The wrong financial adviser could cost you millions

September 1, 2011

The single most common mistake we see in our physician-focused practice is in the doctors’ choice of specialists. The successful delivery of healthcare is based on the patients’ need for physicians to refer them within and between various specialties and subspecialties when unique challenges arise. When it comes to the successful navigation of their own financial health, however, physicians do not apply the same logic or expect the same level of sophistication from their advisers.

The single most common mistake we see in our physician-focused practice is in the doctors’ choice of specialists. The successful delivery of healthcare is based on the patients’ need for physicians to refer them within and between various specialties and subspecialties when unique challenges arise. When it comes to the successful navigation of their own financial health, however, physicians do not apply the same logic or expect the same level of sophistication from their advisers.

As a result, doctors routinely receive, follow and suffer from advice that is designed for the masses - those same people who don’t pay much tax, don’t have risks of lawsuits and will never leave a sizeable estate to the heirs.

If a primary care doctor decided to self-diagnose and treat all surgical patients, it would be severe malpractice. If a sports team refused to draft or develop players, trade for new players or attempt to bring in free agents to improve their organization, the team would certainly suffer and the fans would be outraged as all the other teams improved during the team’s stagnation.

Regardless which analogy works better for you, the point is that this is how doctors are essentially treating their financial planning when they don’t regularly review, interview and replace members of their advisory team as their financial situation and specific needs change from residency to mature practice to retirement.

Even if your goals may not be changing, the tax law and healthcare delivery system is changing around you every month. If you don’t have a team working with you to help you address those changes, you are bound to become less and less efficient.

As a very quick test to see if you may need to take a good hard look at who is on your team, ask yourself the following questions:

Are your advisers helping or hurting you?

• Does your CPA regularly explain tax law changes and offer you suggestions to save tens, or hundreds, of thousands of dollars in taxes? Or do you always bring up the ideas to your accountants?
• Has your attorney explained the 2010 estate tax changes and brought up strategies to transfer $10 million to your heirs without losing control during your lifetime?
• Has your estate planning discussed the need for or explained how to do multigenerational planning that will protect your heirs from spending too much or losing inheritances to lawsuits or divorce?
• Have your tax and investment advisers explained the concept of, and need for, “tax-diversification” as a hedge against future tax rate increases?
• Are you one of the smaller (financially speaking) clients of your advisers and do they specialize in working with physicians on their unique challenges?
• Have your advisers discussed your long-term view of the U.S. economy and explained investment strategies that provide hedges against i) a devalued dollar; ii) increased inflation and interest rates; iii) commercial real estate collapses; iv) increased tax rates; and v) increased costs of commodities such as oil?
• Did your insurance expert explain how you could get: i) up to $50,000 per month of disability insurance; ii) a partial deduction on your life insurance premiums; iii) the federal government to subsidize your long-term care premiums; or iv) the tax benefits of insurance company ownership?
• Do all of your advisers communicate with one another to discuss your situation and brainstorm, bring in additional experts and regularly make valuable suggestions to you?

If you answered, “No” to any of the questions above, then you are not taking advantage of the opportunities that exist and you are settling for inadequate “financial healthcare.”

Fortunately, there are a few simple tools physicians can use to help circumvent such mistakes and allow their families to avoid the unnecessary costs that come with poor planning. Let’s discuss some signs of poor planning and solutions to help manage these avoidable mistakes.

The expiring $10 Million estate planning opportunity
Under the new laws (that may or may not last beyond 2012), tools exist for doctors to easily leave $10 million to $15 million tax-free to their children, grandchildren and future generations. More importantly, physicians can do this in a way that allows them to retain control and access to the funds while alive and leave the funds to the children in a way that protects the kids from losing their drive to be productive, losing the inheritance to a divorce or lawsuit or having to do estate planning for their kids.

Unfortunately, as is the theme with almost all planning that doctors get, you need customized planning and often get “off the rack” solutions that don’t work for you. More than 90 percent of American families will never earn more than $150,000, never be in the highest marginal tax bracket, and never be worth more than $2,000,000. This means that accountants, financial advisers, insurance agents and even estate planning attorneys do not spend the majority of their time dealing with people who have the relatively unique challenges you do.

