From the November 2006 issue of Wealth Manager Web • Subscribe!

Doctors in the House

Physicians can be rewarding clients, if you can get past the special challenges inherent in dealing with these goal-oriented, time-conscious professionals. Smart and highly educated, many doctors simply don't have the time to hone financial skills.

Take Larry Norton, an oncologist at Memorial Sloan Kettering Cancer Center in New York, who may take the time issue even more seriously than most. "I consider it an ethical issue," he says. "I'm totally consumed with treating cancer. Every minute spent reading about financial stuff is time away from learning more about cancer."

At the same time, many doctors don't like to admit ignorance about financial matters. As several advisors have noted, because physicians are smart, they think they should be able to do it themselves. "There's an underlying presumption that if they know medicine, they must know money," says CFP Sheila Chesney, a NAPFA member in Sheldon, S.C. "The biggest challenge is establishing right up front that we're either partners or we're not."

To be partners, however, financial advisors must be sensitive not only to physicians' attitudes towards money, but to their time constraints as well. The average physician works more than 53 hours per week, according to a recent survey by the Center for Studying Health System Change (HSC), a nonprofit research group in Washington, D.C. Obviously, this makes late-evening meetings more common than not and turns follow-up into a significant challenge. Much of an M.D.'s time may be devoted to the increasing paperwork burdens associated with managed care, meaning that fewer hours are devoted to earning income.

Advisors must also be tuned in to the special circumstances that physicians often face. Doctors complete training at a later age than many other professionals and are frequently saddled with debt by the time they finish medical school and residency. Despite the late start--and the debt--they may also face expectations to maintain a certain lifestyle. On top of that--perceived as high earners--they are targets for high-pressure sales tactics.

Sole practitioners must develop business management skills along with medical skills as they run an office, provide their own insurance (including critical "own occupation" disability income insurance), and plan for retirement without the help of either a pension or an employer-sponsored retirement plan. Worse, for office-based and staff personnel alike, income may no longer meet expectations. According to the HSC survey, the average physician's net income declined by 7 percent from 1995 to 2003--a period in which the inflation-adjusted incomes of lawyers and other professionals rose by 7 percent. Most Americans would not complain if they earned what doctors currently earn, but physicians are in fact facing what CFP Bob Tilson of the Tilson Financial Group in Watchung, N.J. calls a "double whammy" of lower fees and higher costs for malpractice insurance.

Special Needs

Adequate malpractice insurance is the vital first step in the asset protection blanket that every physician needs. But clients can be "left high and dry," attorney Alan S. Gassman writes (in Steve Leimberg's Asset Protection Planning Newsletter) if they seek low premiums above all else. Carriers offering substantially lower premiums are often unstable and may not meet state requirements. It's far safer to rely on a financially solvent, state-registered malpractice insurance carrier. It's also wise to make sure clients have "tail" or continuing coverage when switching carriers, Gassman notes, and to notify both old and new carriers of any "patient event" that may be reportable. Physicians may also need to carry their malpractice insurance beyond retirement, at least until the statute of limitations has expired.

Only assets that are creditor protected should be owned individually. Depending on the state, these may include life insurance policies, annuity contracts, retirement funds, 529 plans, and the family home. Aware of this, many physicians place assets in a spouse's name. Yet this is not necessarily a good idea, says attorney Martin Shenkman of Teaneck, N.J., also a NAPFA member. Not only is there a risk of divorce but, even in an ongoing marriage, spouses can be sued as well.

Instead, Shenkman suggests dividing assets into many baskets, bypassing the usual model of consolidating accounts. This makes your job as an investment counselor more challenging, he notes, but puts more assets out of reach. He recommends including a nondeductible IRA--usually considered small potatoes with its $4,000 (formerly $2,000) annual contribution limit--because these accounts are easy to establish and "pretty much impervious" to attack. The small IRA may not be worth much advisor time, but it can be used as a repository for an exchange traded fund or an index fund.

There are additional asset protection strategies to consider before your physician client yields to the temptation of an esoteric and expensive offshore trust, or even one of the domestic asset protection trusts available in states such as Delaware and Alaska. Assessing the type of practice, "quality control systems" and the "true risk of lawsuit" is critical, says CFP Diahann Lassus of Lassus Wherley & Associates in New Providence, N.J. Depending on individual situations, assets can be placed in a limited liability company or family limited partnership. Older doctors with sizable assets may be appropriate candidates for these asset protection structures. Cost versus benefit is the key factor in the evaluation. If any asset protection strategies are appropriate, however, they must be in place well before the need arises.

