The Wrong Advisor Can Cost a Physician Millions

This article is an updated version of last year’s article.

Working with the wrong financial planner, CPA or attorneys can cost you and it’s the most common mistake we see in our physician-focused practice.

Modern health care is based on primary care physicians referring their patients to experts in various specialties and subspecialties when unique medical challenges arise. Doctors must apply the same logic to financial planning. They should expect the same level of sophistication from their own advisors when administering to the various aspects of their financial health.

Unfortunately, doctors routinely receive and follow generalized advice that does not contemplate the individual needs of a successful physician. This general advice rarely considers the high risk of lawsuits doctors face and the corresponding necessity of asset protection. Doctors usually also require specialized planning for tax consequences and estate planning.

It would be malpractice for a primary care physician to attempt to diagnose and treat all medical conditions presented by their patients. Doctor’s financial needs change from residency, to mature practice, to retirement; and these changes often require the physician to regularly review, interview and replace members of their advisory team.

Even if your perceived goals do not change, tax laws and health care delivery systems are ever-changing. If you don’t have a team working with you to help address changes, your plan will be less in line with your actual needs.

Are your advisors helping or hurting you?

Look at who is on your team and ask yourself, does your advisor specialize in working with physicians and their unique challenges? Do all of your advisors regularly communicate with one another to discuss your situation? Have they ever suggested that you consult with additional experts?

If the answer to any of those questions is no, consider shopping around. You may not be taking advantage of opportunities that exist. There is no reason to settle for inadequate “financial health care.” Here are a few other questions to consider:

• Does your CPA regularly explain tax law changes and offer you suggestions for tax saving, or do you always bring up ideas to your accountants?

• Has your attorney explained the impending 2013 estate tax changes? Have they brought up strategies to transfer your assets to your heirs without losing control during your lifetime?

• Has your attorney discussed multigenerational planning that can protect your heirs from over-spending and losing inheritances to lawsuits or divorce?

• Have your tax and investment advisors explained the concept of, and need for, “Tax-Diversification” as a hedge against future tax rate increases?

• Are you one of your advisor’s smaller clients? Are they giving you the attention your circumstances require?

• Have your advisors discussed your long-term view of the U.S. economy and explained investment strategies that provide hedges against 1) a devalued dollar; 2) increased inflation and interest rates; 3) commercial real estate collapses; 4) increased tax rates; and 5) increased costs of commodities such as oil?

• Did your insurance expert explain how you could get: 1) up to $50,000 per month of disability insurance; 2) a partial deduction on your life insurance premiums; 3) the federal government to subsidize your long-term care premiums; or 4) the tax benefits of insurance company ownership?

There are simple tools doctors can use to help their families avoid the unnecessary costs that often go along with common financial planning mistakes. Below you will find frequent signs of poor planning and discussions on possible solutions that can help you avoid common mistakes.

Expiring estate planning opportunities

Most advisors streamline and scale their businesses to cater to their clientele. Doing so enables efficient and inexpensive service. The problem with the one-size-fits-all, fast-food approach is you will generally not get the customized planning your situation likely requires.

Consider over 90% of American families will never earn more than $150,000, and never be in the highest marginal tax bracket. Most people will never approach a net worth over $2 million. Accountants, financial advisors, insurance agents and even estate planning attorneys simply do not spend much of their time handling the unique challenges presented by high net worth individuals.

For instance, by now you have probably heard of the fiscal cliff and some of the impending changes to tax laws. You can still easily leave $10 to $15 million tax free to your children, grandchildren and future generations. You can still do this in a manner wherein you retain control and access to the funds while alive and leave the funds to the children in a way that protects the kids from: a) losing their drive to be productive; b) losing the inheritance to a divorce or lawsuit; or c) having to do estate planning for their kids. But all this could change as soon as Jan. 1, 2013.

Spotting a bad insurance agent or financial planner

In our experience, the insurance purchases of most doctors are either:

a) Poorly designed so cash values are not accumulating as well as they could be;

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.

To determine if your current insurance is in line with your needs, ask yourself the following questions:

• 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 maximum and minimum funding options work and why virtually everything in between likely represents an overpayment of commissions and waste of your money?

• Do you understand how funds in insurance policies may or may not be protected even if you 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 should review your current policies to ensure they fit within your long-term financial plan. We find many clients who have not been advised on available options.

For instance, cash value life insurance can be a valuable tool for asset protection, tax management, wealth accumulation, and estate planning — but it must be used properly. Unfortunately, to use cash value life insurance properly, the advisor needs to know a lot about your situation. The agent must take the time to explain the countless options, and they need to coordinate the insurance purchase with the other advisors on the team to make sure you maximize the benefits you receive.

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 so. Most policies sent to us as part of the comprehensive insurance review we do for new clients are inefficiently structured for doctors and their families. The policies are generally structured with an eye towards high commissions rather than meeting 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 structured, comprehensive financial plan.

Conclusion

In the medical world, specialists have certain sets of health concerns they are uniquely trained to address for their patients. What many high net worth Americans (especially doctors) fail to realize is that their financial, legal and tax concerns require specialists as well.

Doctors need an advisory team of specialists 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 health care system (Stark I, Stark II, HIPAA, Insurance fraud risk, reduced Medicare reimbursements and more).

With the right team, you may be able to protect your assets from lawsuits, taxes and divorce while maintaining control and access to funds. If you are not confident that your current advisors are meeting your goals, or if you would simply like a second opinion, please seek out the advice of those who may be able to help you get to a place where you want to be. The author can be reached at (877) 656-4362 to set up a time to discuss your particular situation.

Jason M. O’Dell, MS, CWM is a consultant, author of a number of books for doctors and principal of the financial consulting firm OJM Group. He can be reached at (877) 656-4362 to set up a time to discuss your particular situation. Call the same number for a free (plus $10 S&H) copy of For Doctors Only: A Guide to Working Less and Building More,

Disclosure:

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.