to be reasonable. If the financial advisor’s strategy is based off picking individual securities or buying when the market is low and selling when it’s hot, you should be concerned.

Finally, unlike a lot of things in life, in investing you get what you don’t pay for. Therefore, the ideal financial advisor needs to be focused on the cost of his recommended investments. Those that aren’t think their great selections will overcome the fees and work out handsomely for you but research has proven again and again that the fees will eat you alive. When the fees are high, the only people guaranteed to make a killing are the ones collecting the fees. Now keep in mind that this is different than the fees charged by the financial advisor. We’ve already conceded that you’ll be paying a fair price for his advice. But you’ll also have to pay fees associated with the investments themselves. These should be as low as possible.

#5 Fee-Only Rather than Fee-Based

These terms sound maddeningly similar but are vastly different. A fee-only financial advisor means the only source of compensation your financial advisor receives is from pees paid directly by you to the advisor. This might be an hourly fee, a retainer fee or a fee based on the percentage of assets under management. Regardless of the type of fee, the key here is that you’re the one paying it directly to the advisor and the advisor is not receiving compensation in the form of commissions based on the products he’s recommending. By keeping it fee-only, you’re removing a major source of conflict since the advice and compensation are completely separate and independent from the financial products recommended.

If fee-only sounds like a good deal, you’ll understand why thousands of investors have gravitated toward their services. In response, the financial industry came with the fee-based moniker which many consumers find confusing (surprise, surprise). In fact, quite a few investors will specifically ask for a “fee-based” advisor thinking they’re making a good first start.

In reality, a fee-based advisor receives fees in at least two forms: (1) as a fee directly from the client (that’s you) and (2) as a commission from the financial product that they’ve recommended, such as load-based mutual funds or insurance. It’s not hard to imagine that a financial advisor that receives a commission from steering you toward a commission-based financial product might have a pretty strong incentive to do so regardless of whether that’s the best solution for you.

Commissions are a terrible way to pay for financial advice. Doctors, lawyers and accountants aren’t paid that way. Neither should financial advisors be paid this way. Commissions should be left to salespeople.

#6 A Fair Price for Good Advice

In addition to receiving good financial advice, I’d only be comfortable paying a fair price for such advice. Generally that means avoiding paying for advice based on the assets under management (AUM) model. Not that any model is perfect but the AUM runs into a few flaws.

First, the fees become ridiculously big as your portfolio grows. It may not seem like much when you have a five figure portfolio but even paying half the industry standard 0.5% on a $2 million portfolio means you’ll be paying $10,000 a year in financial advice alone (not including the fees of your investment products). Managing a $2 million portfolio is not much different from managing a $200,000 portfolio.

Second, the AUM model incentivizes the financial advisor to keep as many assets under management as possible. This means that he may not recommend you to set up a Backdoor Roth or pay off your student loans or mortgage early since it will naturally divert money that could have been counted toward the AUM away into other buckets.

Third, a lot of financial advisor that are solely paid via AUM fees won’t work with you until you have about $500,000 in assets. It simply isn’t worth it to them to collect 1% of $10,000 when you’re just getting started. Ironically, that’s the time when an investor most needs the advice. It may take a decade or more to reach $500,000 (or the investor might not reach it all without good financial advice). By the time you have $500,000 saved up, you should know what you’re doing anyway. Do you really need to pay $5,000/year at that point?

A much better system is simply paying someone an annual fee and/or an hourly fee for financial advice. Those annual fees may range from $1,000 – $5,000 and those hourly fees may cost $100 – $500 per hour. We all know that the billable hour model has its own flaws but at least in this fee-only transaction everything is transparent and you can evaluate whether you’re getting the right amount of attention and advice based on the fee you’re paying.

While naturally you may be inclined to look for the lowest fee possible, keep in mind that we’ve now shifted to an area where you do get what you pay for. If your financial advisor can’t stay in business or can only get his clients to pay him $25/hour, you’re certainly not going to do yourself any favors over the long run by finding someone that’s willing to work at such a low rate.

