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Episode 85: Similarities In Compensation, Incentive, And Moral Hazard For Doctors And Financial Advisors

Feb 15, 2021

This Episode

Solo Episode

You Will Learn

– Different examples of compensation models for advisors.

– What is an AUM Model? Is it right for your business?

– The positives and negatives to a straight commission model.

Resources & Links

Reach out if you have any questions: justin@apm-wealth.com

Check out our YouTube channel

Today I am coming to you solo. I want to discuss how you can stress test incentives and compensation so that you can project the path of the business based on the models in place. By the end of this episode, you should be able to see areas where you need to focus more time, and areas where you can potentially pull back.

 


Justin (00:02):
It’s Justin coming to you.


Justin (00:28):
Solo today just chugs two cups of coffee and look


Justin (00:32):
Forward to sounding off on one of my favorite topics, understanding the role of incentive and compensation, and either an advisory engagement or


Justin (00:43):
As a physician. And here’s what I want to do today is look at a couple of different advisory business models, a couple of different ways that financial advisors get paid as well as a couple of different ways that physicians get paid and really unpack and really stress test what this incentivizes either advisors or physicians to do in given situations. What I want to do is help you see, when you look at a business model, I want you to be able to intuitively push that business model to its logical conclusion based on compensation structure and say, okay, somebody working in that business is going to have a business that looks like this, going to have a client profiles that look like that their clients are going to have, you know, more in assets, under management versus illiquid assets or whatever, or if you’re a physician, Oh, I’m going to be incentivized to work as much as possible or work as little as possible or something in between.


Justin (01:37):
Really the goal is to stress test these systems, to understand where the dangers lie and they equip you to make great decisions, whether it’s about your career or about working with a financial advisor. What we’re going to talk about today are just rules of thumb. They’re only broad brush attempts to help to enlighten you about these things. I can’t give everyone obviously specific contextualized input and really in the real world, that’s what is required to evaluate any specific situation today. We’re going to get a little bit into the exception territory where if the rule of thumb gets you 90% of the way there, we’re going to spend some time in the other 10% where it’s more on a case by case basis. So please all of today’s content in particular, especially to a greater degree than normal is you know, should be really thought through and chewed on and not acted upon rashly.


Justin (02:33):
And don’t obviously make any important financial decisions without qualified input from your financial advisor or your tax expert, or your legal counsel, or, you know, whatever, whatever area you’re thinking about making this decision. And if you have any specific questions about today’s content, please feel free to reach out. Contact info will be in the show notes. I’d love to help you think through any specific situations you’re looking at, whether it be with your career or with working with a financial advisor. I was just talking to a program director this morning, actually discussing the situation that her fellows are in a, in a one-year pain fellowship. This is the case. They need to do many, many things all at one time, they need to learn new clinical skills. They need to understand different business models and pain management. They need to almost immediately start looking for jobs, making connections, building a network, and finding a safe place to land professionally.


Justin (03:22):
There’s a million deeply important things to do even before a physician would start thinking about their own personal finances. And it’s for this reason that I think even financially literate physicians benefit from an advisory relationship at the beginning, almost universally in the first few years of your career, obviously it’ll be no surprise to you to hear me say this as a financial advisor. But today’s discussion is really going to help you parse the industry and figure out how advisors get paid and what it means. First, before I dive into the different compensation mechanisms, I want to address the idea of being a fiduciary. There was a time not too long ago when the word fiduciary meant something. When the word fiduciary had an actual real world application that resulted in a business model, being different from a different business model. You can, you can look at a fiduciary advisor and a non-fiduciary advisor, and there was a real distinction between those unfortunately, the financial regulatory part of the world, in my opinion, in the last year or so effectively obliterated this distinction.


