Just like a physician would recommend a patient see a specialist, a team should be in charge of a physician's finances to make sure he or she is getting the best advice.
As authors of four books for physicians, we have consulted with thousands of doctors of all specialties during the last decade. From this experience, we have become intimately familiar with the mistakes physicians make when working with their CPAs, attorneys and other financial advisors. Whether it is in the area of tax, asset protection, retirement planning or other areas, the result is almost always the same. We leave the meetings or conference calls asking ourselves, "How could this doctor get such [poor, uncreative, or just plain wrong] advice?" It would be laughable if it weren't so troubling.
It is not surprising that physicians do not get the value they should out of their professional advisors. While the typical specialty physician has nearly 25,000 hours of training in his/her profession, there are a grand total of hours of training in business or financial issues related to the "business" of being a doctor. After learning how to utilize specialists in other areas of medicine, doctors receive no training in how to choose or evaluate the advisors whose advice and experience will be the backbone of the doctor's financial plan for his entire career.
fewer than 5% of physicians are properly advised by a professional team.
Doctors lack the spare time and training to do their own planning and have literally no training on how to find and evaluate the right specialists to assist them, so it is no wonder that most are ill-served by their professional advisors. To be honest, it is actually surprising when we meet a physician who is financially savvy or is properly counseled by a team of professional advisors. In our experience,
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 advisor. Whether it is their CPA, investment professional or attorney, many physicians make a poor choice because their method of choosing an advisor is flawed.
When you consider the typical pattern, this is not surprising. Most 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. The doctors may need some life or disability insurance, a will and someone to prepare and file tax returns. Working long hours without financial training or the means by which to evaluate an advisor, doctors typically do what other busy people do and take the path of least resistance (and minimum time commitment). They use the advisor the older residents use, find someone the local medical society recommends, or hire 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 workdays, graduation 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 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 to us is not this initial choice of advisor, but, rather, the fact that most physicians actually stay with these same advisors who handled their triage planning in residency for the rest of their careers. The typical justification for this is, in our opinion, rarely anything concrete or acceptable. Doctors give us explanations like, "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?
Most alarming to us (and something we see every day) is when a physician stays with an advisor when the doctor has clearly outgrown the expertise of the advisor. Consider the following real-life example:
Two fatal flaws of physician-advisor relationshipsFlaw 1: How physicians choose their advisors
Oscar, an orthopedic surgeon living in Nevada, contacted us after reading one of our books. While his income was over $1 million per year and he was part of an extremely successful practice, he used the same New York-based lawyer he retained to create his wills 10 years before when he was a resident. When David relocated from California to New York, he had a meeting with this attorney.
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 was certainly a nice gentleman, and perhaps was competent for doing basic planning for someone with minimal tax or estate planning concerns, the lawyer had no concept of advanced techniques that a physician making over $1 million per year should be considering. He had no knowledge of non-qualified plans, asset protection planning or other fairly routine planning that we routinely implement for high-income physicians. While this gentleman may have been an acceptable choice for Oscar when he was a resident, it was a total disservice to the surgeon at this point to continue to use this attorney as his primary advisor.
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 each year in taxes. Oscar's desire to "not hurt his attorney's feelings" had potentially cost him over $1 million so far.
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, for some inexplicable reason, this surgeon continued to use his attorney as his lead advisor, despite our numerous recommendations that someone else (not necessarily us) may be more appropriate.
How did you choose the professional advisors 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?
Case Study: Oscar the orthopedic surgeon
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 cardiology. In fact, you wouldn’t even settle with seeing the standard cardiologist. You would only seek the help of an interventional cardiologist to handle this procedure. The point is that 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 heath concerns seems obvious. However, our experience has shown that, in the areas of law, taxation and finance, doctors completely fail to apply this same concept. To illustrate this, let’s consider the area of taxation. The ever-changing United States 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 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 areas of tax law.
Nevertheless, each physician will typically rely on one CPA to serve as a “tax advisor” in all areas of tax. The taxation issues that require guidance 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 “tax,” each exists as a discrete subspecialty with its own unique knowledge base. As if the generic “tax advisor” wasn’t yet overextended, we have seen many physicians ask their tax advisors to provide guidance in areas far outside of tax altogether, such as asset protection or investing.
One method to overcome this problem is to bring in a firm that will bring new “value added” subspecialty knowledge. However, the key success factor here is to make sure that your local CPA and the outside firm can work together for your benefit. If additional expertise can be brought to bear for your planning, and your current CPA understands that this outside firm is not trying to take you as an accounting client (i.e., not “competition’), you can benefit significantly. Having an outside expert team work with your present accountant has proven very successful for our firm for the last five years and has worked with hundreds of physicians and hundreds more CPAs, in bringing added value to our clients.
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 of five books for physicians. Jason O’Dell, CWM is a financial consultant, lecturer and author of two books for physicians. They have written
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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.
Flaw #2: How physicians fail to understand “subspecialties” in tax, law and financeConclusion