#7 Connected With the Industry

Finally, while the original comment wanted to hand “somebody” his money and get more in return, unfortunately you’re never going to find one single person that can be your “money guy” and take care of all your needs. Over the course of our investing and financial career, you’ll also need access to other experts, including a financial planner, investment manager, tax strategist, accountant, insurance agent and estate/asset protection specialists. Many advisors can wear several of those hats but none wear them all. As such, I’d only want to work with a financial advisor that understands his own strengths and weaknesses and can coordinate with other advisors as needed when those once-in-a-lifetime concerns come up.

Finding the Ideal Advisor

To be fair, it’s not usually readers of the blog that ask for financial advisors since most of you are doing it yourself. But I suspect that you, like me, are often asked by friends or colleagues for recommendations and advice. Where should you send those people? Well, of course I’d prefer that you send them to this site but what about actual financial advisors?

I’m not entirely sure. I’m still looking for them myself. I’ve traded emails with several, spoken to a few on the phone and follow them via email lists and social media to see what they recommend. So far I haven’t found any particular advisor that I feel comfortable recommending. But at least now you have the tools to look for your own advisor.

If after all this you’re looking for a financial advisor with the lowest cost and the fewest financial conflicts of interest, I still think your best bet may be to take a look in the mirror.

Let’s talk about it. What criteria do you look for in an advisor? Have you found anyone that you’ve recommended to colleagues? Do you think objective investment advice can be given by an advisor that receives payment via commissions?

Joshua Holt

Joshua Holt A practicing private equity M&A lawyer and the creator of Biglaw Investor, Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He spends 10 minutes a month on Personal Capital keeping track of his money and is always looking for honest companies that provide insurance for a fair price without selling you products you don't need.

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    Eleven thoughts on The Ideal Financial Advisor

    1. I do think a good advisor with objective advice is possible. Frankly the real benefit of an advisor is helping you articulate your goals and point your overall financial lifestyle towards those goals. That’s much more then investing. Not everyone is capable of managing these things on their own. I roll my own but I have members of my own family where if I didn’t act as a free advisor they’d be sunk.

      1. Yeah, that’s a great point FTF. Articulating your goals and then developing a plan is tough. Particularly since you need to devote some real time thinking about what you want. But that’s exactly why paying for advice by the hour makes a lot of sense to me. Establishing a financial plan is a huge undertaking worthy of enlisting help. As for ongoing investment account management? You may or may not need to pay for that service.

    2. Haha – love the picture of the guy just handing over a bag of money… fits perfect for this!

      About a year ago, I decided that I wanted to get a second opinion on my finances and sought out a good financial advisor. I ended up getting my prospects through the National Association of Personal Financial Advisors (NAPFA). I then interviewed a few of them on the phone and chose one based on that.

      The guy I went with pretty much nailed everything on your list and, in the end, helped me tremendously. I don’t need as much hand-holding as some people want or need, but I’ll definitely be bringing him back into the mix again in the future.

      — Jim

    3. Biglaw,

      Just came across your site. I thought you did well with the article.

      Ultimately, the most important reasons to hire (and retain) an advisor are simple:

      1) to create a long-term plan with your primary goals/aspirations in mind, quantifying how much it will take to succeed and how to invest to get there

      2) invest properly — no active management or market timing; but instead employing broad diversification across asset classes (large/small and growth/value globally) using index (Vanguard) and structured asset class (DFA) mutual funds.

      How much is this worth? Using your $50k/yr example, we can model 2 portfolios — the first is an advisor-like, globally-diversified approach which includes higher returning small/value stocks, the second is a traditional Vanguard Total Market Index portfolio (which is better than 90% of the plans out there). Over the last 20 or so years (longest data possible), the first approach resulted in about $500K more ending wealth due to about 2% a year higher returns. See here:

      Two other considerations from the perspective of the better portfolio allocation —
      a) it only took $40K per year in savings ($10K less than $50K per year) to get to the same place as the index investor,
      b) at $50K per year savings, the better investor got there in 2014 as opposed to 2017 — theoretically retiring three years earlier.

      3) keep you disciplined along the way, avoiding the all-too-common fear/greed cycle experienced by most investors. Vanguard founder John Bogle estimated that investors underperformed their mutual funds by 2.2% PER YEAR from 1997-2011 from buying/selling at the wrong time.

      Hourly/retainer advice costs less on the surface, but generally, the allocations are inferior, and the investor is less disciplined — staying the course requires regular guidance and counseling. Ongoing advice costs more but the value is typically far greater in the long run, as the examples above illustrate.