Justin (04:34):
And what has happened has allowed many, many advisors to technically by the letter of the law call themselves fiduciaries when facing consumers and the result, is that a word that was meant to help consumers decide who’s on my side, who is legally ethically, morally in all ways bound to the highest possible standard to advocate for my good, that distinction has been ha just muddied beyond recognition. And so if you ask any advisor from the most philosophically pure, transparent ideologically cohesive advisor, all the way on an extreme end of the spectrum billing by the hour, are you my fiduciary versus somebody all the way on the other end of the spectrum, who’s straight commission, essentially a distribution channel for an insurance company. Are you a fiduciary by some mystery? Both of those advisors can say yes. So I advocate for not asking this question anymore, because it just doesn’t tell you anything a better question would be to say, or you feel only, and we’ve talked about this before on the show fee only means there’s no commissions associated with the rendering of advice in a given business model.


Justin (05:53):
Now there’s a lot of good advisors in all business models and a good advisor in two different business models, one fee only, and one non the advice can look the same, but if we’re talking to the, you know, the 90% of people, the best way for me to evaluate is an advisor going to have a lot of conflict and where they’re giving you advice. The easiest distinction to make is on that fee only compensation question. So that’s what I would start with is fee only is sort of the new fiduciary fee only allows you to follow the money and say, I’m the only person paying my advisor. If my advisor is fee only, there’s no insurance company, there’s no brokerage or investment company paying them. In addition to me, they are beholden to me and my interests. And that is it’s what I recommend.


Justin (06:48):
There’s other ways to do it, that aren’t wrong, but that are potentially a little more conflicted. So fee only is, is the safe place. Secondly, a word on incentive. I think that this is an under, under evaluated, under appreciated phenomenon. And what does it look like to be incentivized to do something in the advisory world? If you’re working with a financial advisor, what are they incentivized to do to do more of, to do less of, this is exactly the same with physicians, physician contracts and employment agreements. Doctors are incentivized to do more of something or less of something, depending on how your pay is structured. You may be for example, on salary, I have clients that are on salary. They make a fixed amount per year, no matter what, what does this mean? If we stress test this, we have a doctor who’s on salary.


Justin (07:34):
Let’s push it to both extremes and see how it potentially plays out. A salary engagement is a flat number. It doesn’t change no matter what, we’re a creative, this tug of war, where the employer wants the physician to do as much as possible earn as many RV use to do as many cases to, you know, provide as much anesthesia care as possible. Take as many call shifts, take as little holiday and vacation as possible. Whereas the employee, the employed physician wants to do as little as possible. The compensation isn’t going to change. If I do one case a day or nine cases a day, or see 30 patients in clinic or 54 patients in clinic a day the compensation is exactly the same. Yesterday I was looking at a contract or anything geologist. They had five or six call shifts per month as an attending for a salary that was below MGMA medians.


Justin (08:28):
This creates a tension where it’s clear that the employer is trying to just get as much they can economically out of this doctor. And that makes sense, right? That’s just the way incentives are aligned, that creates sometimes tension, but sometimes there can be equal Librium and there can be balanced. And there’s a sort of a respectful, mutual understanding between parties. The employer wants to keep the employee happy, so they’re not going to beat them too hard and the employee wants to keep the employer happy. So they’re going to make sure that they see enough patients and do enough work, and it’s possible to find a balance. It always depends on circumstances being a financial advisor or hiring a financial advisor, depending on which way you’re looking at this provides the same tensions. The other example in terms of physician comp, you know, if we’re looking at a salary on one end of the spectrum, the other end of the spectrum would be straight RV use.


Justin (09:25):
I get paid, you know, $68 per work RVU. This is very clearly a different kind of incentive where the doctor is incentivized to do as many cases as possible. Up to a point obviously of diminishing returns based on their own preference. And it’s going to the doctor incentivized in that way, who’s making straight RVU production is going to have a very different motivation than the doctor on salary. It’s actually an inverse motivation. And if you zoom in on the patient care question, a given patient you know, if a physician is being paid on a work RVU basis and the patient says, doc, what do you recommend that can create moral hazard between procedure a and procedure B if procedure a is 1.7 work wherever use and procedure B is 63 RV use. Obviously this physician is going to be governed by the Hippocratic oath.


