What are the four most expensive words in the English language? For the average American medical professional, here is my list of candidates:
A less obvious but equally costly answer is “I’ve got a guy,” which often leads to a pernicious erosion of your net worth at the hands of someone who is supposed to protect and grow your money. This article will discuss my experience with professional financial management and why, no matter how nice or charming they are, your financial advisor is not your friend.
I’ve Got a Guy
I heard these exact words 20 years ago after asking an older colleague what he did with his money. He pointed me to his financial advisor, who was readily available, friendly, and knowledgeable. After one meeting, he also became “my money guy.” Fast forward 20 years, and those four words have cost me nearly a million dollars. . . and counting.
Did I get the wrong guy? Did he scam me or do anything illegal? No, and that’s the most frustrating part. He was/is, by all accounts, a law-abiding, decent person, no different than the average financial advisor you find in any average town in America. Unfortunately, most financial advisors are thinly veiled salesmen with incentives that fundamentally misalign with their clients.
I explore the financial advisory industry in depth in “Why You Probably Don’t Need (and Can’t Afford) a Financial Advisor,” including how they are educated, what they do, and how they are paid. But today, we’re here to talk about me.
My History with Financial Advisors
Version 1.0
With my first financial advisor, I was simply ignorant and naïve. Like most freshly graduated medical professionals, I had no idea about money, investing, or retirement. I trusted what he told me about his investment choices and my need for a variable life insurance policy. To make matters worse, I began investing with him in 2006, just before the Great Financial Crisis (GFC). The first few years of my career were during the market downturn, allowing me to buy at the bottom. It should have meant years of outsized returns.
Instead, my guy put me in loaded mutual funds with high expense ratios, performed a lot of trading in my account, and convinced me to buy the aforementioned life insurance. By 2013, I noticed my returns were not commensurate with the market. I didn’t believe his answers to why I was underperforming the market, lost trust, and did what any reasonable, intelligent medical professional would do. I asked another friend if he had a guy. SMH.
Version 2.0
By this time, I had done a little homework and felt better prepared to talk to the new advisor, who worked at a large firm in Dallas. This firm usually only accepts clients with investable assets of over $1,000,000 but took me because I was a doctor (with a high income and thus high future AUM). Lucky me.
Advisor 2.0 was a little slicker, still affable, but more professional and polished. He told me that money managers couldn’t beat the market, so his firm took a long-term approach to investing. He acknowledged that a variable life policy was not ideal for me. He said all the right things to assuage my fears. Then, he drastically underperformed the market over the next several years.
Why? Assets under management (AUM) fees were one thing, but he also put me in mutual funds with high expense ratios and did a lot of trading in my account. His words said long-term, low-cost investing, but his actions didn’t.
Several of my colleagues have worked with this firm over the years, and a few still do. The advisors are very friendly. They take clients to dinner when visiting Dallas. They even came to West Texas to support my colleagues when one participated in a ballroom dancing competition and another performed in a local “Dancing With The Stars” fundraiser.
I genuinely liked Advisor 2.0. Unfortunately, after several years, I again noticed that my assets invested with him were substantially underperforming the market, while those in my personally managed brokerage account weren’t. After getting him to agree to lower his AUM fee, I foolishly waited a few more years before finally leaving him altogether.
My Results
I am embarrassed to say I kept my money invested with these financial advisors for so long. While my initial mistake was ignorance, it later became inertia. Long after I knew that I should move the money, I did nothing. Like many medical professionals, I was “too busy” with life, work, business, and other investments.
How would my results have been different if I had known what I do now at the beginning of my career? I decided to find out by comparing alternative, real-world portfolios to what I earned with “professional management.”
Figure 1 compares my returns with a portfolio of 100% VTSAX, a total stock market index fund. I invest heavily in residential rental real estate, which I consider the “risk off” portion of my portfolio instead of bonds, so this would have been a reasonable choice at the beginning of my career.
100% Stocks
As you can see, the market returned an annualized 10.95% during this period, while my results were an anemic 4.13%. If I had invested 100% in VTSAX with its low expense ratio (0.04%), I would have been up nearly $813,360.97 by the time I dropped my advisor in early 2021!
There is a reasonable argument to be made that I am not comparing apples to apples with Figure 1. Most financial advisors would be unwilling to put me in a 100% stock portfolio. Figure 2 compares my managed portfolio to a passive portfolio comprised of 75% VTSAX and 25% VBTLX (total bond market fund). This is a conservative asset allocation for someone starting their career, but it may align better with what a financial advisor would do.
