Financial Advice for Doctors Bears Careful Scrutiny

May 20, 2014

Before you commit to a financial plan for your practice, carefully consider your specific risk exposures.

Working with thousands of doctors across the United States, my associates and I see a nonstop barrage of legal and financial strategy marketing and articles for and about doctors. Unfortunately, some of these strategies involve applying general principles to your unique healthcare business without a complete picture of its liabilities and other issues.

A recent Wall Street Journal Wealth Adviser article came to my attention this week that provided a financial adviser's perspective on planning for a doctor whose beloved practice was actually running at a deficit of $30,000 a year. The financial adviser felt his duty was to allow the client to continue to do what he loved - practicing medicine - for as long as he wanted, without it affecting his long-term estate planning and charitable giving goals. While the doctor's passion is admirable, the article and this view ignores a simple fact; even if you can afford to run a "passion" business in the red and pay for it out of pocket, the liabilities and market risks you incur don't change - a dangerous combination for high-risk medical professionals.

The article says the adviser ran "thousands" of simulations, likely the so-called Monte Carlo simulations that predict investment performance based on a series of models and algorithms about markets. What these simulations leave out or underestimate, however, may be even more important than the expected rate of return on investments:

• A significant loss of investment assets due to a previously unforeseen anomaly in the economy;

• A market and economic crash due to an act of terrorism or a natural disaster;

• Losses and massive out-of-pocket expenses due to employee lawsuits, a professional malpractice claim, a Medicare audit, a data breach of patient HIPAA or financial information, or historic compensation changes;

• Loss of home and commercial real estate equity of 30 percent to 50 percent;

• Competition from ACOs and hospital-owned practices; and

• An extended period of near zero return on investment income.

What could be worse than any one of these? A catastrophic combination of a number of these factors happening at once - a situation we've faced too many times with a variety of doctors; especially since 2008. If you think that's unlikely, I'd remind you that nearly every doctor reading this has likely faced (or is currently facing) at least two or more of these issues in the last 10 years alone.

Now to be fair, the position of the financial adviser (growth and lifestyle) cited in the article is different from mine as an asset protection attorney (safety first); but while we also have similar conversations with clients on a regular basis, our advice is significantly different. As much as I'd like to always say "yes" or provide a "how," sometimes our role as a fiduciary is to say "no" or "wait."

Here are some things I would have recommended to my own client in the same situation:

1. A consultation with a practice management consultant to identify any preventable losses or unnecessary expenses including the review or creation of a business plan and a review of their marketing practices;

2. A hard conversation with the practice manager and the client's CPA about ever being able to improve the financial viability of the practice;

3. A review of alternatives to owning the practice, like selling it to a hospital group and staying on as a salaried employee, who would actually take money home with less liability, or working in a teaching, volunteer, or clinical capacity;

4. An asset protection case study of the client so they were aware of their current hard dollar exposures and the steps required to protect themselves; and

5. A thorough review of all the client's essential legal and financial planning to help hedge their risks.

Again, we are applying general principles to very fact-specific situations and comparing the viewpoints of two very different advisers with different goals. As always, we ask you to examine the question of the fit of any particular strategy to your own personal circumstances and to account for the professional risks and challenges unique to your business.