When it comes to serving physicians, advisors might prefer a young physician over an old one. Think of a child prodigy like TV’s Doogie Howser rather than St. Elsewhere’s aging Donald Westphall.
Traditional wealth managers have long sought physicians as clients because doctors can meet asset-based minimums and likely grow their wealth over time. As competition increases, more advisors are prospecting for doctors even when they are still in residency, the hands-on training period following medical school. But doctors in residency typically have lower incomes, fewer assets and high levels of school debt.
For that reason, a growing contingent of wealth managers offer advice on retainer and hourly revenue models—advisors like Daniel Wrenne, the principal of Lexington, Ky.-based Wrenne Financial Planning, who is making inroads with medical students and doctors still in residency. “Doctors typically have zero ability with money,” Wrenne says. “When you combine that with the fact that around 80% of them carry student loan debt, and that they hit their peak earning period in their mid-to-late 30s, they can get behind the eight ball on their finances.”
Wrenne argues that an advisor can improve doctors’ outcomes in retirement and other areas of planning by giving them access to financial advice at a younger age.
Young doctors, however, come with a laundry list of challenges for financial planners, says Andrew Mohrmann of St. Louis-based Modern Dollar Planning. “Being a physician is almost like being an athlete: Income is higher than most people’s, but it is compressed into a smaller period of time,” Mohrmann says. “It makes for more complicated planning. Someone who comes out of school as an engineer, their lifetime earning graph is a lot smoother and more level. They won’t have the urgency that a physician has.”
Years of education don’t necessarily mean that a doctor is highly paid or financially literate, says Evan Welch, a partner with Antaeus Wealth Advisors, a Boxborough, Mass.-based wealth management firm. “Doctors have very little financial knowledge as a rule,” Welch says. “They go through more than a decade of education and training, get out of residency and go from making $50,000 to making $400,000. At that point, they need some answers.”
Welch, himself from a multi-generational family of physicians, says that young doctors aren’t living within their means, they’re not receiving tax-planning help, they’re failing to adequately insure themselves, and they’re often taking financial advice from other doctors rather than seeking the assistance of a financial professional.
Enticed by visions of six-figure salaries, many young doctors aren’t balancing their accounts, says Mohrmann. “There’s a tendency to think, ‘I’m a doctor, I deserve to treat myself,’ and it’s easy to fall into the overspending trap.”
Because residency can last well into a client’s 30s, doctors often make their first major financial decisions before their incomes increase. In fact, most doctors choose to purchase their first home during their residency, and lenders may ply them with “physician loans” –high-interest financing to cover large down payments—in anticipation of the doctors’ higher future salaries.
Andrew McFadden, a fee-only planner and principal of Panoramic Financial Advice, says he encourages doctors to think analytically about their purchases. “I try to push them into seeing what they can get on a 15-year mortgage, and I encourage them not to buy anything larger than two-times their annual salary,” McFadden says. “Then we talk about cars, insurance and retirement. It’s crucial to start these conversations in residency when they are the most vulnerable, to talk before they go out and spend, because it saves them a lot of pain in the long run.”
Before issues like home purchases and retirement plans are considered, physicians often seek assistance with managing their student debt. After a minimum of eight years in school, four years of an undergraduate education, plus another four in a professional medical school, doctors can rack up hundreds of thousands of dollars in student debt.
“Coming out of residency, doctors have options,” Wrenne says. “If they’re working for a nonprofit institution like a public university, they can take advantage of public loan forgiveness after 10 years, so we recommend they pay off as little as possible. In some parts of Kentucky, doctors can take advantage of debt forgiveness for working in disadvantaged areas, and the strategies are similar.”
Mohrmann tells doctors to take advantage of refinancing opportunities, especially if they have private loans or if their debt was issued at higher interest rates. After a plan to manage his doctors’ debt is in place, McFadden turns his attention to establishing a basic retirement plan for physician clients, framing the conversation around investing.
“If you talk to them about basic investments, that seems to spark an interest,” McFadden says. “If I’m working with a young physician, I start by helping them invest within their 401(k). That’s something positive that they can watch grow as they contribute and their earnings increase. Then you can ease into other issues.”
A doctor’s 401(k) might sound like small potatoes when he or she might be in the top 1% of U.S. income earners, but McFadden could be onto something. A 2014 Fidelity study showed that physicians not only have a need to save higher portions of their salaries, but that many also fail to contribute up to the limit in their tax-deferred accounts. Among physicians under 50, only 40% had maxed out their contributions.
When doctors start out with clear plans for retirement, they more easily avoid buying into the latest investment crazes or esoteric, complicated products. But if there’s no early planning, it’s harder for advisors to deal with the physician’s portfolio when retirement comes around, says Michael Berry, principal of Michael Scott Financial, a Greenwich, Conn.-based holistic wealth management firm.
“Physicians tend to think that they need a particular product or strategy to reach their goals, so they go out and get it without much research or fanfare,” Berry says. “Then, in their 50s, they realize that they have a hodgepodge all over the place—different accounts, different investments, totally uncoordinated and unbalanced. We have to figure out how it all relates.”
Without advice, doctors often chase high-yielding but time-intensive opportunities, like direct investing in real estate or businesses, says McFadden. “There’s nothing wrong with investing in real estate directly, but if you’re working 60 to 80 hours a week, you don’t have time to be a landlord or property manager.”
Since residents make a fraction of the income of a full-fledged physician, they may not anticipate their investments’ tax implications. Doctors who are self-directed investors often neglect to consider tax-planning strategies altogether, says McFadden.
“Physicians will throw all their money into tax-deferred accounts, not realizing that as their career advances and they make more money, contributions could be taxed, pulling them into higher income tax brackets,” McFadden says. “As it turns out, there’s great value in not socking everything into tax-deferred accounts. I encourage doctors to fund a Roth account as soon as possible. After that’s maxed out, why not consider a trust account?”
Doctors are often undersold or oversold insurance says Jamie Block, tax director and financial planner with Wealth Design Services, a Rochester, N.Y.-based RIA. In their residency, they may be sold expensive whole life policies that are more than what they need, and as they become physicians, they may buy disability coverage without reading the fine print, says Block.
“Life insurance is an issue, but the bigger one is disability,” Block says. “If a doctor is injured to the point where they can’t maintain the same level of work, it’s going to cost them thousands if not millions of dollars. A surgeon with a hand injury may not be able to perform surgery anymore, but they could continue in a classroom or in medicine at a lower income. The wrong disability policy may not pay out if they think the surgeon can return to work doing other things, though [the physician is] undoubtedly experiencing a shortfall.”
With the advent of high-deductible insurance plans and health savings accounts, Mohrmann is also advising his clients on health insurance, using the HSA as “another tax-deferred bucket.”
After the long-term planning issues are addressed, advisors can add value by helping to protect their clients from financial exploitation and by guiding them through their maturing careers. “Most doctors aren’t doing it for the money; they want to treat patients and help people,” Welch says. “That’s why they end up being victims of bad investment advice. Their minds just aren’t on their financial picture.”
A legion of insurance agents, accountants, brokers and other financial professionals who target doctors can pile on the bad advice, says Wrenne. “Not all of those people have the clients’ interest at heart. Doctors are confronted by ‘exclusive’ deals and scams, not only by the scammers themselves, but by other doctors who unknowingly refer them into bad deals.”