Justin (10:21):
And so a physician, whether they’re on salary or whether they’re on work, RBU’s, who’s looking at things objectively and governed by the Hippocratic oath is hopefully going to make the right decision based on the indications of that patient. But, but it does muddy the water, doesn’t it. And the dollars are going to be different in those circumstances. So as a patient, you would want to know that probably. And there are similar considerations. If you’re working with an advisor and insurance policy, a versus insurance policy B, there can be a similar compensation differential in those circumstances. And you as a, as a consumer of those advisory services, you would want to know that, right? So what I want to do now is look at a few different specific compensation models for advisors. And we’re going to unpack and stress, test these models and say, what are the upsides?


Justin (11:21):
What are the downsides for whom is this a good fit for whom is this perhaps not a good fit? And we’re going to assume at baseline that we have an advisor that’s equally or relatively equally qualified each of these models, as well as reasonably conscientious. We’re not, we’re not talking about the one-off advisors who are out there to screw people. And most advisors by the way, are not like that. But advisors get into the advisory business in many cases because they want to help people. They see the tangible need that people have to make good decisions with their money, and they want to be able to meet that tangible need. Now, there are some charlatans out there that are the ones that make headlines, and that’s unfortunate, but let’s talk about these fee models. And I’m going to go from basically most transparent and objective in some ways to least transparent and objective.


Justin (12:11):
So the first model, which is frankly, not very common because it’s difficult to build an advisory business on this model is just the hourly advisory fee. This is basically a fee for service. I’m going to make whatever the number is $300 an hour as a financial advisor, to answer your complex complex, you know, financial question, and this could be investment advice. This could be a contract review, you know, bill this way, CPA’s bill this way. And there are some CFS he’s in financial advisors that would have a part of their business that is hourly billing in general. You know, what, what is the incentive here? An hourly adviser who wants to maximize the value of an engagement obviously wants to take as many hours as possible. They want to run up the clock and they want to send you the biggest invoice they can.


Justin (13:01):
And they’re going to balance that and temper that with the fact that well, they want to maybe keep you happy. And so they don’t want to really gouge you. They just want to make as much as they can reasonably and hope that you’ll come back in the future. That’s what the naked incentive of this economic arrangement is. Now. Obviously we overlay on that, the conscience, the competency of any particular advisor, and that’s going to further shape the way that engagement is going to look. And on the other side of the coin, if we stress test this model in the other direction, what we find is something like any, an email I received this week, which is like, Hey, Justin had a quick question for you. I think it probably won’t take more than an hour of your time. I was wondering if you do hourly billing so that I could spend 60 minutes and have you answer this question for me, I’m trying to figure out what entity is the best to set up for my situation as an independent contracted physician.


Justin (13:56):
I also had a couple of questions about retirement and investments, and I want to make sure that my insurance is all aligned and that the policy I have in place is really a good fit for my needs. I don’t think that’s going to take any more than 60 minutes of your time. So perhaps you’re perceiving in this question in this question, why advisor there’s aren’t like flocking to this business model is because questions like this, they’re not uncommon. And I think to some extent, it’s just a lack of information on the part of the consumer, but these questions are complex multi-factorial and interrelated, and this looks a lot more like a comprehensive financial plan than it does a one-hour drive by let me shoot from the hip and tell you what I think about your situation. And so that is, you know, on the low end, what you might get, if you’re trying to sort of hustle through questions as a consumer, you know, you can save on cost because you can precisely define the scope of what you want in an advisor to work on.


Justin (14:53):
And in that circumstance, you may be able to you know, not pay more than precisely how much you want to pay, which can definitely be a benefit that is worth acknowledging. Then the nice thing about this from a client standpoint from a consumer standpoint is that, well, it’s very transparent. You know, th the cost is pretty much determinable upfront and there’s product agnosticism. And what I mean by that is I don’t care as an advisor. If you pay off debt, if you pay down your mortgage or if you invest, or if you invest in policy a or if you invest in policy B, or if you don’t buy a policy as the advisor, I don’t care. I’m getting paid by the hour to just dispense my opinions, my expert opinions based on your situation. So that’s transparent and it it’s good in the agnostic.


