The Top Five Wealth Management Pitfalls

September 16, 2008
Sue Stevens,CPA,CFP, MBA, CFA

Physician's Money Digest, June15 2003, Volume 10, Issue 11

You're smart, well-educated,and you're doing well. Thenwhy are you worried aboutlosing it all? Or worse yet, maybe youaren't worried and you should be.

Let's take a look at some of thebiggest pitfalls on the road to wealththat physicians and their familiesshould avoid. If you're truly goingto be successful, you'll need to navigatecarefully through the manyhazards along the way, including thefollowing most common snares:


The most successful wealth managersknow they need to be disciplinedin their spending. It's so easyto let expenses creep up as you makemore and more money. If you're notcareful, those expenses can kill yourchances of capitalizing on thatwealth. The first rule of any goodfinancial plan is to pay yourself first.Make sure you're putting away ahealthy portion of your income andinvesting it. Don't fall into the pitfallof living beyond your means.

Another aspect of managingcash flow is minimizing taxes. Asyour return gets more and morecomplex, you need to find professionalhelp to take advantage ofevery deduction you're entitled to.Your accountant can also help identifyother opportunities like additionalretirement funding vehicles,mortgage refinancing strategies,and/or estate planning techniques.At the very least, you should be discussingways to use capital losscarry-forwards (many of you willhave these) to your advantage.

During your working years, it iscritical that you carry disabilityinsurance. If you work with a largermedical practice or hospital, youmay be able to purchase this coveragethrough your employer. Takeadvantage of the opportunity toprotect your income should somethingprevent you from working. It'sfar more probable that you'll have adisability claim than a life insuranceclaim, and yet many people ignorethis important coverage.


A well-run company knows howto manage its debt. You need to thinkabout debt management in your personallife, too. How much debt is toomuch? Look at your shorter-termdebts first, such as credit card debt,car loans, bank loans other thanmortgages, student loans, etc. If yourshort-term loans add up to morethan your liquid assets'worth, youprobably have too much short-termdebt. (Liquid assets would includecash accounts, brokerage accounts,and cash-surrender value of lifeinsurance policies.)

If you find yourself in this situation,at the very least, you shouldexamine the interest rates you'repaying on each loan and try to consolidateyour debt at a lower interestrate. Home equity lines of creditwork well in many situations becausenot only are interest rates low, butthe interest is tax-deductible.

Mortgages can be a good meansof managing debt. You get a taxbreak, and interest rates are at anhistoric low. But even with yourmortgage, you should exercise somecaution. Taking on more debt makesit harder to adjust should you findyour circumstances changed (eg,you lose your job). If at all possible,try to keep mortgage debt below75% of the value of the property.

Many people are finding thatthey can shorten the length of theirmortgage (ie, refinancing from a30-year to a 15-year fixed rate) nowthat interest rates are so low. Justpaying your mortgage every 2 weeksthroughout the year helps to cutyour overall interest payments overthe life of the loan.


One of the biggest pitfalls I seein wealth management is simplylack of attention. Physicians especiallyare very busy. Sometimespersonal finance takes a backseatto other more pressing matters.But if you take that approach, youmay wind up feeling that the yearshave flown by and you haven'tmade much progress. Successfulwealth creation takes a time commitment.If you can't make thatcommitment, hire a financial advisoryou can trust.


Even if you're able to generate aconsiderable amount of income,you have to know how to protectand preserve that capital. One pitfalla lot of investors have experiencedin the past few years is misjudgingtheir risk tolerance. Whenthe market just kept going up, it waseasy to think you could handle therisk. But now, after seeing much oftheir portfolio value erased, manyinvestors are rethinking how muchrisk (or loss) is acceptable to them.

Another common mistake is notrebalancing periodically. Many peoplerefuse to sell if they've lostmoney on an investment. If yourasset allocation (ie, your mix ofstocks, bonds, and cash) makes youvery uncomfortable, think abouttaking some losses and moving toan asset allocation that's in line withyour ability to handle risk.

If you do realize losses, you cantry to make the best of it by beingtax-savvy. No one likes to losemoney, but those losses can be abenefit at tax time. You can use$3000 a year to offset ordinaryincome. You can net out an unlimitedamount of capital gains and lossesagainst each other. Any lossesyou can't use right away can be carriedforward indefinitely. This is 1 ofmany techniques you can use tocreate a tax-efficient portfolio.


Sometimes life hands you a littlesomething extra. Maybe it's stockoptions, an inheritance, or someother once-in-a-lifetime event. Overthe next 10 years, $10 trillion willpass from generation to generation.Most heirs have no idea how tointegrate that wealth into their ownportfolios. If you do find yourself arecipient of a financial perk, whatdo you intend to do with it?

The bottom line:

Many of you will benefit fromprofessional advice in these types ofsituations. There are almost alwaystricky tax implications. For stockoptions, you have to understandwhat type of tax you may triggerupon exercise or sale of your shares:ordinary income, capital gains, oralternative minimum tax, or a combinationof them all. Careful planning can help you keepmore of your windfall.

You've worked hard for yourmoney. Be sure to reap all the benefitsyour compensation can offer bybeing a savvy wealth manager.

Sue Stevensis director of financial

planning for Morningstar

Associates, LLC, and columnist

for Morningstar FundInvestor.

She is also president and

founder of Stevens Portfolio

Design, LLC, a private financial planning

practice specializing in retirement and portfolio

planning. Named one of the top 250 planners

in the country by Worth magazine for the

past 2 years, she has over 14 years of financial

planning experience. She welcomes

questions or comments from readers at 847-

444-0209 or

This article was reproduced with permission

from Morningstar.