When the Doctor Is the (Financial) Patient
Virtually all personal-service professions have moved toward specialization — and rightly so. Their clients have different needs and goals; and, to serve them effectively, these differences must be acknowledged and addressed with specificity.
People with heart conditions seek out cardiologists. People with tax needs seek out tax accountants. People building houses seek out residential architects. What happened with financial advice, where people think that it’s OK to get advice from someone who has little experience dealing with someone like them? And worse, how can an ethically trained financial advisor feel comfortable providing generic advice to someone who needs specialized advice?
Understanding that every individual is unique, are physicians as a profession meaningfully different in terms of their financial advisory needs? The answer is yes. Here are the major differences, along with general rules for how they should be addressed.
1. Accumulation Period
Certain professions defy the norms of a 40-year progression along a steadily rising earnings trajectory followed by a pre-retirement period of decline. Physicians are different, primarily because they require so much training that their peak earning years are usually delayed, shortening the length of time in which they can meaningfully accumulate wealth. For some physicians, this phenomenon is intensified if they specialize, requiring even more education. Perhaps this is why, according to one survey, physicians have an expected retirement age of 65, two years greater than the average American. Financial advice for physicians, including goal setting and asset allocation, must account for this important distinction.
2. Earnings Fragility
Financial planning for physicians must also account for their relative dependence on their minds, memory and, in most cases, physical abilities. This combination creates specialized needs not only for retirement planning but also planning for potential disabilities, other impairments, or even the phenomenon of “burnout.” These needs can be addressed through targeted planning tools and techniques such as disability insurance; life insurance; and retirement, business and exit planning.
3. Continuing Education
Many professions require continuing education, but perhaps none requires more than the medical profession. To the extent that continuing education is funded personally, the manner and tax consequences of that funding become paramount. The Tax Cuts and Jobs Act cut back on the ability to claim some, but not all, tax benefits associated with education expenses.
4. Macro Risks
Even considering the clear shortage of physicians, the current political trend is slowing the growth of physician earnings. Medicare reimbursements are moving downward, along with the rest of the reimbursement framework. Add to this growing pressures from insurance carriers, new technologies, new types of service providers (e.g., physicians’ assistants), new service models (e.g., telemedicine), as well as the global prospects for continued socialization of medicine, and it should be clear that planning for physicians must account for many future variables.
5. Debt Management
According to a 2017 report from the Association of American Medical Colleges, 76% of medical school graduates had education-related debt, with a median amount of $190,000. In 2016, the median cost of attending a four-year program for an in-state medical student was nearly $250,000, and substantially higher for out-of-state students and those attending private schools.
In turn, physicians often are under increased pressure to rationalize their debt strategy, which may include personal, educational, mortgage, business and investment-related debt. Given the relative costs, repayment periods and tax attributes of each type, a full plan to address debt use and service is critical.
Physicians that are well-advised regarding tax mitigation are likely better positioned to achieve their financial goals. Yet many physicians are far more focused on other aspects of their financial plans, such as investments. Asset allocation and portfolio construction are important, but they must be considered alongside taxes and other expenses. Tax planning for physicians must focus on both individual circumstances and practices, especially if they are owners of their practices. The following tax planning techniques and tools are often the most effective:
- Choice of entity for their practices (e.g., using S corporations to mitigate employment taxes)
- Income deferral
- Deduction acceleration
- Education-expense planning
- Debt planning
- Philanthropic planning
- Use of defined benefit, defined contribution and other tax-favored plans
- Tax-loss harvesting
- Creation of capital gain in lieu of ordinary income
- Alternative structures designed to defer and mitigate taxable income
7. Risk Management
The nature of a physician’s practice is such that the risks of being sued for malpractice or other claims are relatively high — regardless of whether such a suit is justified. This risk amplifies the need for smart strategies around risk mitigation. These strategies should include, at a minimum:
- Regular, targeted insurance reviews
- Use of limited-liability entities and trusts
- Strategic asset titling and gifting
- Use of homestead and similar liability protections
8. Estate Planning
Estate planning, too, should be specialized for physicians. Many of the traditional concerns, such as the need for a will, trusts, and powers of attorney, may look the same as for other high-net-worth professionals. Yet, there are other items that may look different. Physicians sometimes seek more detailed healthcare-proxy and living-will documents than others. They also frequently require much more planning around succession and exit planning relative to their medical practices.
In addition to their needs, physicians are different because of how they think, work and act. Not all are the same. Yet, our experience tells us that many physicians experience great scarcity around time. They also may be used to being in charge and expected to have all the answers. Planners who seek to serve physicians should be prepared to accommodate, understand and even leverage these personal dynamics as they formulate their plans and implement them.
As personalized medicine takes hold of the medical profession, so too should personalized planning take hold of the financial advisory profession. Just as for their own patients, the best outcomes for physicians depend on matching their specific needs with customized solutions.