Biggest Mistakes Physicians Make in Choosing a Financial Advisor

March 1, 2011
David B. Mandell, JD, MBA

,
Jason M. O'Dell, CWM

Physicians receive no training in how to evaluate financial advisors, whose guidance often becomes the backbone of their future success -- or failure. Here are two fatal flaws physicians typically make when choosing an advisor.

It is not surprising that physicians fail to get the value they should out of their professional advisors. While the typical specialty physician has nearly 25,000 hours of training in his or her profession, there is a grand total of zero hours of training in business or financial issues related to the "business" of being a doctor. Doctors receive no training in how to choose or evaluate advisors, whose advice and experience will be the backbone of their financial plans over their entire career.

Here are two common flaws we see in physician-advisor relationships, and how to fix them.

Flaw No. 1: How Physicians Choose Their Advisors. The first mistake the overwhelming majority of physicians make in the financial, legal, or tax aspect of their careers is how they initially choose their professional advisors. Whether it’s a CPA, an investment professional, or an attorney, many physicians make poor choices because their method of choosing an advisor is flawed.

When you consider the typical pattern, you’ll find it’s not surprising. Many doctors choose their advisors when they are in residency or fellowship, as this is the time when most doctors begin to make money or start a family. Physicians may need some life insurance or disability coverage, a will, and someone to prepare and file tax returns. Working long hours without financial training, doctors typically do what other busy people do and take the path of least resistance (and minimum time commitment). They get recommendations from older residents, find someone the local medical society recommends, or hire a friend or family member.

This approach serves its purpose when there are bigger challenges at hand (such as working 20-hour days, graduating, and finding a job). Your life is so hectic, you just need to "get it done fast." The advisor you choose at this point simply has to be decent and cheap — and, for most, that is good enough. Like a triage nurse in an emergency room, a top-trained specialist is unnecessary when all you need are a few basic stitches.

What is alarming is not this initial choice of advisor, but, rather, the fact that most physicians choose to stay with these same advisors who handled their triage planning in residency for the rest of their careers. The typical justification for this is, "We have been together so long, I'd hate to change now," or, "If it ain't broke, don't fix it." This begs the question: How do you know "it ain't broke” if you don't get a second opinion?

What’s worse, many physician stay with their advisors when they or their practices have outgrown the expertise of the advisor. Consider the following real-life example:

Case Study: Oscar the Orthopedic Surgeon.

Oscar, an orthopedic surgeon living in Nevada, had annual income of more than $1 million and he was part of an extremely successful practice. He used the same New York-based lawyer he retained to create his will 10 years before, when he was a resident. Not only was this attorney not licensed in Nevada, but he continued to advise Oscar in areas that were clearly beyond his expertise. While he certainly was a nice gentleman, and perhaps was competent for basic tax-planning or estate-planning, the lawyer had no concept of advanced techniques that physicians making more than $1 million per year should be considering. While this gentleman may have been an acceptable choice for Oscar when he was a resident, it was a total disservice to the surgeon to continue to use this attorney as his primary advisor.

Doctors urge 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 each year in taxes. Oscar's desire to "not hurt his attorney's feelings" had at that point potentially cost him more than $1 million in taxes.

The idea that you can outgrow an advisor may seem obvious to you in the medical arena -- you would no longer send your child to a pediatrician when the child becomes an adult. Yet, many physicians continued to use advisors that are no longer appropriate for them.

Are you one of them? Here’s a self-test: How did you choose the professional advisors you work with today? How many other professionals did you interview prior to choosing your advisor? Have you interviewed others over the years as your needs have changed?

Flaw No. 2: Failure to Understand 'Sub-Specialties' in Tax, Law, and Finance. If you needed a stent put into your aortic valve, you would not go to a general practitioner. Moreover, you would not consult with any specialists outside of the field of cardiology. In fact, you wouldn’t even settle for seeing the standard cardiologist -- you would seek the help of an interventional cardiologist to handle this procedure. As we know, medicine is a highly specialized discipline. If you have a specific issue, you will seek out a physician properly trained and experienced with that particular issue.

Utilizing a specialist to assist you with your health concerns seems obvious. Conversely, when it comes to the areas of law, taxation, and finance, doctors completely fail to apply this same concept.

Consider the area of taxation. The ever-changing U.S. tax code is the most complex set of rules ever created by one society -- and that’s only the beginning. IRS revenue rulings, private letter rulings, tax memoranda, announcements, and circulars, as well as tax court and federal court cases, only serve to make the field that much more difficult to understand. The quantity of information is so vast that many law libraries devote an entire floor to tax materials. No single person can possibly be an expert in all areas of tax law.

Nevertheless, each physician will typically rely on one CPA to serve as his or her advisor in all areas of taxation. The taxation issues that require guidance for physicians typically include retirement planning, income structuring (salary vs. bonus), payroll tax, corporate structure (whether to be an "S" or "C" corporation), compensation (whether to implement a deferred compensation plan), estate-tax planning, taxation on sales of real estate, individual tax returns, corporate tax returns, and buying or selling of the practice. While these issues all fall within the scope of “taxation,” each exists as a discrete sub-specialty with its own unique knowledge base. Meanwhile, many physicians rely on their CPAs for guidance in areas far outside of the area of taxes, such as asset protection or investing.

We have continually encountered this scenario, struggling to work with a physician's CPA or attorney to implement a particular strategy (i.e., a non-qualified deferred compensation plan). In most of these cases, it is obvious that the advisor has little experience in the doctor's area of concern and the vast majority of the time the physician client suffers financially.

Because advisors are so fearful of bringing in another advisor, who may "steal" the client, the attorney or CPA will not admit his or her shortcomings to the physician and recommend another specialist. One reasonable alternative would be for the advisor to admit a lack of experience in the area and agree to review the area in question -- and charge the client for the time needed to "get up to speed." Most advisors are afraid to do this. Perhaps they are afraid of the client seeing them as inadequate. So, instead, the advisor will tell the client that the idea “doesn't work,” without providing any substantiation. In the end, the doctor is clueless as to what is really going on -- and the problem remains unsolved.

In conclusion, physicians need to begin taking their own advice. You encourage your patients to seek second opinions and rely on specialists to address their complex medical needs. Your financial needs are similarly complex, and getting a second opinion and utilizing specialized advisors is critical to your long-term financial well-being.

David Mandell, JD, MBA is an attorney, lecturer, and author. Jason O’Dell, CWM, is a financial consultant, lecturer and author. They are both principals of the financial consulting firm OJM Group in Cincinnati, Ohio. The authors welcome your questions and can be reached at (877) 656-4362, or through their website Ojmgroup.com. For a free (plus $5 shipping & handling) copy of "For Doctors Only: A Guide to Working Less and Building More," please call (877) 656-4362.

Disclosure: This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein. For additional information about the OJM Group, including fees and services, send for our disclosure statement as set forth on Form ADV using the contact information herein.