No one’s story is the same. Everyone has their own unique set of circumstances and needs. There is no “one size fits all” when it comes to financial planning for doctors.
Let’s consider some common planning needs of the young doctor:
There are plenty of people in the financial industry who can provide these services to doctors: Bankers, Financial Advisors, Realtors, Mortgage Brokers, Insurance Agents, Benefits Salespeople, etc. When choosing someone to work with, there are some very important points to keep in mind:
1) Is this person acting in your best interest? Most financial service providers, including financial advisors, are NOT required to act in their client’s best interest. Their job is to sell products, and not necessarily to be a fiduciary.
2) Transparency – do you know exactly what you’re paying for? Are there hidden fees? Are there better alternatives? Who is making money off of this transaction, and how much? It’s a common topic but a rare occurrence. Conflicts of interest and expenses are rarely disclosed.
3) Do you need the product or service being sold? Training to become a doctor involves very little financial training. Many are unable to identify the solution that is in their best interest.
4) Is this person a specialist? Most financial services people are generalists. Doctor’s have unique needs that would be better served by a specialist (or team of specialists). However, you’ll find many work with generalists that don’t refer to specialists.
5) Can this person relate to your situation? Do they have experience with your peers? There are plenty of financial product salespeople that sell to young doctors – they are targets. There are also plenty of wealth managers that try to focus on people with assets. But there are very few planners that advise young people – the people that often need it most.
As a result of things like these, doctors tend to overpay for (at-best) mediocre financial products and services. They often don’t even realize it’s occurring – they don’t have any training on this type stuff. And many don’t have the time to learn. Many advisors don’t pause to think about it either – they are simply doing their job. Eventually, some doctors figure it out and become skeptical of all financial services people – they stop taking their advice or avoid them altogether.
I was once a typical financial service provider myself. Eventually, I realized that I was not in the best spot for providing financial planning for doctors and any other professional for that matter.
To be clear, I believe the financial services industry creates and distributes great products and services that make life better for people. However, it’s very clear (if you look) that the financial services industry is not as interested in providing people with advice that is in their BEST interest. They make money selling their financial products, not objective advice. Most want to provide GOOD advice, but maybe not the BEST advice, because that may steer you away from their products. I was interested in providing clients with the best advice. And the natural conflicts associated with selling products made this difficult.
It’s an interesting contradiction – financial services firms don’t always steer you to what’s in your best interest, but they still want their salespeople to be a trusted advisor to clients. It’s much easier to sell products if the salesperson is viewed as an advisor instead of a salesperson. And it reduces the company’s liability. I was a product salesperson that called himself a financial advisor.
As a result, I left my previous company and started my own firm to provide doctors with a better alternative. I created my firm to provide the most objective, relevant advice to doctors in the most transparent manner possible. We work strictly in our clients’ BEST interest. We understand and stay on top of their unique needs. We have very transparent fees that must come directly from clients – no kickbacks, hidden fees, etc.
Doctors should be seeking help from an objective, transparent, doctor-focused advisor. Someone that understands their unique needs and can provide the best possible advice. Someone who has experience with their peers. Someone that works for them, on their side of the table.
Examples Of Bad Advice
Question: How should I prioritize paying off my $200k Federal Student Loan (7% interest rate) and investing for the future? I want to make the most of my income from the teaching hospital I work for as an attending doctor?
A: Use all of your extra money to pay off the loan ASAP! Except for your retirement contributions that are matched.
B: Set a reasonable and specific timeline for paying off the loan that’s more aggressive than the normal payoff plan. Divert extra money to retirement savings – you can’t get behind on that. And you should expect a higher return than 7%.
Answer: Both are wrong! This is a not for profit hospital. This person should be making sure they do what’s necessary to qualify for and maximize Public Service Loan Forgiveness (PSLF). This involves paying the LEAST amount possible each year on the loans until they are forgiven at year 10. If they are not eligible for PSLF, they should REFINANCE the loans ASAP. They should chose the specific lender that’s going to provide them the best terms and rate (there are around 15 lenders in the US).
The estimated cost variance in your typical advice vs. the best solution in this situation is likely in the neighborhood of $50k – $150k
Question: I will be a new doctor in the area – should I buy a home? How much should I spend on my first home purchase?
A: You qualify for an $800k mortgage and we would suggest starting there!
B: You must first figure out your take home pay, organize your assets and liabilities, and come up with a plan for making sure your money goes where you want it to go based on your long range planning FIRST and then make the home purchase decision based on these factors.
Answer: B. Often, mortgage brokers and/or realtors will offer option A. They get paid to sell more house – and this may or may not be in your best interest… you could end up house rich and cash poor.
Question: I have an old retirement plan I need to do something with. What should I do?
A: You should buy this mutual fund from our platform here at the bank. It’s a great fund!
B: You should open an account with Vanguard and use their target date retirement funds for now.
Answer: B. The bank load funds are often 10x more expensive than no-load funds (like you can find at Vanguard).
Question: Where should I save $100,000 for my kid’s college expenses coming due in 18 years?
A: 529 – $100,000 – Virginia – American Funds Target College Date 2033 – A Shares, Advisor Plan
B: 529 – $100,000 – NY – Vanguard – Age Based Investments – Direct Plan
Answer: B is in the best interest of the customer, but provides no commission for the advisor. A is in the best interest of the advisor and ok for customer. When you net out all the fees, performance tends to be comparable. Why? Because most of the excess fees are going to non-performance related things… like advisor comp, marketing and sales.
A: All In Fees – Commissions to advisor – ($4250) plus .25%/yr ($250/yr)
Fees to American Funds – .55%/yr ($550/yr)
18 Year Total fees and commission without growth = $18,650
B: All In Fees – .16%/yr ($160/yr)
18 Year Total fees and commission without growth = $2,880
Why not pay a few hundred dollars now to hire someone who will tell you all of this and help you get set up with the best plan and keep the $15k+?
Question: What is the best way to protect my assets from potential creditors after I have maxed out all my retirement plans?
A: Maximize 529’s, HSA’s, IRA’s and any other creditor protected asset in your state.
B: Create a trust that’s protected from your creditors and begin transferring assets to it.
C: Pay off your home.
Answer: A (unless no other creditor protected choices exist in your state). Often people choose B prematurely. C is way wrong in KY, but not in other states. People should seek advice from an attorney and input from their other advisors first.
Question: How much life insurance should I buy?
Should I buy permanent or term life insurance? I don’t anticipate having an estate tax issue. I am not maximizing retirement plans yet. I don’t have an emergency fund. I need $2 mil of coverage to protect my family.
A: Term – the most efficient way to cover risk – $1k/yr
B: Permanent – you want to own your life insurance instead of rent it so that it pays out when you die – $20k/yr
C: Combo – You probably need mostly term, but it’s a good idea to get started with a small portion of permanent to balance it out – $3k/yr
Answer – A. You should have your ducks in a row before even considering permanent life insurance. Most advisors get paid to sell life insurance – I used to myself – and inevitably had to deal with this conflict. Consumers should, at minimum, understand the conflicts and compensation. To give you an idea, advisors often get paid 50-100% of first year total premium no matter how large it is. Higher premium = higher commission.
Financial planning for doctors can be a slippery slope. These are just a few examples of situations we’ve heard from clients. The bottom line is that you want to work with someone who does not have an incentive to benefit themselves first – find someone who will work for you and your BEST interest.
Do you have any examples of situations where you received bad advice? Please share your story with us!
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