Formulate a Financial Plan

Know Your Net Worth

Manage & Minimize Debt

Accumulate Assets

Budget to Live Within Your Means

Understand Investing Basics

Plan for Retirement

Insure People & Property

Deal with Financial Advisors

Review Your Employment Contract

Make Plans for Your Estate

Make Good Decisions


Ideally, financial advisors serve as architects and masons who help to design and build our Pillars of Wealth. But in reality, some financial advisors undermine our nest eggs with bad advice, high fees, or both.  

This gap between ideal and real is the crux of the problem in the retail financial services industry. To be sure, there are advisors who provide good service at a fair price. But the challenge for you is to distinguish the good—from the bad and the ugly.

And there’s a lot of bad and ugly. The entire retail financial services industry should be reformed with a focus on transparency and simplicity. Anyone offering retail financial services should be a fiduciary. In a better system the vast and confusing selection of existing products would be pushed into the background, with a smaller number of simple, standardized, and transparent offerings taking center stage. Such a radical overhaul would save consumers billions of dollars in unnecessary fees every year and make financial decisions easier and far less stressful. But change on that scale would likely also put two thirds (or more) of the current providers of retail services out of business. And that, of course, is why the industry has fought tooth and nail to resist any and all change.

There was hope that consumer protections would increase following passage of the Dodd Frank Act (2010) and creation of the Consumer Financial Protection Bureau (CFPB, 2011). But progress was slow from the outset. Behind the scenes, industry lobbyists immediately sought to water down Dodd Frank provisions and to undermine the CFPB. Many advances, including an effort to expand fiduciary duty requirement to more providers of financial advice, were ultimately scrapped.  

An outcome of the government’s decision to reduce oversight and regulation is that our finances are more vulnerable. This makes it more crucial than ever for each of us to gain more knowledge so we can make better decisions and reduce our reliance on unscrupulous or inept advisors. Even if you still prefer to outsource decisions to an advisor instead of going the Do-It-Yourself (DIY) path, you still need to know enough to choose the right advisor.

My default recommendation is to encourage more rather than less self-sufficiency because that gives you more control. Either path is legitimate, but, of course, each has its pros and cons.

While I recommend reducing or ending your reliance on financial advisors and, in particular brokers, I don’t recommend that you try to function as an accountant or attorney. 15-20 hours of education will give you a good foundation for financial decision making, but you’d need several years of education to take on accounting and legal issues. Furthermore, accountants and attorneys owe a fiduciary duty (the highest level of care) to their clients, so there isn’t a pressing need to bypass them.  


The Advisor’s Sales Agenda

Successful advisors, i.e., those with numerous clients and profitable practices, are not necessarily those with the best analytical capabilities. Rather, they’re the ones with the best influencing skills. And they have numerous opportunities to refine those skills, embracing the latest psychology and sociology research on effective ways to win clients’ trust and influence them to purchase particular products.

A new product presentation from an insurance company or asset management firm to its salespeople often includes these segments:

  • These are the client pain points …
  • These are the things you can say to get the client hooked …
  • This is how you get paid …

In other training sessions salespeople may be taught to use fear and greed to persuade clients to buy their products. To succeed, all advisors must have refined sales skills, and this very set of influencing skills will inevitably be aimed at you.

Yes, there are advisors out there who genuinely want to help you, and they’re good at their job. But even they may resort to the proven psychological techniques that get you to sign up for their services. Their motivation may not be: I need to manipulate the client so I can make money. It may instead be: I’m one of the good guys. I’ve always bent over backwards for my clients. I’m not manipulating my clients. I’m simply doing what is necessary to ensure they entrust their money to me, instead of some crook who will take advantage of them.

The end result in either case is that you’re being manipulated.


New Clients are Better than Old

Another feature of the advisory business is that: advisors make a lot more money by gaining new clients rather than from servicing existing ones.

Let’s assume you invest $100,000 with an advisor who charges annual assets under management fees of 1%.[1] The advisor spends quality time with you, and your portfolio rises in value by 12% to reach $112,000 at year-end. Thereafter, the advisor’s fee rises to $1,120. If instead your portfolio value declines over that year by 10% to $90,000, the advisor’s subsequent fee drops to $900. Advisors argue that this aligns their fortunes with ours. If we make money they earn more, if we lose money they earn less. But now consider the advisor’s fortunes if instead of spending time with you, he spends that time pursuing another client, who also invests $100,000. If the year ends with gains of 12% for both clients, the advisor’s income increases to $2,400. But more importantly, even if the advisor gives terrible advice so that both you and the new client lose 10%, the advisor is still in line to receive $1,800 for the second year—a lot more than if he’d helped you alone gain 12%.

This explains why advisors prefer to spend their time marketing their services to new prospects, rather than spending that time with existing clients. That’s one reason why you may find yourself being handed off to the advisor’s junior assistant soon after becoming a client. This frees the advisor up to hunt for more client prospects. The junior associate is usually less knowledgeable and less experienced, which can be a problem if you need complex ongoing guidance.  


Why Advisors Target Medical Professionals?

Here’s the answer given by a bewildered bank robber when asked by a judge why he robbed banks: “Because that’s where the money is!”

The financial advisory community views doctors as high-earners with significant investment assets or the potential for amassing significant assets. That’s why they pursue you—because you are where the money is. Doctors also generally lack the time and inclination to spend on finances and prefer to hand off all financial decisions to their advisors. This makes the advisor’s life easier.

The bottom line (and admittedly the most cynical interpretation of advisor motives) is that advisors like wealthy clients who will blindly trust them without questioning their fees or benchmarking their services against competitor offerings. In other words, it’s easy to take advantage of busy doctors.  

Advisors know it’s hard to break into doctors’ insular societies, because doctors prefer to seek advice from each other rather than trusting finance professionals. This makes gaining the trust of doctors a long process. But advisors also know that once they gain the trust of a doctor, she will be inclined to recommend them to her doctor friends. That’s the big payoff. And that’s why they hound you, mercilessly. They don’t just want you—they want everyone around you.


I’ve been quite hard on advisors to this point. The reason is that the wrong advisor represents a serious danger to your finances. Accordingly, I feel it necessary to expose the ugly underbelly of the profession. Having said that, there are good advisors out there who can provide good service at a fair price.

We begin this chapter with a comparison of the DIY and outsourcing approach. From there we’ll move on to discuss the basic functions of advisors, i.e., what specifically they can do for us, and their core characteristics: alignment with our interests, compensation methods, and expertise. The remainder of the chapter is dedicated to helping you find an advisor who is appropriate to your needs.


[1] For the record, I don’t recommend paying an advisor an annual fee anywhere near 1%. The number is used here simply because it makes the math easier.