There is nothing wrong with advisers wanting to streamline and scale their businesses so that they do not have to reinvent the wheel with each client. In fact, by doing so, they can become more efficient and work less expensively to help you. The problem arises when you hire advisers whose average client is not in a financial situation similar to yours.

Download and read the 2010 tax law change summary and article at www.docworthy.com/2010estate tax change. Then, contact your estate planning attorney to set up a meeting to discuss the options that existing under the new law. If you would like a referral to an estate planning attorney who specializes in working with doctors, feel free to email the author at jarvis@ojmgroup.com.

Spotting a bad insurance agent/financial planner
Has your financial planner or insurance agent explained to you that there are two very different, but equally acceptable, ways to purchase life insurance? Do you understand how “max funding” and “minimum funding” options work and why almost everything in the middle is an overpayment of commission and waste of your money? Do you fully understand how funds in insurance policies may or may not be protected even if you had to file bankruptcy? Are you aware you could get a partial net tax deduction for your life insurance premiums or that you could buy life insurance within your retirement plan (pre-tax) dollars and leave almost all of the death benefit to your spouse tax-free? Did you know you could buy life insurance, leave the death benefit to your heirs and still have access to the cash value while you are alive?

If you answered, “no” to any of the questions above, then you either hastily purchased the insurance you have, or the agent hastily sold it to you. Cash value life insurance CAN BE a very valuable tool for asset protection, tax management, wealth accumulation, and estate planning. BUT (yes, all caps), it must be used properly.

Unfortunately, to use it properly, the adviser needs to know a lot about your situation, needs to take a great deal of time explaining the countless options, and needs to coordinate the insurance purchase with the other advisers on the team to make sure you maximize the benefit you receive.

In our experience, the insurance purchases of most physicians are either a) poorly designed so cash values are not accumulating as well as they could with a better design; b) owned improperly so that funds will be left in the estate; or c) owned in irrevocable trusts where cash values are not available to you in the event you need them.

There is a great deal of discussion on insurance in our book, For Doctors Only: A Guide to Working Less and Building More - available for free at www.docworthy.com/books.

Please take some time to get a better understanding of how life insurance may work for you, and don’t just assume that you did everything right because your agent told you that you did. Most policies that are sent to us as part of the comprehensive insurance review we do for new clients are inefficiently structured for the doctors and their families. Not surprisingly, the policies are almost always structured for high commissions and seldom structured to meet the goals of maximum tax-efficient accumulation or minimum cost of income replacement/estate liquidity - which are the only two acceptable ways to purchase life insurance as part of a well structured, comprehensive financial plan.

Suiting your needs
In medicine, physicians in each specialty have a certain set of health concerns they are uniquely trained for, and dedicated to, address for their patients. What many high income and high net worth Americans (especially doctors) fail to realize is that their financial, legal and tax concerns are not well managed by generalists.

Doctors need to build an advisory team of subspecialists who not only work with high income, high liability and high tax rate paying clients, but also understand the unique challenges of working within the constraints of a more complicated healthcare system (Stark I, Stark II, HIPAA, insurance fraud risk, reduced Medicare reimbursements, and more).

With the right team of subspecialists, you can protect your assets from lawsuits, taxes and divorce while maintaining control and access to funds and successfully transferring $10 million to $15 million of today’s value to future generations.

If you aren’t confident that these goals are being met by your advisers who have worked together to adjust your plan since the tax law changes in December 2010, or you would like a second opinion (review) of what you do have, please seek out the advice of those who may be able to help you get to a place that you want to be. The authors can be reached via email at jarvis@ojmgroup.com or at (877) 656-4362 to set up a time to discuss your particular situation.

Christopher Jarvis and Jason O’Dell are principals of the financial consulting firm OJM Group, with offices in Texas, Ohio, Arizona, Florida and New York. They have co-authored seven books for doctors. Their other articles can be read at www.ojmgroup.com/articles.

Disclosure: 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. Pricing ranges are for informational guidelines only and prices for more complex circumstances may exceed these published ranges. For additional information about the OJM Group, including fees and services, send for our disclosure statement as set forth on Form ADV using the contact information herein.