Justin (15:42):
Isn’t that way. I like that about this engagement. The downside, in addition to the fact that while they could just take as long as possible, and by the way, in practice, this type of arrangement, I don’t, I don’t find advisors running up invoices that just doesn’t in the real world happen in my observation. But what does happen and where this has this model does break down is if you’re thinking about outcomes, if you’re thinking about implementation and the actual enacting of a given strategy, somebody who goes to an hourly adviser is probably going to say, you know, what, tell me what to do. And then I’m going to go do it. That might work, that might not work it’s dependent on a consumer enacting the recommended strategy. And what I see in the real world is that, you know, the best laid plans when they gather dust on your bookshelf, don’t really move the needle for you.


Justin (16:33):
And so an hourly adviser in that way you might think you’re getting a good deal. And in some ways you are, but are you really getting the results that you desire? Some concerns, some physicians are wired to be able to succeed in that type of engagement and some aren’t. So you’ve kind of got to know yourself to understand how this is going to play out for you. And if we stress test this and say, well, worst case, if I hire an hourly adviser, who’s reasonably competent and conscientious, worst cases are going to give me a bigger than expected invoice. But what they’re probably not going to do is try to push a policy on me that I don’t need, or try to sell me an annuity that is not a good fit for me, or try to do something else. So, so in general, I would view this as a, we’ll call it a, a small standard deviation of potential outcomes in terms of like the risk of something going terribly cataclysmically wrong.


Justin (17:27):
That’s probably not going to happen in an hourly engagement, in my opinion. And in my observation, what you’re not going to get though the trade off is you might not get the outcome because you’re not going to get the followup. So that’s the most transparent, the most easy to understand fee structure and how that would play out for a financial advisor. The equivalent to would be basically like a salaried physician, salaried physician is going to just do what they’re asked. They don’t you know, when it comes to follow up, when it comes to there’s no quality metrics, there’s no, you know, they, they want to basically work as little as possible and get the money that they’re going to get. And that’s, that’s fine. We don’t, we just want to understand the economic alignment there, the next tier, the next tier Torres and incentive.


Justin (18:16):
What we might call a fee for service, like doing more work, earning more money or handling more complexity and earning more money as an advisor, it would be a flat fee or a tiered flat fee based on net worth. Now, what this would be is as an advisor, I’m going to charge you say $10,000 a year. And for that $10,000, I’m going to do some menu of services. And this is still pretty transparent. It has some of the same conflicts and same lack of conflicts. It’s the profile is very similar to the hourly adviser. If the hourly is getting paid 250 bucks an hour, the flat fee is just basically assuming a number of hours per year. And multiplying that out into the future. This is another circumstance in which, from an incentive standpoint, it’s like that salary doctor, the flat fee advisor is incentivized to keep you happy, but to do as little as possible and not tax their own time and have as many clients as possible to earn the most revenue.


Justin (19:20):
Again, a conscientious and competent advisor is going to filter that through their own sense of what is right. And hopefully give you great service that you’re going to really succeed in implementing, and they’re going to help you implement. But again, the cold economics are what they are a tiered flat fee might be based on net worth. So one way that this fee structure might be modified is to say, I’ll charge you $10,000. If your net worth is less than a million, and I’ll charge you $15,000, if it’s between one and 3 million, and I’ll charge you $25,000, if it’s over 3 million and it’s a flat fee, it doesn’t change within those bands. This has a similar profile and it also, now we’re starting to build, in some incentive, you could think of this, like a, it’s a physician salary with an RVU bonus. The advisor, what they want to do is grow the physician’s net worth and they’re incentivized to do so because what the advisor wants to do is get that net worth from, you know, 500,000 to one and a half million as they grow the doctor’s net worth.


