Choose professional investment advice that works for you
Selecting an investment advisor can be an important decision for an orthopedic surgeon’s long-term financial security. In this third article of a three-part series on investing, the leading options orthopedists have for professional investment advice are compared. Most orthopedic surgeons, at some point in their careers, will likely choose between these options based on their specific circumstances and preferences.
Brokers and banks
Concerning investment advice, brokers and banks tend to be popular because they are, or they are affiliated with, the largest corporations with the most marketing and name brand recognition.
A broker dealer is generally a person or firm in the business of buying and selling securities, operating as both a broker and a dealer, depending on the transaction. Some examples of such firms are national/global broker dealers, such as Merrill Lynch, Morgan Stanley or UBS; regional brokers include such firms as Raymond James and Edward Jones; and bank-based advisors are affiliated with large banks, like Wells Fargo and Bank of America.
In addition to being large firms, banks and broker dealers share another fundamental component in that they are not fiduciaries. They are required only to abide by the suitability standard that was discussed in the September 2019 Forward Thinking article in Orthopedics Today.
An orthopedist may consider using this option for the benefits of working with the world’s largest broker-dealers or banks, which include tremendous research capabilities, unique investment offerings and the convenience of worldwide branch offices.
Among the reasons an orthopedic surgeon may consider avoiding a broker or bank is the conflict of interest that is present in a relationship where the compensation of the individual who makes the investment recommendations is based on the product he or she uses or selects for the investor. Also, from a client’s perspective, the broker’s “suitability” standard is significantly weaker than the higher “fiduciary” standard that was discussed in last months’ issue.
It is important to note that most firms have realized the negative connotation the name “broker” implies and have begun referring to members of their sales force as financial advisors. To determine if the “advisor” is actually a broker, ask the advisor how they and their firm receive compensation and whether or not they owe their client a fiduciary duty or are subject to a suitability standard.
Fee-only financial planners
A fee-only planner usually provides services for a set hourly fee, such as $200 to $500 per hour, or for an annual retainer of perhaps $1,500 to $10,000.
An orthopedist would consider using a fee-only planner because such individuals are generally conflict-free fiduciaries. They also have a simple hourly or retainer fee structure.
On the other hand, an orthopedic surgeon might consider avoiding a fee-only planner because many of them are small operations that have little in the way of research resources and personnel. Some fee-only planners are even one-professional firms that lack a succession plan for the long term. Also, these individuals may not be licensed to buy/sell securities. Although they may be able to help you craft a plan, you may have to implement it yourself.
Automated investment management
A robo-advisor or “robo” is an online, automated, algorithm-based portfolio management/investing service that provides little or no human interaction. Robos are typically low cost and have low account minimums. Many of these services specialize in giving investors convenient exposure to index fund investing and portfolio rebalancing.
An orthopedic surgeon may want to avoid using a robo because most robos do not provide the opportunity to communicate by phone or in person to discuss a particular situation. While a few robos are experimenting with offering a team of customer service representatives, the level of sophistication of such phone reps may be low.
Most robo services available today only allow for cash transfers and deposits and are not capable of account transfers that include established positions. This might work for orthopedic surgeons who are just beginning to invest. However, those individuals with existing portfolios may be practically unable to participate based on their current holdings and large unrealized capital gains.
In addition, many of the current robos have other limitations, including those related to the type of accounts that can be created. For example, they are unable to create trust accounts or accounts for limited liability companies or family limited partnerships.
Finally, but just as important, robos require large cash positions. These minimum cash positions can be a drag on performance. These costs may not be substantial, but are a hidden expense that a non-astute investor may not recognize.
Registered investment advisor
A registered investment advisor (RIA) is an advisor or firm that is engaged in the investment advisory business and registered either with the Securities and Exchange Commission or state securities authorities. An orthopedic surgeon may consider using an RIA because this type of advisor must adhere to a fiduciary standard. Thus, they must serve a client’s best interests, which was discussed in the second article in this series (Orthopedics Today, September 2019, page 5).
Also, independent RIAs are not tied to any particular fund family or investment product. Therefore, they can typically recommend nearly any investment without financial bias. Further, RIAs use independent custodians to hold clients’ assets rather than holding the assets themselves as do brokers and bankers. Finally, RIAs typically charge a simple, transparent fee based on a percentage of the assets they manage.
An orthopedist may want to avoid working with an RIA if access to firm branches nationwide, sophisticated research departments or complex financial products is a priority of theirs. Even the largest RIAs could be lacking in these areas compared with the largest banks and brokers.
Other professional advisors and firms, including hedge funds, private equity firms and venture capital/angel investor funds, are typically not viable options for an orthopedic surgeon’s overall investment approach or for comprehensive wealth management. Moreover, they are generally beyond the scope of what most young orthopedists need.
In the first two parts of this series on investments, we covered data as to why orthopedic surgeons may benefit from the services of a professional advisor and the fundamental differences between advisors who are subject to fiduciary vs. suitability standards. In the final article in the series, we outlined the leading options, as well as pros and cons for the types of professional investment advice from which most orthopedists will choose.
- Wealth Protection Planning for Orthopaedic Surgeons or Wealth Management Made Simple are available free in print or by e-book download by texting OT19 to 555-888 or at www.ojmbookstore.com. Enter code OT19 at checkout.
- For more information:
- Sanjeev Bhatia, MD, is an orthopedic sports medicine surgeon at Northwestern Medicine in Warrenville, Illinois. He can be reached at email: email@example.com.
- David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group www.ojmgroup.com. You should seek professional tax and legal advice before implementing any strategy discussed herein. He can be reached at firstname.lastname@example.org or 877-656-4362.
Disclosures: Bhatia and Mandell report no relevant financial disclosures.