Doctors pay for flawed relationships with financial, professional advisors

January 1, 2006

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.

In my consultations, I 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. I leave the meetings or conference calls asking myself, "How could this doctor get such (poor, uncreative, or just plain wrong) advice?" It would be laughable if it weren't so troubling.

After learning how to use 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 doctors' financial plans for their entire careers.

When you combine the lack of time and training to "do it yourself" with the lack of training in finding and evaluating the right specialists to assist you, it is no wonder that most doctors are ill-served by their professional advisors. In my experience, fewer than 5 percent of physicians are properly advised by a professional team.

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 is a 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 a family. The doctors may need some life or disability insurance, a will and someone to prepare and file tax returns. Working long hours and without any financial training or the means to evaluate an advisor, doctors typically do what other busy people do and 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 work days, graduation, and finding a job). 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, they do not have to be a top-trained specialist when all you need are some basic stitches. What is so alarming to me is not this initial choice of advisor, but rather the fact that most physicians actually stay with the same advisors who handled their triage planning in residency for the rest of their careers.

Consider the following real-life example:

Case Study: Oscar the orthopedic surgeon: Oscar, an orthopedic surgeon living in Nevada, contacted me after reading my book. 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 who created his wills 10 years ago when he was a resident. I had a meeting with this attorney.

Not only was this attorney not licensed in Nevada, but he continued to advise the physician 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, 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 gentleman may have been an acceptable choice for the doctor when he was a resident, it was a total disservice to this surgeon at this point to continue to use this attorney as his main advisor.

Doctors advise patients to get a second opinion before opting for surgery or chemotherapy, but they don't get their own "second opinions" before agreeing to pay hundreds of thousands of dollars per year in taxes. Oscar's desire to "not hurt his attorney's feelings" has potentially cost him over $1,000,000 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 my numerous recommendations that someone else (not necessarily me) may be more appropriate.

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