Justin (20:23):
The advisor can move their fee from 10,000 a year to 15,000 a year. Now, from a consumer standpoint, that might feel offensive. Like Holy cow, my net worth went from 900 K to a million. And all of a sudden you Jack my fees 50%, how is that fair? The work feels pretty much the same as it was last month, but now my fees went up by half. That’s one of the downsides. That’s one of the challenges with this model, but on the upside, like if, if I’m a consumer, I want my advisor to be vested in my success and really the best way, the best way to do that is to pay them more for succeeding. And so this is the, this is the tight rope you’re going to have to walk as a consumer. Am I willing to incentivize my adviser by paying them more as my assets grow?


Justin (21:18):
Or does it feel more fair to me to pay that flat 10,000, no matter what the flat 10,000 advisor doesn’t economically care if your assets grow. So now we really get into the nitty gritty of well do advisors who are flat fee versus advisors who are capturing your percentage of growth of net worth. Is there a difference in outcomes there? Well, let’s ask the question for doctors who are on salary versus doctors that get an RVU bonus. Is there a difference in performance there? I don’t know the answer to that question in terms of like a white paper citation, but I can tell you there’s probably a difference, but on any given situation with any specific doctor or any specific advisor, it’s hard to say, but as a class of professional incentives drives outcome. So that’s one thing to be aware of the flat fee and the tiered flat fee based on net worth.


Justin (22:10):
And when I say net worth, I mean, everything that you own, your house, your investments, your cash minus any debt you have. So that’s, you know, one of the benefit it’s there. And now we get into probably the most common advisory compensation model, which is a U M assets under management. And this is a little bit more out on the, we could think of it in the, like more of a pure RVU type of setup. An AUM advisor who builds on assets under management is going to charge you based on how much money of yours that they manage. So we want to think about in this circumstance, what is an advisor incentivized to do? If I’m charging on percent of AUM, I’m going to take 1% of managed assets and you come to me as a physician, and you’ve got, say a hundred thousand dollars in a 401k and you know, $32,000 in a Roth IRA.


Justin (23:07):
And you just started your career as an advisor. If I’m charging on AUM, the money in your 401k, if it’s with your current employer, I actually can’t touch that as an advisor and I can’t bill on it. Cause it’s an employer retirement plan. The only thing I can do is take that 32 grand and manage that. And I’m going to charge 1% on that. And 1% of 32 grand is $320. So you can think of it about what kind of service you’re going to get for $320. In many cases, advisors to protect themselves in this circumstance will have a minimum, a minimum fee that you’ll have to pay from cashflow. Meaning if I’ve only got 32 grand than a Roth IRA, I’m also going pay a monthly advisory fee of three, four, five, $600 a month in order to get that advisor really engaged and be able to afford their time and attention on my circumstance.


Justin (23:55):
So in this type of setup, an advisor is going to be incentivized to try to add to specifically the AUM, the assets under management, they want to build up your investment accounts as much as possible. They want your Roth IRA to be sky high. They want to open a taxable investment account, and they want to start stashing money into that too. And whenever you change employers, they want to take that 401k and they want to roll it into a new IRA, an investment, a rollover account, investment retirement account, individual retirement account, an individual retirement account that they can then manage. So if you’ve got $200,000 in an employee and employer 401k that you then roll in, the advisor’s fee is going to be increased based on the percentage of that asset base. So this is a dynamic to be aware of the advisors, getting a raise when they’re doing that.


Justin (24:54):
So you always want to ask the question, is it good to roll over that money? Is that the right thing to do in some cases? Yes. In some cases, no. If you want to continue to do a backdoor Roth IRA contribution, for example, this causes problems. If you’re working with an advisor that charges on AUM and you want to do the backdoor Roth, the only way you can do that is by keeping all of your assets in an employer, 401k that money is not managed by the advisor. And it can’t be billed by the advisor in, in an AUM model. And therefore the advisor is not going to make as much money if they just rolled that out into an IRA. So that’s a dynamic to be aware of. It’s one of these moral hazards in addition and advisor charging, percentage of AUM is going to be disincentivized to have you pay down debt.


