Physicians often face a unique financial dilemma of having significant income but not necessarily being in a comfortable overall financial position, due to factors such as:
- Medical school debt.
- Trying to raise a family while in residency.
- High tax obligations.
- Building a medical practice and all the costs that come with that, e.g., malpractice insurance.
- Navigating reimbursement rate changes.
On top of these concerns, by nature of having significant income, physicians need to save a significant portion of their income and grow their investment accounts in order to maintain a similar lifestyle once they stop practicing.
“How do you replicate the revenue stream that you were having as a physician? It’s usually fairly sizeable, so [think about] what lifestyle are you accustomed to? How do you maintain that lifestyle? Do you plan on dialing it back or keeping it the same?” notes Dr. Snehal Doshi, a neonatologist in Beaumont, Texas. “Most physicians are not living off of a pension through a large company or through the state or federal government…So your retirement [nest egg] has to be sizable to be able to last throughout your entire retirement.”
Yet many physicians do not have the training, let alone the time, to learn how to manage their finances in a way that secures their future.
“Physicians overall have a lack of knowledge of business. They also have a lack of knowledge of investing, much less a knowledge of retirement,” says Dr. Ray Callas, a physician anesthesiologist in Beaumont, TX. “The reason why is because we don’t have any education for the most part when we’re in medical school, residency or fellowship that is driven toward business. So, we’re way late in the game.”
To overcome these challenges, physicians need to assemble a financial team that they can trust and who can help meet their unique financial needs. This guide will cover how to build this type of team, including looking at:
- Which types of experts you need on your financial team.
- Where to find these experts.
- Factors to consider before working with financial professionals.
- Why physicians should consider investing in real estate, particularly multi-family real estate.
Experts You Need on Your Financial Team
Just as the medical world includes a wide range of healthcare professionals, the financial industry is comprised of many different types of experts that can help in areas such as tax planning, business management, investment management and estate planning. Physicians should consider adding multiple experts to their financial team in order to get the most support, just as an individual may have a dentist, dermatologist, physical therapist, etc. that they know they can turn to for specific issues.
Still, you can start by using a financial advisor, who can serve in a role akin to a primary care physician. A financial advisor can help you perform a check-up of your financial situation and refer you to other specialists as needed, or they may be able to handle most of your financial needs in-house depending on the complexity of your financial circumstances.
However, physicians should be aware of the vagueness of the term financial advisor. Some advisors serve as comprehensive financial planners to help in areas such as budgeting, debt management and retirement planning, whereas others may be broker-dealers who primarily focus on investing. While you may not need help in every area of financial planning, you may want to meet with a few different kinds of advisors to see what type works best for you.
In addition to using a financial advisor, you may also want to add experts like an accountant to handle your taxes, such as if you have a complex income structure from being an owner or partner in a medical practice. You may also want to add an estate planning attorney to help prepare your assets and document your wishes for what you would like to happen when you pass away or in the event you become incapacitated. While this may not seem like a pressing concern, it’s generally a good idea to be prepared for the worst to help protect your family and your practice from financial hardship.
Physicians may also want to add specialty investment managers who have additional expertise in areas that a general financial advisor may not. For example, physicians interested in real estate may want to add a real estate investment fund manager, and those interested in funding startup companies may want to add a private equity or venture capital fund manager.
How to Find Financial Experts
As physicians consider which types of financial experts to add to their team, they should conduct a thorough search to narrow down their choices and find professionals that best fit their needs.
To start, physicians can ask colleagues for recommendations. Finding financial professionals with experience working with other doctors can be a useful indicator of their ability to help overcome physicians’ unique financial challenges, and getting referrals from colleagues can add a level of trust. Still, physicians should take the time to have a consultation with any new financial professional, even if they come highly recommended.
In addition to colleagues’ recommendations, physicians can also ask for referrals from friends, family, etc., but keep in mind that certain professionals specialize in helping specific types of individuals, whether that’s based on age, income, occupation, etc. As such, referrals from someone that has significantly different financial considerations may not always be the best fit. You may still want to have a consultation with these recommended professionals and remember to explore their capabilities before handing over your money.
To supplement a search based on referrals, physicians can also find financial experts through their own research. For example, professional associations such as the National Association of Insurance and Financial Advisors (NAIFA) allow the public to search for advisors and view related content about financial issues.
Physicians can also simply use a search engine to find financial professionals near them, and they can then see if these professionals have been published in respected media outlets, check out their social media presence and read these experts’ websites to get a sense of their credibility and how they can help. However, it’s incredibly important to meet (at least over the phone) any financial professional before committing to working with them. Just as a patient shouldn’t assume the first doctor they find online is a good fit for them, physicians should take the time to vet any financial professional they might want to work with.