Every high-net-worth client--physicians included--should carry excess liability insurance over and above auto and homeowners' coverage. Chesney also suggests a large mortgage on the family home, providing a welcome tax deduction as well as making the home less attractive to creditors. Cash from the mortgage can be used to purchase a creditor-protected asset such as an annuity or life insurance policy. (Before doing so, an attorney familiar with state law should be consulted.)

Life insurance is essential and can be creditor-proof if it is owned by an irrevocable life insurance trust. Shenkman recommends multiple trusts, each owning separate policies on the husband's life, the wife's life, and both lives in the form of a survivorship policy.

When it comes to trusts, however, it's wise to coordinate planning with the physician's accountant and estate planning attorney. The total return trust--"so wonderful for resolving conflicts for most clients" in Shenkman's words--"is not appropriate for physician clients while they are still working and still subject to malpractice risk. You don't want a consistent payout stream because it can undermine the asset protection benefit," he says.

One of the best asset protection strategies is making full use of tax-sheltered retirement plans. The staff physician should contribute as much as possible to an employer-sponsored defined contribution plan. The physician in private practice can take advantage of plans tailored for small businesses. Because doctors are often considerably senior to their office personnel, CFP David Schwartz of First Capital Equities in Great Neck, N.Y., may suggest a defined benefit plan when physician clients are over age 50. When clients are younger, a safe harbor 401(k) plan is more appropriate. Both allow larger contributions on behalf of older participants and smaller contributions for the rank and file--all pre-tax.

The need for asset protection also changes the investment landscape, making risk minimization paramount in creating an appropriate asset allocation model. Tax reduction is another consideration. Solutions include tax-exempts and such strategies as tax loss harvesting and avoidance of short-term gains in taxable investments. Tilson notes that owning real estate and renting it back to the practice can provide both current tax deductions and a later source of retirement income.


When it comes to investments and other financial products, their limited time often makes physicians vulnerable to the tactics of high-pressure salespeople. As a result, many wind up owning odd collections of investment vehicles and insurance policies.

"My dad got sold every life insurance policy out there while he was still living on a resident's salary," says CFP Lauren Gadkowski of Personal Financial Advisors in Covington, La. And apparently, little has changed in this regard. Doctors are "inundated with make-a-million investment deals, approached constantly with new ventures," says Lassus. "Many fall for sales pitches because they don't understand how the product works, but are unwilling to ask enough questions."

This kind of targeting makes physicians excellent potential clients for financial advisors who can provide objective advice and help them sort through the confusion. Sloan-Kettering's Dr. Norton, for one, is suspicious of financial advisors pushing products. "I need help, but I don't like their attitude," he says. "They make me feel as if I'm the dirt and they're the farmer, wanting to turn over the soil. I don't want a salesman, I want a professional--the way my patients come to me, asking for an overview of the situation and, if nothing needs doing, expecting me to say so."

How do you tap this market? Be prepared to meet after hours and to be persistent about follow-up; do a bit more handholding than might be necessary with other clients; and offer comprehensive financial services.

"With their time constraints, being able to handle everything they need is critical to working with physicians," Tilson says. "Make sure they know you cover all the bases, including creditor protection and tax management, with a good return on investments as the hub." In working with these clients, you may need to evaluate an automobile lease and recommend long-term disability insurance as well as manage investments and suggest appropriate retirement plans--always coordinating your recommendations with the client's accountant and estate planning attorney.

Because doctors in private practice are business people who are not necessarily business-like, part of your role may entail offering business management strategies that minimize overhead expenses. "Newly-minted doctors," Gadskowi points out, "are often not aware that the cost of cleaning lab coats or traveling to conferences is a deductible business expense." Older physicians may welcome help with succession planning. Some sole practitioners join together to reduce overhead costs and move toward phasing out as they near retirement. Some want to work forever, but take in younger colleagues and reduce their own hours.

To get around their reluctance to admit ignorance about financial matters, Lassus tells potential clients: "I know if you had the time you could figure this out all by yourself, but why would you want to spend the time doing it? I pay my partner to do my taxes because it's not a good use of my time. It all comes down to, 'what's the best use of your time?' You do what you do best; I do what I do best."

Once physicians become clients, Chesney devotes considerable energy to educating them about the planning process. She wants them to "see the connection between our process and the process they use for gathering information from a patient--evaluating the data, testing the hypothesis, coming up with a strategy, implementing the strategy, then re-analyzing it and making changes."

As for the best way to reach physicians, Lassus suggests working with medical magazines and volunteering to speak with local professional groups and large medical practices. Word-of-mouth is critical, and "Doctors are often better than others at referrals because they network a lot," she continues, "--just being in the community and doing a good job is best way."

Grace W. Weinstein, a freelance financial writer based in Englewood, N.J., is the author of 13 books, including The Procrastinator's Guide to Taxes Made Easy (NAL, 2004). A columnist and contributor to many national publications, she can be reached at

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