Justin (25:44):
They don’t want you to prepay your mortgage. They don’t want you to pay off your student loans aggressively. And why would they, if you’ve got a million dollar mortgage and you’ve got an extra $10,000 a month option a, you could pay down that million dollar mortgage and the advisor’s compensation is not going to go up. Option B. You can take that 10,000 a month and put it in an investment account that the advisor manages and they’re making an extra a hundred dollars per month. Which of those is right or wrong? I mean, it’s impossible to say because it depends on your situation. It’s obviously a good thing to be saving 10 grand per month for your future, investing it to grow and incentivizing an advisor to help you do that. It’s like having a personal trainer, who’s getting paid based on how good of a shape, how good of shape you’re in.


Justin (26:30):
You might say, dang it. I’m the one doing all the hard work. Why am I paying the trainer more? But it’s a matter of incentive. Do you want that trainer to care? Do you want them to really be motivated to help you get there or not? Another way to look at this might be, if we take an RVU corollary, you can think of it in terms of, well, I can do, I can either tell my patient who is having a lot of back pain that they need to go on a diet, or I can tell them that they need some kind of invasive treatment. It’s any given situation. It’s hard to say, which is the right answer, but it’s clear to see which one of these is going to get the doctor paid. The doctors don’t make money. When patients go on a diet patients end up incurring costs whenever they go through procedures.


Justin (27:12):
So that’s the hazard. Obviously, a physician governed by the Hippocratic oath is going to do what they think is right. Similarly, a good advisor, even in the AUM model with this inherent conflict, if they can make more money by saying, don’t pay off your debt instead and invest in your investment accounts. Even if that that relationship exists, a good advisor is going to get to know their client and was going to say, you know, Mr and Mrs. Smith, I really have gotten to know you and understand that student loan pay down is a high priority, a mortgage pay downs, a high priority. And therefore I’m going to help you do that, even though it’s not going to get me a raise. That’s one of the differences between the AUM and the net worth, which I described earlier in the net worth model and advisors fee goes up when your net worth grows, meaning debt pay down and investment accounts growing are the same.


Justin (28:07):
They’re treated similarly in the eyes of the advisor, but in the AUM model, we don’t care about paying down debt. We only want to grow the investments which creates this, what can be a weird dynamic? So that’s the AUM model. And then as you get further out this spectrum again, on the one end, the most transparent end of the spectrum, we’ve got just hourly fees. And then we go to flat fee or tiered net worth flat fee. And then I just described AUM. And then when we get further out what I would call either fee plus commission or fee based, these are sort of technical terms that define the compensation model to the advisor. This gets very, there’s a lot of different permutations of a fee plus commission model. And some of these advisors who function in this realm look a lot like a fee only advisor who doesn’t earn any commissions who gets paid like a flat fee or a tiered flat fee, or even an AUM.


Justin (29:13):
Any of those can be fee only if they don’t earn commission. If you do AUM plus you can earn commissions. And when I say commission, I mean, you sell a financial product and insurance policy, a disability life policy, or an annuity of some sort, when you’re doing that, then we get into this fee plus commission territory and it gets, there’s just a much wider dispersion. So this is much more case by case basis. Here are some of the pitfalls of this, and I think if you can avoid these pitfalls, then you can work with a fee plus commission adviser in good faith. But this is where these engagements can really go wrong. When you’re an accumulator, when you’re paying off debt, when you’re building up assets, you’re still sort of at the beginning to early middle of your career, when you get sold permanent insurance before you’re financially independent, I view that as one of the hazards of the fee, plus commission also known as fee based model where this can go wrong.


Justin (30:15):
And this is one of the reasons that I get fired up. And some of these other, some of my friends in this corner of the world, this is why we say only work with a fee only advisor. It’s not because only fee only advisors give the best advice. It’s because I’ve just seen cases where fee plus commission or fee-based advisors abuse, their ability to sell insurance and they do it inappropriately. So I ended up working with clients who have inexpensive, permanent insurance or whole life insurance policy for which they’re paying 1500, 1800 $2,200 a month while they’re still making payments on student loans. While they’re still trying to save for a down payment on a house. I can tell you as somebody who is not incentivized to sell something like that, that there’s no way I would, I would ever be interested in doing that for a physician in that place, in their career.


