It’s a familiar refrain: Doctors often don’t manage their money well. They chase returns and end up with extremely risky investments, or they forego saving altogether to focus only on student loan repayment. Often, they trust the wrong adviser. Learning from the most common mistakes, however, can lay a foundation for improvement.
Here are some important lessons when it comes to investments from physicians and financial advisers who work for them.
1 Avoid taking on too much debt
As financial markets and the economy hit a nadir in 2009, Melissa Lucarelli, MD, was also ending a five-year partnership with a physician she had hired out of residency to join her Randolph, Wisconsin-based primary care practice.
She took on thousands of dollars in debt to pay him a signing bonus and moving allowance, expand her office and supplement his salary while he built his patient base. Then he quit at the five-year mark, when his state loan forgiveness program ended. He also took about half of the patient base he had generated, says Lucarelli, a member of the Medical Economics Editorial Advisory Board. He started a practice just outside the non-compete radius.
“It took more than four years to pay off all those incentives,” she says. Paying off the debt from hiring the junior partner kept her from fully funding her retirement and children’s college savings accounts, she says, but she carries no ill feelings today. She understands he was frustrated as well by the slow pace of debt repayment, which kept him from becoming a full partner as quickly as he wanted.
Lucarelli regrouped, personally and professionally. She hired a nurse practitioner and a physician assistant instead of another partner. She found a new 401(k) plan provider that charged a fraction of her former plan’s fees, so that her savings could build faster once she began contributing again.
She opened a 529 college savings plans for her children instead of continuing to fund some older custodial accounts because the newer plans count as parental assets in college financial aid formulas. Older plans, such as plans through the Uniform Gift to Minors Act, are considered student assets, making them less favorable in aid formulas.
“It didn’t kill us; we got past it,” she says of those dark days. “But if I could do it over differently, I would have figured out a way to have a health system assist with the recruitment costs.”
A health system she was affiliated with offered assistance early on, but she declined because she felt there were too many restrictions attached. In hindsight, Lucarelli wishes she would have found a way to make the deal work.
2 Don’t over-rely on financial advisers
During residency, internist Robert Allison, MD, FACP, asked a financial adviser to fulfill what he thought was a pretty straightforward request to open a Roth IRA (which shelters after-tax contributions from future income or capital gains taxes). But he learned later that the adviser had mistakenly opened a traditional IRA (which offers a current tax deduction and defers future income taxes).
The error was easy to fix, but it reinforced for the Pierre, South Dakota-based physician the importance of not delegating too much authority to advisers.
William Bernstein, MD, Ph.D., a principal with Efficient Frontier Advisors LLC in Portland, Oregon, agrees. Physicians need to educate themselves about how investing and financial planning work, whether they are investing for themselves or hiring someone to do it for them, he says. They don’t need to spend as many years studying finance as they did training for medical careers, but some real effort is required, he says.
That involves not only vetting a financial adviser’s credentials to avoid fraud, but determining what services are actually needed and how best to pay for them. So-called robo-advisers (such as Vanguard, Betterment and Wealthfront), which offer varying degrees of automated portfolio management, can handle rebalancing and account maintenance for very small fees.