How to decide which type of investment advisor works for you
by Sanjeev Bhatia, MD and David B. Mandell, JD, MBA
Choosing an investment advisor can be an extremely important decision for the long-term financial security of a physician.
In this second installment of a three-part series on investing, we briefly compare the leading options for professional investment advice. It is likely that many of you will choose from among these options, based on your specific circumstances and preferences, at some point in your career.
Brokers and banks
Definition: 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.
When it comes to investment advice, brokers and banks tend to be very popular because they are the largest corporations with the most marketing and, thus, name-brand recognition. Here are some well-known examples of such firms:
- National/global broker dealers include Merrill Lynch, Morgan Stanley or UBS.
- Regional brokers include firms like Raymond James and Edward Jones.
- 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 – they are not fiduciaries and are required only to abide by the suitability standard (see the first article in the series for more on this).
Why would a physician consider using a broker or bank? Some of the benefits of working with the world's largest broker-dealers or banks include tremendous research capabilities, unique investment offerings and the convenience of branch offices throughout the world.
Why would a physician consider avoiding a broker or bank? The top reason is the conflict of interest present in a relationship where the compensation of the individual making recommendations is based on the product he or she uses for the investor. Also, the broker’s “suitability” standard is significantly weaker, from a client’s perspective, than the higher “fiduciary” standard (to be further discussed in the third article in this series).
It's important to note that most firms have realized the negative connotation the name “broker” implies and have begun calling members of their sales force “financial advisors.” To determine if the “advisor” is a broker, simply ask how they and their firm receive compensation and if they owe their client a fiduciary duty or are subject to a suitability standard.
Fee-only financial planners
Definition: A fee-only planner usually provides services for a set hourly fee ($200-$500 per hour) or for an annual retainer ($1,500-$10,000).
Why would a physician consider using a fee-only planner? They are generally conflict-free fiduciaries. They also have a simple hourly or retainer fee structure.
Why would a physician consider avoiding a fee-only planner? Most of them are small shops, with little in the way of resources in terms of research and personnel. Some are even one-professional firms with no succession plan for the long term. Also, they may not be licensed to buy/sell securities – while they may be able to help you craft a plan, you may have to implement it yourself.
Automated investment management (robo-advisors)
Definition: A robo-advisor (robo) is an online, automated, algorithm-based portfolio management/investing service providing little or no human interaction.
Why would a physician consider using a robo? 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.
Why would a physician consider avoiding a robo? Most robos do not provide the opportunity to communicate by phone or in person to discuss your situation. Most of the robo services today only allow for cash transfers and deposits and are not capable of account transfers that include established positions. This might work for a physician just beginning to invest, but those with existing portfolios may be practically unable to participate based on their current holdings and large unrealized capital gains.
Many of the current robos have a multitude of limitations, including the type of accounts that can be created (ie, they are unable to create trust accounts or accounts for LLCs or FLPs).
Finally, but not insignificantly, robos require large cash positions. These minimum cash positions can be a drag on performance. While these costs may not be substantial, they are a hidden expense a non-astute investor may not recognize.
Registered Investment Advisors
Definition: A Registered Investment Advisor (RIA) is an advisor or firm engaged in the investment advisory business and registered either with the Securities and Exchange Commission or state securities authorities.
Why would a physician consider using an RIA? Most importantly, an RIA must adhere to a fiduciary standard of care – thus, they must serve a client's best interests. (This will be discussed further in the third article in this series.) Also, independent RIAs are not tied to any particular fund family or investment product, so 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 banks). Finally, RIAs typically charge a simple, transparent fee based on a percentage of assets managed.
Why would a physician consider avoiding an RIA? If access to firm branches nationwide, sophisticated research departments or complex financial products is a priority, even the largest RIAs could be lacking in these areas when 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 a physician's overall investment approach or for comprehensive wealth management. Moreover, they are generally beyond the scope of what most young physicians need.
In the first installment in this three-part series on investments, we covered the data around why physicians may benefit from a professional advisor. Here, in the second article in the series, we have outlined the leading options for professional investment advice from which most physicians will choose and presented pros and cons for each option. Look for the third article in the series, where the authors discuss the fundamental differences between those subject to a fiduciary standard vs. those who adhere to a suitability standard
- For Doctors Only or Wealth Management Made Simple are available free in print or by e-book download by texting HEALIO to 555-888 or at www.ojmbookstore.com. Enter code HEALIO at checkout.
- For more information:
- Sanjeev Bhatia, MD, is an orthopedic sports medicine surgeon at Northwestern Medicine in Warrenville, Ill. He can be reached at: firstname.lastname@example.org.
- 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 email@example.com or 877-656-4362.
Disclosures: Bhatia and Mandell report no relevant financial disclosures.