Outgrown your financial advisor? How to be sure it's still a good fit.
Flawed relations with your adviser means you're not getting the advise you should.
As an author and consultant to physicians on personal wealth management, I have become intimately familiar with the mistakes physicians make when working with CPAs, attorneys, and other financial advisers. Whether it is in the area of tax, asset protection, retirement planning, or other areas, the result of flawed physician-adviser relationships is almost always the same.
I leave the meetings or conference calls asking myself, "How could this doctor get such lousy advice?"
It would be laughable if it weren't so troubling. Yet I can't say it's surprising. While specialty physicians typically receive nearly 25,000 hours of clinical training, they get zero hours of training in business or financial issues. Nor do they receive training in how to choose or evaluate the advisers whose advice and experience will be the backbone of their financial plan.
When you combine the lack of time and training to do it yourself with the lack of training in finding and evaluating the right specialists to assist you, it is no wonder that most of you are ill-served by your professional advisers. In fact, in my experience, fewer than 5 percent of physicians are properly advised by a professional team.
In this first of a two-part article, I will attempt to point out the common flaws I see in physician-adviser relationships, and discuss some solutions. In February, I will continue to explain how to remedy these problems so you can move toward your goals of minimum lawsuit and tax exposure and maximum peace of mind.
The Fatal Flaws
There are four truly devastating flaws I see in relationships between physicians and their financial advisers. We'll discuss the first two in this issue, and continue next month with the other two.
1. Physician often choose their advisers poorly.
Most doctors choose their advisers when they are in residency or fellowship - as this is the time they begin to make money or start a family. You probably did what other busy people do: you took the path of least resistance by using the adviser the older residents used, finding someone the local medical society recommended, or hiring a friend or family member.
Though this unscientific approach is obviously flawed, it serves its purpose when there are bigger challenges at hand - like 20-hour work days, graduation, and finding a job. The adviser you choose at this point simply has to be decent and cheap. This is, in fact, quite understandable.
But most physicians actually stay for the rest of their careers with this same adviser they initially selected for basic assistance. That's what's so alarming. The typical justification for this is rarely anything concrete or acceptable (in my opinion):
"We have been together so long, I'd hate to change now." This is unpersuasive.
"If it ain't broke, don't fix it." How do you know "it ain't broke" if you don't get a second opinion?
Every day, I see a physician who stays with an adviser despite having clearly outgrown his expertise.
Consider the following real-life example:
"Oscar," an orthopedic surgeon living in Nevada, contacted me after reading my book. While his income exceeded $1 million per year and he was part of an extremely successful practice, he used the same New York-based lawyer who created his will 10 years ago when he was a resident.
I had a meeting with this attorney. Not only was he not licensed in Nevada, but he continued to advise the physician in areas that were clearly beyond his expertise. He had no knowledge of nonqualified plans, asset protection planning, or other fairly routine planning that we implement for high-income physicians. While this attorney may have been an acceptable choice for the doctor when he was a resident, it was a total disservice to this surgeon to continue to use him as his main adviser.
Doctors advise patients to get a second opinion before opting for surgery or chemotherapy, but they don't get their own second opinion before agreeing to pay hundreds of thousands of dollars per year in taxes. Oscar's desire to "not hurt his attorney's feelings" has potentially cost him more than $1 million so far.
Oscar would agree that you shouldn't send an adult to a pediatrician. Yet he continued to use his attorney as his lead adviser, despite my numerous recommendations that someone else (not necessarily me) may be more appropriate.
Self Test: How did you choose the professional advisers you work with today? How many other professionals did you interview prior to choosing one? Have you periodically interviewed others as your needs have changed?
2. Physicians often fail to understand subspecialties in tax, law, and finance.
If you needed a stent put in your aortic valve, you would not go to an internist. You would only seek the help of an interventional cardiologist to handle this procedure. Medicine is highly specialized. If you have a specific issue, you want a physician properly trained and experienced with this particular issue.
Yet I can attest that in the areas of law, taxation, and finance, doctors completely ignore the lesson they should take from their own field. Consider taxes, for instance. The ever-changing U.S. tax law is the most complex set of rules ever created by one society. The lengthy and confusing Internal Revenue Code is only the beginning. IRS revenue rulings, private letter rulings, tax memoranda, announcements, circulars, as well as tax court and federal court cases, only make the field all the more difficult to understand. Set foot in any law library and you may see an entire floor dedicated to tax materials. No one person can possibly be an expert in all areas of tax law.
Nevertheless, you probably rely on one CPA to serve as your tax adviser in all areas of tax planning. The issues that require guidance typically include retirement planning; income structuring (salary vs. bonus); payroll taxes; whether to register as an "S" or "C" corporation; deferred compensation plans; estate tax planning; real estate taxes; individual tax returns; corporate tax returns; and buying or selling the practice.
The list goes on. All of these areas are actually subspecialties that require a unique knowledge base. Yet I have seen many physicians ask their tax adviser to guide them in areas that are far outside of taxation altogether - such as asset protection or investing.
I cannot tell you how many times I have run into this problem while trying to work with a physician's CPA or attorney to implement a particular strategy. It is usually obvious that the advisers have little experience in the doctor's area of concern, and the physician client suffers needlessly most of the time.
Because the adviser is so fearful of bringing in another adviser who may "steal" the client, the attorney or CPA will not admit her shortcomings to the physician and recommend another specialist. In the end, the doctor is clueless to what is really going on - and the problem is not solved.
Self Test: Ask your CPA or attorney which tax areas noted above are his areas of expertise. Ask him how he would handle an issue for you beyond this area.
Don't forget to check out the second part of this article next month, when I will explain the third and fourth biggest mistakes physicians make when dealing with their financial advisers - and what to do about them.
David B. Mandell, JD, MBA is an attorney, lecturer, and author of the book "Wealth Protection: Build and Preserve Your Financial Fortress." He is also a cofounder of The Wealth Protection Alliance, a network of financial advisory firms whose goal is to help clients build and preserve their wealth. Also contributing this article is Beryl N. (Sandy) Stokes, III, CPA, MBA, MS-tax, who has been serving the financial needs of physicians for over 20 years, and is a charter member of the Wealth Protection Alliance. Both David and Sandy can be reached at 800 554 7233, or via firstname.lastname@example.org.
This article originally appeared in the January 2006 issue of Physicians Practice.