Common Financial Planning Mistakes

We have authored 11 books for physicians, including For Doctors Only: A Guide to Working Less & Building More, and we have consulted with thousands of doctors of all specialties. 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, or retirement planning, the result is almost always the same. We leave the meetings or finish the conference calls wondering, how could this doctor get such poor, uncreative, or just plain wrong advice? In our experience, fewer than five percent of physicians are properly advised by a comprehensive professional team.

The typical specialty physician endures nearly 25,000 hours of training in his/her profession. However, they generally receive a total of zero hours of training in business or financial matters related to the business of being a doctor. Doctors learn how to utilize specialists in other areas of medicine, but they receive no training in evaluating financial advisors whose advice and experience will be the backbone of the doctor’s financial plan for his/her entire career. Doctors lack the spare time and training to do their own planning, so it is no wonder that most are ill-served by their professional advisors.

The Two Fatal Flaws

Flaw #1: Outgrowing Your Advisor. The first mistake the overwhelming majority of physicians make in the financial, legal, or tax aspect of their careers is remaining with a professional advisor, or sticking with a financial plan—even if their financial situation has changed.

Most doctors choose their advisors when they are in residency or fellowship, or when they 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. They use the advisor older residents use, find someone through their local medical society, or hire a friend or family member. This approach serves a purpose when there are bigger challenges at hand (20 hour work days 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 may be good enough. Like a triage nurse in an emergency room, a top-trained specialist may be unnecessary if all you need are a few basic stitches.

The initial choice of advisor is usually not problematic, but remaining with the same advisors who handled the triage planning for the rest of your career may have devastating long-term consequences.

Doctors give us explanations like, “We have been with our advisors 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? Every day we meet physicians who have remained with advisors when clearly the doctor and his/her financial situation has outgrown the advisor’s expertise. Consider the following real-life example:

Case Study: Dan the Dermatologist. Dan, a dermatologist 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 in residency to create his wills.

Not only was this attorney not licensed in Nevada, but he was advising Dan in areas clearly beyond his expertise. The attorney was certainly a nice gentleman, and perhaps competent doing basic planning for someone with minimal tax or estate planning concerns, but he had no concept of advanced techniques that a physician making more than $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 implement for high-income physicians. While this attorney may have been an acceptable choice for Dan during residency, it was a disservice at this point to continue to use this attorney as a primary advisor.

Doctors advise patients to get a second opinion before opting for surgery or chemotherapy, but don’t get their own “second opinion” before agreeing to pay hundreds of thousands of dollars EACH YEAR in taxes. Dan’s desire to “not hurt his attorney’s feelings” had potentially cost him more than $1 million.

The idea that you can outgrow an advisor may seem obvious in the medical arena—you would no longer send your child to a pediatrician when s/he becomes an adult. Yet, for some inexplicable reason, this surgeon continued to use his attorney as his lead advisor, despite numerous recommendations that someone else (not necessarily us) may be more appropriate.

Self Test: 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?

Flaw #2: Failing To Utilize Specialists in Tax, Law, and Finance. If you need a stent put into your aortic valve, you would not go to a general practitioner. Moreover, you would not consult with specialists outside of cardiology. You wouldn’t even settle with seeing the standard cardiologist. You would only seek the help of an interventional cardiologist to handle this procedure. Medicine is a highly specialized discipline. If you have a specific issue, you seek out a physician properly trained and experienced within that particular field.

Financial planning is no different. However, our experience has shown that, in the areas of law, taxation, and finance, doctors fail to apply this similar concept.

The ever-changing US 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 all areas of tax law.

Nevertheless, each physician typically relies on one CPA to serve as his/her “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. These issues all fall within the scope of “tax,” but each exists as a discrete sub-specialty with its own unique knowledge base. As if the generic “tax advisor” wasn’t yet over-extended, many physicians use their tax advisor in areas far outside of tax, such as asset protection or investing.

To overcome this problem, utilize a firm that brings new value-added subspecialty knowledge. Make sure that your current CPA and the outside firm work together for your benefit. If additional expertise can be instituted, and your current CPA understands that the outside firm is not trying to take you as an accounting client, you can benefit significantly.

Do not be nervous about engaging outside experts to work with your present advisors to ensure you are getting the best, most current advice.

Conclusion

Physicians need to take their own advice. You encourage your patients to seek second opinions and rely on specialists to address their complex medical needs. Financial needs are similarly complex—getting a second opinion and using specialized advisors is critical to your long-term financial wellbeing. n

To receive a free hardcopy of Wealth Protection Planning for Dermatologists, call 877-656-4362. Visit www.ojmbookstore.com and enter promotional code PRDERM08 for a free ebook download for your Kindle or iPad.

David B. Mandell, JD, MBA, is a former attorney, consultant, and author of five national books for doctors, including For Doctors Only: A Guide to Working Less & Building More, as well a number of state books. He is a principal of the financial consulting firm OJM Group www.ojmgroup.com along with Jason M. O’Dell, MS, CWM, who is a principal and author. They can be reached at 877-656-4362 or mandell@ojmgroup.com.

Disclosure: OJM Group, LLC. (“OJM”) is an SEC registered investment adviser with its principal place of business in the State of Ohio. OJM and its representatives are in compliance with the current notice filing and registration requirements imposed upon registered investment advisers by those states in which OJM maintains clients. OJM may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. For information pertaining to the registration status of OJM, please contact OJM or refer to the Investment Adviser Public Disclosure web site www.adviserinfo.sec.gov. For additional information about OJM, including fees and services, send for our disclosure brochure as set forth on Form ADV using the contact information herein. Please read the disclosure statement carefully before you invest or send money.

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.