Justin (31:07):
When I see a 32 year old with permanent insurance, with whole life insurance, with an annuity, with an indexed universal life policy, any of those I have yet to see a situation where I’ve seen that. And I thought, yup, that’s a good idea. I’m glad it’s there. Usually it’s a crap that person got sold. Something that they didn’t understand that they didn’t realize they didn’t need. And they also did not realize that the adviser who sold it and I’ll put adviser in air quotes for this one, the advisor who sold it was going to get a commission on it. Now we get to the advisory incentive part of the fee plus commission. And this is where it becomes a minefield and advisor functioning. In this model, they get paid to dispense advice. Yes, they get paid to manage assets. Yes, but they also get paid to sell policies, to sell whole life policies, to sell a term life policies, to sell annuities, et cetera.


Justin (31:58):
Now term life policies pay very, very little by way of commission, a 30 year term life policy versus a, a permanent insurance policy or a whole life policy of the same amount is, could be a, a 10 X differential in terms of compensation to the advisor. So that’s why I end up seeing these is because they pay advisors really well. Insurance companies paid advisors very well to sell them because insurance companies make money on them and that’s not wrong, but it is moral hazard. Whenever the price is not disclosed and the, the consumer does not know what they’re getting. And they get these policies that are very difficult and expensive to extract themselves from. So on this end of the spectrum, the fee plus commission, we start getting into this territory where the advisor becomes more of a sales person potentially, and less of a true advisor.


Justin (32:52):
And what you get is instead of objective advice, you get product distribution, you get somebody who’s basically an employee of an insurance company. Who’s pushing products. Again, if we, if we take a conscientious, competent advisor, the advice might look pretty similar in this model as it does in even the hourly model, but a rule of thumb is that you’ve got to really be aware when you start to get into this end of the spectrum. And these people will still claim fiduciary status, and it’s beyond the scope of this discussion. Why that isn’t true in what circumstances it is, but just know, follow the money. If they can earn commissions, there’s economic incentive to sell. And whenever there’s those products involved, it can create some weird dynamics that end up getting you financial products that you don’t want. And then finally on the far end of the spectrum.


Justin (33:47):
So again, to walk through this progression, we’ve got hourly 250 bucks an hour, no matter what we’ve got flat fee, which is five or $10,000 a year, no matter what tiered flat fee based on net worth, which is the flat fee goes up based on how much money you’re worth or how much income you make. Then we’ve got AUM assets under management, which is a percentage of all of the money managed. We’re moving down this spectrum. Then we get to the fee. Plus commission also known as fee based, which could have an AUM component, but also the ability to sell, to sell insurance policies. And by the way, let me just, so you get a sense of the magnitude I described these like they’re all equal and like there’s an equal amount of advisors in each bucket. The number of hourly advisors out there who have a viable long-term hourly business, it’s, it’s minuscule.


Justin (34:37):
It’s probably a fraction, definitely a fraction of 1% who do exclusively or primarily hourly business. If we go from hourly and flat fee and tiered flat fee and AUM without commissions, if we have all four of those, we’re probably talking about between two to 3% of all advisors out there, and these are all fee only models, meaning there’s no commissions associated with any of these. And so it’s actually difficult to find people functioning in these businesses. You have to kind of know where to look and you have to seek them out intentionally the fee and commission and commission models, which are the last two I’m going to describe the lion’s share. 95 plus percent of advisors are going to function in these business models, various reasons for that having to do with sort of industry legacy considerations. But if you’re talking to an advisor, probably they can earn commissions and you need to just be aware of that dynamic.


Justin (35:36):
So finally the last type of compensation model for an advisor would be straight commission. And this is you know, just, they’re only getting paid to sell, sell, sell, sell, sell insurance policies, sell annuities in this bucket. You can also find subject matter or product experts. So there are some insurance people, and this is basically an insurance bucket that I’m describing. Now, some of these insurance people will actually partner with fee only advisors. These people who can’t earn commissions, that hourly adviser I described, or the person who charges AUM, but they don’t write any insurance coverage and they don’t sell annuities. If they run into somebody who needs an annuity, they may call one of these people to put that annuity in place. But that advisor, that fee only advisor is still qualified to determine if you need it and will still oversee the implementation of that in an economically agnostic fashion.


