No. 1 physician financial mistake?

February 1, 2006

If your life were in jeopardy, wouldn't you get a second opinion? Isn't your financial life important as well?

Last month in part one of this two-part series, we noted the staggering percentage of physicians who get substandard advice from their CPAs, attorneys and financial advisers.

We went on to explain the reasons for this fact and outline two common flaws in such relationships.

The first two flaws were how physicians choose their advisers and how physicians fail to understand "subspecialties" in tax, law and finance.

Flaw #3: Failing to get a second opinion

Of the four flaws we discuss, failing to get a second opinion is the most damaging - and, unfortunately, the most common. It is most damaging because, despite the other flaws, if a physician gets a second opinion beyond his or her traditional adviser(s), the chances of identifying planning mistakes or noticeable omissions from planning skyrockets. Most physicians have not changed advisers because they have an "if it ain't broke, don't fix it" mentality. Getting a second opinion is the only way to know if the planning is "broken"!

You encourage your patients to get a second opinion, yet your advisers discourage you from doing the same. This is the only way for you to adequately judge an adviser's performance. You are no more qualified to look at a trust document or tax return and see flaws than we are to examine a report on a chest CT and see a misdiagnosis!

With your entire financial future banking on the success of your professional advisers, it amazes us how few of you have paid another professional to review your existing adviser's work. If your life were in jeopardy, wouldn't you get a second opinion? Isn't your financial life important as well?

Consider this true story:

In 2000, my prior law firm was retained to perform a self-audit by a long-term client. The client, an extremely successful businessman, was concerned when one of his business colleagues was found liable for back taxes and penalties because of some mistakes by his accounting firm. Nervous that he also might become an IRS target, our client hired us to do an audit of his personal and various businesses' income tax returns for the prior five years. What we found was shocking.

Even though this client had used four different accounting firms for his various returns (including a well-known 500-plus person firm), the taxes he had paid were far from what he owed. Luckily for him, it was an overpayment - in the ballpark of $5 million.

That is correct. Because of the self-imposed audit that our firm oversaw, the client filed for a seven-figure refund from the IRS and state tax agency.

Have you ever paid an outside adviser to review your attorney's work? Your CPA's work? Your investment adviser's work? If not, why not?

Flaw #4: Failing to insist on adviser coordination

Even if you have a team of highly experienced advisers in the fields of tax, law, insurance and investments working for you, your plan can still be in complete disarray. If the advisers are not collaborating to use their collective expertise to implement a comprehensive, multidisciplinary plan for your benefit, your planning will suffer significantly.

All too often, I see the symptoms of such a lack of coordination. Physicians who come to my office often paid a technically sound attorney to create a very comprehensive living trust ... but the family's assets have not yet been titled to the trust (perhaps making the document useless). I see life insurance policies and life insurance trusts, but the proper steps were not taken to combine the two (so the death benefit of the insurance may unnecessarily be taxed at rates of 50 percent).

I notice investment accounts that are managed like they are in a pension (with no regard for taxation) - and the end result is often 30 percent to 45 percent reduction in the gain of the investments. Conflicting advice from professionals in different areas or a lack of respect for what the other professionals do often leads to planning inertia or just plain bad planning.