Although most investors, especially physician-investors, feel that they need to workwith a team of competent professionals tomanage their financial affairs, for various reasonsthey either put it off for as long as they can or makethe wrong choices. The sooner you focus on thisissue and find the right experts to workwith, the better off you are going to be.
These days almost all financial professionalsseem to call themselvesfinancial advisors. Specifically, however,they can be divided into 4 broadgroups: financial planners, financialspecialists, sellers of financial products,and investment advisors. Thisarticle will cover the first 3 groups.
PLANNERS AND SPECIALISTS
As the name implies, the key role ofa financial planner is to help you createa comprehensive plan for your financialfuture and coordinate the help youwant to implement the plan. You canview them as a general practitioner orfamily physician.
Financial planning, of course, includesplanning for retirement, children's education,and other long-term needs. It also includesmaking important decisions about how much ofwhich types of insurance you need.
A good financial planner should have broadknowledge of the financial markets, financialproducts, tax laws, etc, as well as significant experience.But more importantly, they must havein-depth knowledge of finance without whichthey won't be able to create customized solutionsfor you and your family's unique needs. A lot offinancial planners just provide printed outputsfrom standard computer programs without evenknowing exactly what assumptions are built intothose programs. Also, most financial planners arenot investment experts, and you should not relyon them for investment advice.
It is best to work with a fee-only financial planner—one who does not derive income, directly orindirectly, from any product or servicethey recommend to you, so that theirrecommendations will be unbiased andin your best interest. When you startworking with a financial planner, it willinvolve a few months of intensive workto create a financial plan and put yourfinancial affairs in order. This may costyou several thousand dollars, dependingon the complexity of your situation andqualifications of the planner. You shouldagree on a lump sum price for thisphase of work or, if you will pay on anhourly basis, get the hourly rate and agood estimate of about how manyhours of work will be involved. Afterthis phase you would need to consultthem only periodically. But you shouldmaintain a long-term relationship withthem so that you can get help in makingimportant financial decisions.
A key group of financial specialists is estateplanning attorneys, who will work with you tocreate a detailed estate plan, draw up your will,set up trusts if you need them, and so forth.Another important group is tax specialists, whoseservices can range from preparing and filing yourtax returns to developing strategies to minimizetaxes. In addition, from time to time you mayneed help from specialists, for example, to findfinancial aid for your children's education.
A good financial planner will be knowledgeableabout most of these matters and will be ableto offer you general advice on them. But in manyareas things have become so complex thatbeyond a certain point they will refer you to acompetent specialist for your own safety andbenefit, and then work with you and the specialistto achieve the best results for you.
You will need the help of financial specialistsonly occasionally. For example, once you createan estate plan, prepare your will, etc, you wouldneed to have them reviewed only every 5 or 10years, when the laws change, or when some significantchange takes place in your life.
SELLERS OF FINANCIAL PRODUCTS
This group includes your broker, agents whosell various kinds of insurance and annuity policies,and others. Although your broker does notsell you a product, they are really a salesperson.Never rely on them for investment advice, andnever give a broker discretionary trading poweron your account. Remember that they make theirmoney either by encouraging you to trade frequentlyor by signing you up for wrap-typeaccounts at annual fees that may look small butwill reduce your returns significantly over theyears. None of this serves your best interest.
Unlike your broker, the agents who sell insurancepolicies, annuities, and other products aregenerally very knowledgeable about their own aswell as their competitors' products. But it is essentiallyimpossible for them to give you unbiasedadvice because to make more money they have tosell you larger policies and steer you toward highermargin products. You can easily waste tens ofthousands of dollars if you buy the wrong productsor are not aware of large hidden costs andfees. So take full advantage of the knowledge ofthe salespeople, but make your decisions with thehelp of your financial planner.
Chandan Sengupta, author
of The Only Proven
Road to Investment Success
(John Wiley; 2001),
currently teaches finance at the Fordham
School of Business and
consults with individuals
on financial planning
and investment management.
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