    4. Hi Biglaw!
      A couple of thoughts –
      1) You mention the specific needs of young associates and that they are complex- especially with regard to loan management (and I very much agree.) I would propose that it is a HUGE miss for the financial advisors that they have not designed a tailored advising program for your specific situation (and a few other situations, such as doctors). They should be creating a targeted advising network rather than just treating people with money as all the same.

      2) This goes to why the industry has failed to provide what we mentioned in #1. Have you ever looked at the requirements to be a Certified Financial Planner? I have – they are really pretty basic and insurance-focused. CFA at least requires more ability to analyze investments – but at the cost of pretty much all other aspects of financial planning. These certifications are not targeted well with regard to the tasks that you have mentioned above – and I agree are important. Frankly, many FAs are not super aggressive or entrepreneurial and are not really looking to provide extra services and knowledge. They mostly just chase the biggest fish. They are also typically not super-knowledgeable either.

      3) Unless you don’t invest in any mutual funds at all, your statement above that “I’m not paying anyone to manage my money” is not quite accurate. I am willing to bet that there are some management fees there – but they are likely low. Beware of financial advisors that try to steer you into funds of their own or with which they have a relationship. They could be taking 2% as a fund management fee for the underlying fund – and then taking another 1-2% as your financial planner. Additionally, several fund families have programs where they rebate part of the management fee back to the financial planner for steering your investment to them. I think that the American Funds family did at one point – not sure if it still does.

      4) A little pro-FA item here – Having an FA can give people a sense of security and help them sleep at night or reduce their stress. That alone is valuable. What cost makes it sensible will differ from person to person. Also, sometimes people’s faith in their FA is misguided, but it at least makes them feel good. In a similar vein (but even worse), is buying an annuity. Their high fees typically make them terrible investments, but their “guaranteed” increase in investment value can help relieve people’s stress.

      1. Managing Partner:

        Since writing this article, I’ve been approach by several financial advisors that specifically work with lawyers. I agree that it’s a unforgivable deficiency to work with a financial advisor that does not design a program tailored for you specifically. To me, that makes it hard to imagine working with anyone who isn’t familiar with lawyers in their client base (or preferably only works with lawyers).

        Your point #3 is great and sometimes misunderstood. There are the fees paid to financial advisors to manage your money and then there are the underlying management fees in the investments themselves (i.e. the expense ratios). You pay both if you’re paying a financial advisor.

        1. Hi Biglaw!
          How about an article summarizing your experiences with the lawyer-specific FAs that contacted you? Also, any recommendations or things to watch for would be useful.

    5. I have arrived at the discussion somewhat late but I can’t resist adding my thoughts for posterity if nothing else!

      The US advice industry, as viewed from the perspective of the Australian system, seems to be both antiquated and somewhat haphazard in its efficacy. In the ‘land down under’ ‘fiduciary’ is enshrined in laws surrounding the advice industry. It is also a key to all adviser association’s ‘codes of ethics’. I can imagine your concerns trying to locate quality advice if this fundamental premise is optional with the US advisers!

      I do note in your post (which I certainly enjoyed) that you focussed very much on both accumulated education costs and products to fund retirement as area’s of major concern. I am certainly unfamiliar with the specifics of both (I was slightly alarmed when I came across the term ‘backdoor Roth’ until I discovered it was a strategy to contribute extra to retirement funds and not porn!) but we also have similar issues surrounding both areas in Australia

      The key I always found that with the efficient use of your available cash flow, you reduce debt first and then concentrate on retirement savings. The “jail” that debt creates, I think, can be just as punitive as the ones your clients are trying to avoid.

      I must say, being an ex-adviser and now a teacher of same, I was going to draw a parallel to lawyer fees and adviser fee’s and possibly throw in the term ‘glass houses’ but I have reframed as your argument was both clear and reasonable (mostly!)

      Finally, I note above, the comments by Eric. He too has a great analysis, and I would have enjoyed your response. And I must say Eric makes some very strong points and has included some indisputable evidence. The ‘metrics’ page of his ‘comparison calculator’ makes for interesting reading.

      Thanks for your post, a most enjoyable read.

      Regards Adrian

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