The Financial Mistakes New Physicians Make

By: Steven Abernathy and Brian Luster

In the past, it was simple: Get through the rigors of a medical school education, training, interning, residencies. Become a physician. Earn a great living. Right? Not so these days. Being a physician just isn’t as “easy” as it used to be.

The Physician Family Office recently completed an extensive study that confirmed what we all know to be true: Reimbursement is falling while the costs of operating a practice are rising.

And the latest Medical Malpractice Insurance Survey conducted by Medical Liability Mutual of New York shows dramatic increases in malpractice insurance rates across the board: they rose 54 percent for OB/GYNs, 54 percent for internal medicine, and an astounding 70 percent for general surgeons.

Meanwhile, the National Practitioner Data Bank shows litigation rising significantly over the past two decades. The cost of resolving this litigation has risen 66 percent, with the average cost of resolving malpractice suits approximating $330,000.

Physicians must now see more patients and perform more procedures just to maintain their current income level.

“A lot can happen, and no one attains mastery of business management and wealth management skills–including portfolio management, legal asset protection and estate planning in medical school.” says Physician Family Office Advisory Board Member Steven Almany, M.D., an interventional cardiologist and partner of the Michigan Heart Group.

So with all of these challenges, and the added possible burdens of debt, how can a new physician avoid common financial pitfalls? It turns out that for many physicians, it’s the choices made outside of the practice of medicine that are responsible for their failure to realize their full wealth potential.

Today the average M.D. with a specialty or subspecialty makes approximately $350,000. If they can save just 25 percent of their annual income, by the time they are 60, there should be over $7 million saved for retirement. Sounds easy enough, but this is an outcome that few are able to realize.

Here are what we found to be the six most common wealth preservation mistakes made universally by medical doctors–and how to successfully avoid them.

1. Successful physicians are failing to integrate their advisors.

Typically, a physician surrounds himself with financial advisors, brokers, an accountant, an estate planning attorney, an insurance agent, a tax planning attorney and many others.

If each one isn’t communicating with the other before dispensing advice, chances are their advice will either negate the effects of the others, or they will give you counsel that will actually destroy wealth.

Solution: In order to be effective, your advisors must be integrated, in communication and working toward common and clearly defined objectives.

2. Less than 1 percent of all financial advisors are acting as a fiduciary.

This alarming fact comes directly from the National Association of Personal Financial Advisors.

In most instances, advisors are your adversaries, legally obligated to hold their employer’s financial interests ahead of their client’s. Perhaps this is why there were more than 3,200 investor complaints and nearly
5,000 new arbitration cases against brokerage firms in 2011, according to CEG Worldwide LLC. That means that there are 23 new complaints and arbitration cases reported every day. If that’s not disturbing enough, often buried in the fine print of legal jargon on standard non-fiduciary agreements, people are advised: “Our interests may not always be the same as yours.”

So unless a doctor has reviewed literally all of the lines with an attorney or other fiduciary who will act in his best interest, it is highly likely that he will be wasting money.

Solution: Have your advisors sign a Fiduciary Oath that assures, in writing, their actions will be aligned with yours and they will prioritize your wealth interests and goals ahead of their own.

3. Seeking counsel from salesmen.

Even if you found one of the 2,500 U.S. advisors upheld to the fiduciary standard, what are the chances that their advice is of any value? It’s actually quite low. The problem is that most of the advisors out there are not experts; they are salesmen or relationship managers.

Solution: Seek out professionals who have been managing funds (in addition to individual client accounts) with audited track records for at least a decade, with proven results. These advisors should have a client base similar to you so your needs are best served.

4. Taking on too much portfolio risk.

The concept of “keeping up” with the stock market is a Wall Street myth. The stock market has averaged 7 percent per year for the past 140 years, and the median investor expected to earn between 10 and 33 percent during the past decade. Yet the median stock fund investor only earned 1.9 percent, according to Securities Industry and Financial Markets Association (SIFMA) Annual SIA Investor
Survey: Attitudes Toward the Securities Industry.

Solution: Investors should take on only as much risk as they need to meet their goals. Unfortunately for your advisor, this means fewer commissions and fewer fees.

5. Lack of education among your heirs about preserving wealth.

In two generations, 60 percent of wealth is destroyed; 90 percent of all family wealth is destroyed in three generations, according to The Family Business Institute. William Vanderbilt left his heirs the equivalent of
$4.8 billion (in current dollars), yet not one ranks among America’s most affluent today.

Solution: Begin educating your children about money management, wealth, taxes and financial responsibility early. As soon as your child has a grasp of basic arithmetic and can follow an adult conversation, it’s time to start. Take time to explain the role of your advisors, their strategies, and the lessons of capital budgeting, saving and investing. Your heirs will receive the best lessons in responsibility and preserving an inheritance directly from you.

6. Not creating and living by a written budget and comprehensive financial plan.

Articulate your family’s goals and objectives, project cash flows out into the future, and manage spending and your investments accordingly. Monitor progress against goals, and as circumstances change, adapt your behaviors accordingly–even if this means sacrificing in the short term or postponing retirement.

Solution: Have a clear, written budget. Review it and update it as needed.

This is a step that many highly educated people avoid because they do not like the idea of “budgeting.” Financial planning for physicians creates clarity; do not skip this vital practice. Just as with little or no planning, bad advice, or working with non-fiduciary entities, physicians can easily erode their wealth. With the right planning, young physicians can grow their practices, increase their wealth and enjoy their lives more fully.

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