What to Consider Before Working with Financial Experts
As physicians research which financial experts they may want to add to their financial teams, they should keep in mind factors such as:
How is that financial professional compensated?
Financial professionals can be compensated in many ways, some of which may create conflicts of interest, and some of which may be preferable to you from a cost perspective.
The main difference to consider is whether a financial professional is fee-only or fee-based/commission-based.
A fee-only financial professional only gets paid by clients, such as with an hourly rate, a flat fee for their services or as a percentage of your assets that they advise on or invest. In contrast, a fee-based or commission-based financial professional can receive compensation both from you and from other financial companies for selling certain products. For example, a fee-based financial advisor may earn a higher commission for selling you one insurance plan over another, whereas a fee-only advisor would still earn the same rate from you regardless of which insurance plan you choose (though there may be slight differences, such as if one product affects your account balance more than others, thereby slightly affecting percentage-based fees).
What legal obligations does that financial professional have?
In addition to having different compensation structures, financial professionals may also be held to different legal obligations depending on their role. For example, some advisors are fiduciaries, meaning they have a legal obligation to always act in your best interest rather than their own. An investment adviser representative (IAR) within a registered investment adviser (RIA) follows this fiduciary rule.
In contrast, a broker-dealer can follow a less restrictive legal obligation. In the past, broker-dealers have typically been self-regulated and held to the suitability standard, where recommendations simply have had to be suitable for your needs. By June 30, 2020, however, broker-dealers will have to start complying with Regulation Best Interest. This law comes closer to the fiduciary standard for when broker-dealers make recommendations, but it’s still generally considered to be less restrictive.
What professional designations does that financial expert have?
Physicians can also get a better sense of the type of financial experts they’re considering adding to their financial teams by looking at their professional designations. While these designations do not always tell the whole story, they can indicate where a professional’s expertise lies.
For example, some financial advisors hold the Certified Financial Planner™ (CFP®) designation, which indicates a background in financial planning, while others carry the Chartered Financial Analyst (CFA®) designation, which is generally geared more toward investment management. Some advisors hold multiple designations, or an RIA may have a few advisors within their firm with complementary certifications, for example, so they can pool expertise in areas like retirement planning, tax planning, investment management, etc.
Why Physicians Should Consider Real Estate Investing
While physicians should look to build a financial team that covers many areas of finance, one area in particular to consider is real estate, due to the unique financial considerations of doctors.
For example, as part of a larger investment portfolio, such as one that includes investments in equity and fixed-income funds, adding real estate investments can be a great way to gain diversification.
Someone in their 20s, who needs to significantly grow their investment balances over the next several decades, may be comfortable with the risk of allocating 100% of their investments in the stock market, for instance, as they have time to ride out market cycles. A physician may not have that luxury, though, as they may start investing later in life after they finish residency and pay off medical school debt. As such, diversifying an investment portfolio with real estate, which does not necessarily move in the same direction as stock or bond markets, can help reduce volatility.
In particular, multi-family real estate can provide uncorrelated investment returns with the potential to generate consistent rental income even through recessions. During these periods, people still need a place to live and renting may be more appealing than buying a home. As such, through investing in real estate, physicians have the ability to enjoy more consistent investment returns throughout market cycles. And, they can reduce the risk of losing a significant amount of money due to stock market volatility or even a stock market crash without having enough working years left to recover.
Real estate investments can provide benefits such as tax deductions based on depreciation, mortgage interest, repair costs, etc. These deductions can be particularly helpful for high-income earners like physicians who typically face high tax obligations.
However, real estate can be a complex, time-consuming area of investing, so physicians should not assume they have the resources to handle it on their own. From conducting due diligence to marketing properties to managing tenant issues, the ins and outs of owning real estate are often best left to a professional.
Start Assembling Your Financial Team
By following this guide, physicians have a roadmap to better retirement planning, tax planning, investing and feeling more confident with their financial situations.
While there’s a lot to consider when adding professionals to your financial team including the costs associated with working with these experts, turning to financial professionals is often better than the alternative of managing everything on your own. Just as individuals should let healthcare professionals help them with medical concerns, rather than someone only trying to treat themselves and diagnose everything through resources like WebMD, physicians can get the financial care they need by turning to professionals.
Taking the time to find these experts can ultimately free up more time in areas ranging from filing taxes to managing real estate properties. And with a well-chosen team, physicians can put their hard-earned money to work to earn the additional income they need to retire comfortably and take care of their families.