75% Stocks/25%Bonds
Even with this more conservative approach, my managed portfolio still underperformed the market by over 5% annually, leaving me down $485,227.22 by the beginning of 2021. While it is clear that the active management of my portfolio by two financial advisors significantly hurt my returns, what’s less clear is why.
I don’t know what my AUM fees were with my first FA. I never even thought to ask. The second advisor charged 1% AUM, which dropped to 0.85% once you had $5M under management with the firm. So, this wasn’t all about AUM fees. As demonstrated in the graph, even with a 2% AUM fee, my portfolio badly underperformed the benchmark. There were clearly loads, high expense ratios, frequent trading expenses, and other costly shenanigans occurring.
** Please note that this is only my SEP account. I presented these charts to our ER fellows during a personal finance lecture a couple of years ago, and they began discussing afterward how they thought I would be richer. Haha. This is a retirement account with a fixed yearly contribution amount. I also had a brokerage account and a small Roth IRA with the advisors I didn’t include because I don’t have great records of my contributions. Fortunately, I kept a second brokerage account through E-Trade, where I invested more heavily. I also have extensive real estate and business investments, as well as cash reserves. So, please don’t feel too bad for me. **
Unfortunately, Figure 2 doesn’t include the theoretical losses in the brokerage account or the amount I placed in the Variable life insurance policy. You can read about that and my many other blunders in “15 Money Mistakes That Have Cost Me Millions, where I estimated that buying the variable life insurance policy sold by my first advisor had cost me $298,125 in lost gains vs purchasing a comparable term life policy and investing the difference in VTSAX/VBTLX. My brokerage account losses were too difficult to assess accurately, so I left them out. Still, it’s safe to say the total damage financial advisors did to my net worth is even higher than what is presented.
The Escape & The Aftermath
In 2021, after I received my MBA with a specialization in finance, and long after I had learned about personal finance, I moved my accounts with Version 2.0 to Vanguard. My FA had set me up with Charles Schwab as the custodian for my accounts. It was as easy as going to Vanguard, filling out a few forms, and waiting for the transfer to happen. The accounts were transferred from Schwab to Vanguard. However, I was still in all the same funds my advisor had placed me in.
I sold all the funds in my SEP and Roth without tax consequences, using the proceeds to buy VTSAX and VBTLX in a roughly 90%/10% ratio. I sold the mutual funds with high expense ratios in my brokerage account and just paid the taxes.
I’ll admit I was a bit of a coward and didn’t inform my advisor beforehand about the transfer. He never called to ask me why. Maybe he already knew.
2001 – Present
Since I invested in VTSAX and VBTLX, both low-cost, broad-based index funds in 2021, my returns have been market returns. I’m not trying to beat the market because I’ve bought the market without AUM fees, excessive trading, or high-cost mutual funds. Simple and effective.
If I had the additional $485,227.22 in my SEP that I lost due to active management, this would have also compounded during the past 4 years, leaving me with $553,399.81 more in my retirement account. Again, this does not include my IRA or brokerage account figures.
Future Considerations
Using a conservative 6% annualized return and extrapolating out $553,399.81 from 2025 until 2040, when I turn 65, active management will have taken $1,326,254.85 from my SEP IRA for use in retirement.
If I extrapolate the money I lost due to the variable life insurance policy to 2040 using the same mechanism, “my guy” will have cost me an additional $814,770.83 in retirement.
Conclusion
Despite the occasional lunches, frequent phone calls, annual Christmas cards, and inquiries about your children, your financial advisor is not your friend. You may like them, they may even genuinely like you, but yours is a business relationship at best and a parasitic one at worst.
Professional money management has cost me dearly over the course of my career due to commissions, fees, and bad advice, totaling over $850,000 to date. My mistake was blindly trusting financial advisors referred to me by colleagues who knew little about personal finance or investing. Unfortunately, this is the gift that keeps on giving, as the money I have lost will compound over the rest of my life, likely costing me more than $2 million by retirement age. That is money I could have spent, given to charity, or left to my children or grandchildren.
You can learn more about the financial advisory business in my article “Why You Probably Don’t Need (And Can’t Afford) A Financial Advisor,” which details what a FA can and can’t do, how they get paid, and how they cost you money. While there are some legitimate reasons that medical professionals may need or want to work with a financial advisor, this should not be the default. This article will teach you what to look for in a FA and, more importantly, what to avoid.
Most highly educated medical professionals can learn the basics of personal finance and manage their money without paying millions of dollars in unnecessary fees. Join us at www.BusinessIsTheBestMedicine.com to learn how for free.
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