Tax Planning: Common Physician Financial Planning Mistakes: Are You Making One (or Both!)?
We have authored eleven 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, including neurologists and neurosurgeons. 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? It would be laughable if it weren’t so troubling.
In our experience, fewer than 5% 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 grand 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 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.
In this article, we will point out the common flaws we see in the physician-advisor relationship.
The Two Fatal Flaws of Physician-Advisor Relationships
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 the physician’s 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 the older residents use, they find someone through their local medical society recommends, or hire a friend or family member.
This approach serves a purpose when there are bigger challenges at hand (like 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 expertise of the advisor. Consider the following real-life example:
Case Study: Ned the neurosurgeon
Ned, a neurosurgeon 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 during residency to create his wills.
Not only was this attorney not licensed in Nevada, but he was advising Ned in areas that 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, he 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 implement for high-income physicians. While this attorney may have been an acceptable choice for Ned when he was a resident, it was a disservice to the client-surgeon 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 they don’t get their own “second opinion” before agreeing to pay hundreds of thousands of dollars EACH YEAR in taxes. Ned’s desire to “not hurt his attorney’s feelings” had potentially cost him over $1,000,000.
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?
Flaw #2: Failing To Utilize Specialists in Tax, Law, & 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 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. 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. Utilizing a specialist to assist you with your health concerns seems obvious. However, our experience has shown that, in the areas of law, taxation, and finance, doctors fail to apply this similar concept.
To illustrate, consider the area of taxation ad tax planning. 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 all areas of tax law.
Nevertheless, each physician typically relies on one CPA to serve as their “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; we have also seen many physicians use their tax advisor in areas far outside of tax altogether, such as asset protection or investing.
To overcome this problem, utilize a firm that brings new value-added subspecialty knowledge. The key success factor here is to make sure that your current CPA and the outside firm work together for your benefit. If additional expertise can be instituted for your planning, and your current CPA understands that the outside firm is not trying to take you as an accounting client (i.e., not “competition’), 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.
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. Your financial needs are similarly complex, and getting a second opinion and utilizing specialized advisors is critical to your long-term financial well-being. The authors welcome your questions. You can contact them at 877-656-4362 or through their website, www.ojmgroup.com. n
To receive a free hardcopy of For Doctors Only: A Guide to Working Less & Building More, please call 877-656-4362. Visit www.ojmbookstore.com and enter promotional code PRNEURO08 for a free ebook download of For Doctors Only or the shorter For Doctors Only Highlights 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 also a principal and author. They can be reached at 877-656-4362 or email@example.com.
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.