What I share below is the 20/20 hindsight I’ve gained by helping to protect the success and manage the risks of thousands of successful Physicians for nearly two decades.
Experts have consistently warned us for several years that another recession was possible, if not likely, and that our economy is fragile and vulnerable to a variety of social, political, and economic variables. This has certainly proven to be true in the last 60 days as the coronavirus pandemic has slowed the U.S. economy to a near halt as dire predictions for at least the next six months, but as long as two years, are being made.
The last recession in 2008 was a lesson for many of the most successful people in America and their advisors, (including myself), who had together weathered several economic downturns before but had never seen anything that serious or long lasting before. Even those with high incomes and a high net worth (at least on paper) who never imagined the possibility of a day they they’d worry about paying their bills, let alone going bankrupt, were not spared. Just in my personal office in 2009 alone, I turned away over 50 millionaires that were referred to me for help against pre-existing exposures when it was too late, and when I could only refer them to bankruptcy and litigation counsel.
As the damage went on for years, we began to see clear patterns of behavior and preparedness that easily predicted if an individual would survive the recession or not, regardless of net worth. It may seem deceptively simple, but these lessons were hard learned by others. It’s time to stop repeating their mistakes.
Dangerous Financial Patterns That Wiped Doctors Out, and That I’m Seeing Again.
Significant fixed expense to income ratios. People were living large, spending heavily on lifestyle, homes, and luxury goods. They were using credit and leveraged debt for both lifestyle and investments including real estate and medical businesses. As one example, it’s going to be a rough few months for ASC and AirBnB owners as travel grinds to a halt and all elective or non-essential medical procedures are put on hold.
A lack of complete due diligence and sophisticated legal counsel on the investment deals they were in. I’m still amazed how many people signed personal guarantees for 100 percent of the debt in a given deal when they owned 25 percent or less of the project. They also often failed to use their advisors to conduct complete due diligence on deals and partners including on the buyers of their practices and other businesses. We are seeing this exact same pattern again now in the age of the “medical practice M&A deal”, which is this year’s version of the real estate development and spec home deals we saw wipe doctors out in 2008. Be very careful and fully informed about who’s on the other side of the table.
Stalled or negative investment momentum for those that did actually have investments and/or income sources outside their actively earned practice income and a significant lack of liquidity and diversity in the allocation of their assets. This is a natural instinct; go with what you know and what’s worked in the past, until it doesn’t. Even high earning physicians were illiquid for a variety of reasons including some combination of the following: their fixed business and personal overhead (mortgage, nanny, private schools, multiple car payments, etc.); the fact that they were fully invested in a down market and couldn’t afford to sell on their securities and real estate at a loss; and a failure to take money out of their practices and deploy it in other areas or to allocate a portion to cash savings when they could actually afford to do so.
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Increased litigation exposure on every imaginable front caused by economic pressures, (including among and between partners and investors and employment lawsuits, as just two examples) with a lack of any kind of defensive legal and financial planning (asset protection) and a fatal reliance on traditional estate planning (death planning) alone. Most of these folks were one big, undivided and collectible bucket of money.
A failure to adequately insure themselves and their families on a variety of issues (including funding buy-sell agreements with business partners with life and disability insurance) and a failure to insure against predictable liabilities for issues ranging from directors and officers insurance to business interruption, RAC audit and employment lawsuits.
How Did Others Survive and Even Prosper During the Same Time?
It’s interesting to note that at the same time we saw an economic climate with so much loss, some physicians survived and even prospered. Some of those people were ‘lucky’ but others actually planned for success, either on their own or with the help of top advisors who actually looked at the doctor as a holistic being with many moving pieces, not just as an investment account holder, estate planning client, etc.
However they got there, they shared some common traits you can implement now:
1. They and their advisors were aware of their potential risks and exposures, and were proactive in addressing them. This included paying attention to management, leadership and compliance issues that helped control risk, and having and enforcing professionally drafted polices to do so including on issues like employment policies, HIPAA, and IT security. All of these are current issues practices are facing as they deal with exposed employees, layoffs and quarantines.
2. They were able to meet their personal, family overhead commitments from existing resources and savings for an extended period of time, even without additional or reduced cash flow. They were willing and able to adjust their lifestyles and expenditures to current economic conditions. They lived well, but well within their means, as opposed to at the limits of their means, so they had some room to maneuver when times got tough.
3. They had assets that allowed them to meet existing business financing burdens and other fixed operating costs in a form that they were able to liquidate or collateralize to obtain at minimal delay and expense. This included a disciplined allocation to cash or cash equivalents as part of their savings. They also had longer term assets that were able to be made liquid with minimal penalty and delay, despite that liquidation not being part of the original plan, (i.e. long-term investments with an escape or liquidity plan built in). This liquidity will allow many to take advantage of the opportunities that emerge in a recession.
4. They had top counsel in place on tax, business transactions, and estate planning issues, and that counsel used a variety of strategies that not only served the primary goals of growth and income but also predictably protected those assets for the family.
5. They had great personal and business credit, could access that credit when needed, and had relationships with banks that allowed them to agree on terms that were best for all parties involved. Some had these relationships with several institutions in case one couldn’t preform.
6. They were advised to “safety wrap” exposed assets in various legal entities that had legitimate business purpose and which provided asset protection by segregating their assets from their personal and professional liability. Simple examples include the (fact specific) use of LLCs for investment real estate, the use of LPs to own and control non-qualified savings and investment accounts, and the use of irrevocable trusts as opposed to simply dumping everything into their revocable living trusts (financial suicide).
7. They (knowingly or not) used exemption planning in a variety of areas including funding qualified retirement plans which are often legally protected (including from bankruptcy in certain cases), used homestead laws effectively and had an allocation to statutorily protected assets like annuities and cash value life insurance, which are also both creditor protected by law in many states. In one case, an individual with a net worth of $150 million was literally wiped out (bankrupted) by leveraged real estate exposures and left with just a single asset to start over, the statutorily protected cash value of his life insurance policy which amounted to seven figures.
8. They had invested in significant amounts of personal and specialty business liability insurance that helped protect them from a variety of exposures including defense costs at a time when a lawsuit award or paying six figures in legal fees would have been the “final straw” that broke them.
9. They and their financial advisors had investment plans with down market plans beyond “hope and hold” that included alternative investments and strategies that could withstand and even profit from market volatility and debt. Their advisors were willing to reexamine these plans and make smart, tactical decisions and changes as required. In some cases they took short-term losses to make smarter allocations or to free up cash to pursue opportunities. Examples included clients taking advantage of low valuations for businesses (including other medical practices) they wanted to buy residential and commercial real estate price drops by liquidating other under-performing assets to raise purchase money and large down payments required by a tough credit environment.
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10. They aggressively worked on making their medical practices (and the other businesses they owned) the best they could be. This meant paying increased attention to and investing in their offices, marketing, better websites, service and processes, and other issues that that made their practice stand out and helped it compete for business during tough times.
Finally, they remained humble, realistic and flexible. They were willing to listen to their staff and advisors, adapt, change plans, and respond to realities. That means making some tough choices and being proactive about the threats outlined above, including the possibility of downsizing to remain solvent before it become a crisis. Likewise, during what I hope is a short-lived crisis for all of us, we will continue to monitor the situation as it changes and inform you of defensive options and risks as they emerge.
Ike Devji, JD, has practiced law exclusively in the areas of asset protection, risk management and wealth preservation for the last 16 years. He helps protect a national client base with more than $5 billion in personal assets, including several thousand physicians. He is a contributing author to multiple books for physicians and a frequent medical conference speaker and CME presenter. Learn more at www.ProAssetProtection.com.