Avoid Financial Pitfalls Before Time Runs Out

Christine Menapace

Physician's Money Digest, July31 2004, Volume 11, Issue 14

Malpractice—of the personal finance kind—is an all-too-common problem for physicians today, according to several respected investment advisors. Financial advisors Gregory Carlson (800-418-9989; www.ccm.us.com), James Wilson (888-799-9203; www.jewilson.com), and Scott Sarber (800-441-4412; www.petersenhastings. com) are members of the Zero Alpha Group (www.zeroalphagroup.com), a national network of fee-only investment advisory firms.

Sitting-Duck Doctors

"Some of the personality traits necessary to make doctors truly outstanding in their field—the ability to make snap decisions, shouldering the responsibility for hard choices, and a well-developed sense of confidence—can be counterproductive when it comes to handling personal finances. These traits tend to work against doctors who are too quick to assume that they can figure out their financial picture for themselves," Carlson says.

"I would never think of performing a medical procedure, but there is no shortage of physicians who mistakenly think they know enough about money to handle their own complex financial situations," Sarber says. "We find doctors up to their necks in the most bizarre financial schemes imaginable. In other cases, super busy doctors may give zero time or attention to their long-term financial needs."

Pitfalls to Avoid

The following are the four most common financial pitfalls for physicians:

• Investing in the hot new drug. Many physicians mistakenly believe that a new medicine currently seeing heavy sales will translate into a higher stock price.

"In nearly every case, the price of the company's stock already reflects what their new drug offering is going to do in the marketplace," Sarber says. "The doctor isn't the only person getting this pitch from the drug company. Analysts, investment companies, and other doctors are all hearing the same thing. The price is already set."

• Obsessing about cheap debt. The average medical school graduate has more than $100,000 in debt. Some doctors work relentlessly to pay off that debt, even to the detriment of saving for retirement. "Education debt tends to be loaned at an incredibly low rate, usually below 5%," Carlson says. "This is manageable debt—it shouldn't be paid off while more expensive debt piles up, or while some of that money could be earning more in a long-term financial plan. Instead, pay it down incrementally, while also saving for retirement and making prudent decisions regarding other investments."

At the same time, other doctors move in the opposite direction. On top of their relatively inexpensive school debt, they start using expensive credit cards to accumulate real estate, cars, and other toys.

• Overcomplicating matters. Many physicians are inundated with offers for complicated investment schemes to keep their money safe from financial difficulties. But most don't need expensive asset protection plans. "You need an astronomical level of assets for the upkeep costs of offshore monies," Wilson says. "Most doctors don't need that. Malpractice insurance will cover most calamities—unless gross negligence is involved."

The tendency of doctors to get sucked into complex financial arrangements also explains why they are among the most alluring targets for financial con artists. Unfortunately, doctors have the money to make themselves targets for scam artists.

• Running out of time. Physicians are some of the busiest people in the American workforce. Actually setting aside the time to sit down with an investment advisor is difficult for them to do, but it is a necessity. The financial planning needs of physicians require special attention and time to make sure their plan is the right one for them. Too many doctors are so time-squeezed that they put off long-term financial planning for years or even decades longer than is advisable.