Be on the Prowl for Financial Blunders

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

Doctors generally make money, but theydon't always do a good job of keeping it.Some simply overspend. Others don'tknow how to manage their money and investpoorly. Many doctors lose their hard-earnedmoney through poor financial decisions andhaven't even enjoyed spending it.

I know—I'm one of you. I, too,toiled through medical school, residency,fellowship, and practice. It'sdemanding, exhausting, and rewarding.Those who aren't physicians havea difficult time understanding therigor we doctors go through.


I am also "one of them,"a financialprofessional. That means I know thehidden costs, the less-than-transparentagenda, and the occasional trainingtape, "How to Tap into Gold-PlatedDoctors."Preparation to become afinancial professional didn't alwaysmake me feel good. That's because Irealized what we doctors are to manyof our colleagues—targets. We fit intothe category of someone with money,but little training in the financial area.

This means that when someone has a hotdeal, they'll come to us. They'll be betting wewon't have the background or the time to fullycomprehend the downside. Of course the upsidewill be fully explained so that the deal seems appealing.It is the weakness of the proposedarrangement that we need to understand. If wedo, we are more likely to keep our money, andour net worth won't be constantly bitten into byless-than-optimal investment choices.

There are multiple ways thatyou can lose money foolishly.Based on my observations, themost common, needless error forhigh-net-worth investors is toinvest in mutual funds with highoperating expenses. Theaverage mutual fundcharges 1.4% per yearin management fees. Inaddition, there can be ahidden 12(b)-1 expensethat you don't appreciate.The latter can increaseyour expense from the averageof 1.41% to 1.66% total. This highexpense every year erodes any positiveinvestment gains, and the effect iscumulative. Loads and back-end feescan further increase your cost.

So, if you have more than $1 million,why not hire a private financialadvisor? Their fee would be about 1%,which is less than the average mutualfund. Therefore, your capital is erodedless by expenses. In addition, you getthe extra added value of an advisor.


Another financial hazard is annuities. Theytend to be costly, and their lack of defenseagainst inflation makes them less appealing. Fora discussion of the specific incidences in whichthey might be appropriate, please see the consumerreport at

In the worse possible case, annuity costs canget you coming and going. By that I mean thereare extra costs going in, and if you exit early, goingout as well. Annuities are insuranceproducts, and the initial sales commissionscan be up to 8.25% of thetotal annuity. This means that yoursalesperson receives this amountwhen you sign on the dotted line. Asif this isn't enough, the operatingexpense is up to 1.6% annually.Many annuities have high surrendercharges (ie, up to 9%), so you can'tget at your money without payingmore money. This means yourmoney isn't liquid. You can't tap itwithout a penalty. The crowninginsult is when you take your money out, theincrease in its value is taxed at regular incomerates. If the money had been growing in your ownprivate account (ie, no sales fee, no penalties fortaking it out), then the gains would be taxed at thelower capital gains rate.

A final potential error for many doctors is toinvest in private equity. Though few physiciansdo this, those who do take the plunge usuallylose money. Private equity is for the accreditedinvestor. The accredited investor is one whomakes over $200,000 net income per year andhas over $1 million in net worth. If you're in thiscategory, you are potential bait for individualswho need business money, but don't want topass the requirements of market registration.

Because you have money, presumably, youcan afford to risk it for someone else's new venture.Again, the marketer explains the upsidethoroughly to you. It's the downside that may becouched in language that is less than transparent.Have your financial advisor, lawyer, or CPA lookat the proposal before you seriously considersigning anything.

Shirley M. Mueller


boarded in neurology

and psychiatry. She

was a practicing neurologist

until 1995.

Since then, she has

retrained and is active

in the investment and

financial planning area.

Dr. Mueller is a senior

wealth advisor at Star

Wealth Management

in Indianapolis, Ind.

She welcomes questions

or comments at