While it’s possible to only work with one financial professional who manages all your investments, tax preparation, estate planning, etc., physicians can often optimize their finances by working with a team of financial experts. Just as the medical field includes an array of professionals ranging from general practitioners to surgeons to specialists who together can provide comprehensive healthcare specific to patients’ needs, the financial services industry also includes a wide range of experts such as financial advisors, accountants and real estate investment professionals, who together can help physicians meet their financial goals.
“For physicians, we’re good at what we know in our field, and outside of that field we consult,” says Dr. Snehal Doshi, a neonatologist in Beaumont, Texas. For example, while an internist may have some basic knowledge of surgery, they wouldn’t perform the surgery themselves; instead, they would send the patient to a doctor with relevant expertise. Likewise, notes Dr. Doshi, physicians who want to invest shouldn’t assume they know enough to manage specific areas of finance on their own, but they should instead consult with relevant experts.
In particular, physicians and other doctors should look to assemble a financial team that includes experts such as:
Hiring a financial advisor is a good place to start when assembling a financial team. Think of a financial advisor as your general practitioner who can assess your overall financial picture, define goals, start your investment strategy and direct you to other resources and experts as needed.
However, it's important to note that financial advisors vary widely in what they offer and how, and you shouldn’t take titles at face value. For example, some advisors primarily focus on managing your investment portfolio, while other advisors take on more of a financial planning role and then outsource investment management to a third party.
As such, it's important to look at any advisor’s or other investment professional’s credentials and registrations, which tend to reveal more than the title the professional uses for themselves.
The first distinction is to note whether a financial advisor is an Investment Advisor Representative (IAR) within a Registered Investment Advisor (RIA), or if they’re a broker-dealer. The terms can be confusing at first, but ultimately the differences come down to how that advisor is compensated and their legal obligations. IARs within RIAs must follow the fiduciary rule, which means they’re legally bound to act in your best interest.
Broker-dealers, however, follow less restrictive standards; typically they’ve followed the suitability standard, meaning they only have to make recommendations that are suitable for you, even if doing so benefits the advisor more. Yet a new rule, Regulation Best Interest, requires broker-dealers to act in the best interest of retail investors when making investment recommendations. The law became effective September 10, 2019, but broker-dealers have until June 30, 2020, to fully comply. However, investors should be aware that this new law has some vagueness to it and is generally considered less restrictive than the fiduciary standard. What’s more confusing is that someone can be a hybrid advisor, meaning they’re both an IAR and broker-dealer.
Thus, a good rule of thumb is to ask any potential advisor if they’re a fiduciary, as well as how they are compensated, which can fall into the following areas:
- Fee-only: A fee-only advisor can only be compensated directly by clients for their services, rather than making commissions or incentives from selling you products. IARs/RIAs are typically fee-only, but you should clarify, as they may be able to earn commissions if they disclose conflicts of interest to you.
- Commission-based: A commission-based advisor, such as a broker-dealer, earns compensation through commissions, such as when investment companies pay brokers for selling their products. While this isn’t always a negative, you have to consider whether you’re comfortable with this potential conflict of interest, especially if the advisor is not legally obligated to act in your best interest.
- Fee-based: While a fee-based advisor sounds like a fee-only advisor, a fee-based professional has the ability to receive both client fees and product commissions.
In addition to considering an advisor’s legal obligations to you and their compensation structure, you may also want to consider their certifications. For example, you may see some advisors market themselves as a Certified Financial Planner™ (CFP®), or that they carry the Chartered Financial Analyst (CFA®) designation. These certifications do not inherently tell you which advisor is right for you, but they can give you a general sense of whether their background is more related to planning (such as with a CFP®) or investment management (CFA® holders). Still, you should meet with advisors to get a more complete picture of their expertise, considering the lack of uniformity in the industry.
Ultimately, it’s up to your personal preferences for what type of financial advisor you feel comfortable with to form the general basis of your financial team, and from there you can fill in gaps with other experts.
In addition to having a financial advisor to help set the stage for financial management, physicians may want to add someone with more specific tax expertise to their financial teams, such as a certified public accountant (CPA). Some financial advisory firms may have CPAs on staff, so you may be able to have more of your team within one firm, but you should still make sure that you can obtain dedicated tax support from them, rather than general advice.
Due to physicians’ generally significant salaries and the need to make up for lost earning years during medical school, strategic tax planning is key. A CPA or other tax expert can help you keep more of your earnings, such as by advising you on how different investment strategies trigger different tax consequences, as well as advising you on setting up tax-advantaged accounts like individual retirement accounts (IRAs) to make up for lost time with retirement planning.
It's never too early to start planning for how you want your assets and affairs handled after you pass or in the event you become incapacitated. Here too, a financial advisor may have some general estate planning knowledge. Yet due to the size of many physicians’ estates, it's often a good idea to add an estate planning expert, such as an estate planning attorney, who can guide you through areas such as:
- Establishing a will or trust
- Designating power of attorney responsibilities
- Designating your beneficiaries
- Establishing a business succession plan
Alternative Fund Managers
As physicians start to increase their wealth, they may get solicitations for alternative investments in areas such as real estate and venture capital. However, these areas can be complex and risky to invest in without the help of an expert.
Again, some financial advisors can provide guidance in this area, and some work with specialty investment managers to invest part of your portfolio. Or you may want to work with certain alternative investment experts directly if you’re an accredited investor, meaning you meet certain income or net worth thresholds, which many physicians do.
Working with a real estate fund manager, for example, can enable physicians to invest part of their portfolio in this asset class without having to conduct all the due diligence and property management on their own if they were to buy their own properties directly.
Overall, physicians need a variety of experts on their financial team to get the most out of their wealth. Taking the time to develop a strong team can be more efficient in the long run, as professionals can continually guide you through complex processes like estate planning and alternative investing. Moreover, leveraging their expertise can help you identify cost savings and investment opportunities that you otherwise may have missed if you tried to do everything on your own.