Justin (36:31):
So obviously the commission model incentivizes these commissioned salespeople, AKA advisors in air quotes to just sell as many policies as possible. A conscientious advisor in this space is going to do that responsibly and appropriately. But the incentive is what it is. This is basically like a, you can think of this as like a tiered RV use scale where less than 5,000 views is 60 bucks per RVU. And then 5,000 to 7,000 RV uses 70 bucks per RVU, and 7,000 to 10 is 90 bucks per RVU. And it’s basically a graduated scale. The more you treat as a physician, the more you make per marginal patient, that’s exactly how insurance works. The more you sell the higher, the percentages of commissions are on each subsequent policy. So the people who are making the most in this part of the world are doing the most business and they’re making the highest percentage of commissions on subsequent business.


Justin (37:32):
So obviously the hazard here is you’re gonna get sold something you don’t need, and you’re not going to get any advice to go with it. The advisors are going to sell it to you and they’re going to move on because that’s what they get paid to do is sell, sell, sell. And the, the sad thing is to the uninitiated consumer. You can’t tell that this is how this model works. So one way to sort of determine if this is the type of model that you’re talking to. And by the way, let me make an aside here. The person that you buy your disability coverage from is likely in one of these last two buckets. And that’s not, again, this isn’t bad. There are real experts who are trusted advisors who do great work in this realm, but it, in my experience, it doesn’t make for the best primary advisory relationship to have somebody who’s doing the, the last two, the fee plus commission or commission models.


Justin (38:27):
And that’s because of this conflict to be essentially a distribution channel for the insurance companies. And so one way to sort of be able to determine is the person I’m talking to one of these types of people. And do I need to maybe find somebody else to be a trusted advisor is just ask them, how many clients do you work with? If the answer is 30 or 50 or a hundred or 120, then that could be a reasonable workload depending on the team that this person has behind them. If they say, Oh, 500, 700, 900, 1300, I mean, do you know 1300? You probably don’t even have 1300 Facebook friends or 1300 Twitter followers. Imagine trying to provide competent professional service and advice. The 1300 people it’s impossible. So that can be one distinguishing characteristic that once you get to know what someone’s businesses like, you’re gonna understand how much of their time you’re really going to be able to get.


Justin (39:22):
And that makes sense, right? Cause if someone sells you an insurance policy, they maybe get an upfront commission and then they’ll get a small trail on that. So they don’t get paid on an ongoing basis to continue to pay attention to you. They got paid to sell you something and then move on. So they can’t afford to help you more than that. And you want to just be aware of that dynamic in this relationship. So that’s all I’ve got. Hopefully this is helpful. I know it’s a very technical conversation, but I think it’s really important to think through. If you understand the incentive, you’re going to understand the outcome. There. There’s a reason that salespeople are incentivized to close business. There’s a reason that service people are paid on salary. It just more closely aligns with the actual business that they’re going to be doing some physicians when they earn a salary, versus when they’re on RV use or, or production.


Justin (40:16):
Those engagements look different. They feel different for the physician, the marginal time that they spend in the Orr, in the procedure in the procedural room or at the clinic or at the ASC they feel differently about those depending on how they’re getting paid. And even the advice that they’re going to give a patient like they’re incentivized in different ways. Again, governed by the Hippocratic oath and an objective physician. Given certain indications is hopefully going to give the same advice. Similarly, a good advisor, given the same inputs. It’s hopefully going to get the same advice, but follow the money to understand the inside.


Justin (40:53):
That’s all I got for today. I hope everybody has a great week and happy Valentine’s day. If you liked what you heard this week, head on over to APM success.com, where you can find more content and free resources to help you build a successful career in anesthesia and pain management. If you want to leave a review in iTunes, I’d also really appreciate it. Thanks for using some of your valuable time to join me today on APM success.

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