Top tips from top financial advisers

By Leslie Kane
Senior Editor

Good advice is priceless. And when it's well timed, it can save you a bundle.

We asked top financial advisers to recall times when they gave doctor-clients specific counsel that made a huge difference in their finances. The answers ranged from tax tips to warnings about "can't lose" investments. Here's a roundup of their best guidance.

Avoid the AMT

For a 50-year-old surgeon, hefty investment gains created a tax nightmare: The doctor had to pay the Alternative Minimum Tax (AMT) for two consecutive years, says Joseph A. D'Orazio, a financial planner with Rembert, D'Orazio & Fox, in Falls Church, VA. In both 1999 and 2000, the physician's income was $275,000, and his capital gains from venture investment sales and mutual fund distributions totaled about $45,000.

"Like many taxpayers, the doctor didn't understand that the AMT can kick in when a person has large capital gains," says D'Orazio. "Nor did he realize the AMT's implications. Although capital gains normally are taxed at rates of 20 percent or lower, the AMT forces the taxpayer to pay a higher rate—26 or 28 percent. It also renders worthless some important itemized deductions, including those for certain mortgage interest, real estate taxes, and state income taxes.

"To avoid these problems in 2001, I advised the doctor to sell his shares of several mutual funds whose value had plunged due to the market decline," says D'Orazio. "Our goal was to offset his projected capital gains from other investments with an equal amount of capital losses. By harvesting these losses, the doctor escaped the Alternative Minimum Tax.

"The AMT applies only if it exceeds the taxpayers' regular tax," notes D'Orazio. "But because Congress lowered the tax rates and new laws make the AMT applicable in more situations, many more taxpayers are now subject to it."

Automate your savings

This strategy worked wonders for one 38-year-old pediatrician who found it difficult to save and invest, recalls financial planner Elaine Bedel of Bedel Financial Consulting in Indianapolis.

"His income fluctuated during the year," she says. "I advised him to have part of his income automatically deposited directly into an investment account. The other portion goes into a checking account used for monthly living expenses.

"The investment account includes emergency cash held in a money-market fund—enough to cover three to six months' worth of expenses," says Bedel. "Money needed in less than five years goes into CDs or shorter-term bonds. The rest goes into a diversified portfolio of stocks and high-yield bonds, with a risk level appropriate for the pediatrician's time horizon.

"We determined how much goes into the investment account and the checking account by looking at the doctor's monthly spending and calculating the amount he needs to save for retirement, his kids' education, and other goals.

"The doctor found this arrangement a lifesaver," says Bedel. "The automatic deposit helped him build his retirement fund far faster than he would have otherwise. If your payroll department can't handle this type of deposit, you can set up an automatic transfer from your checking account to the investment account."

Make passive losses pay off

For a 49-year-old surgeon who had bought real estate through a limited partnership, the challenge was to claim $300,000 of passive losses from land deals, says Janet Briaud of Briaud Financial Planning, in Bryan, TX. "The tax law says passive losses can offset only passive income. If you don't have passive income (investment capital gains or interest don't qualify), you could carry those losses for a long time without using them, as this doctor had.

"To generate passive income, we bought income-producing oil and gas property. This was not a speculative move; we chose a diversified pool of existing working oil interest properties. We also used dollar-cost averaging, meaning we invested the same amount twice per year, so we could diversify the risk of the price of oil and gas.

"For the first several years, the properties returned only about 10 percent annually. When the stock market was booming, that looked skimpy; now it looks great. The properties have since picked up steam and now bring in even higher returns.

"Within the last two years, the doctor has had enough passive gains to let him claim his entire leftover passive loss. He's saved over $100,000 in taxes."

Dodge capital gains taxes

A 56-year old pulmonologist was in danger of losing much of his $1 million IRA account and $1.5 million brokerage account to taxes, says investment adviser Tony Ogorek of Ogorek Wealth Management in Buffalo. "Both accounts were concentrated in growth stocks that had greatly appreciated since he purchased them eight years ago. He held about 85 percent stocks and 15 percent bonds.

"My client wanted to reduce the stock allocations in both portfolios, since he only needed a 6 percent total return for his investments and wanted to lower his risk. But I didn't want him to sell appreciated stocks and take a major tax hit on the capital gains. "For asset allocation purposes, I suggested viewing both accounts as one unit, instead of considering them separately, and I recommended an overall balance of 60 percent stocks and 40 percent bonds.

"To achieve that, we had to sell $500,000 worth of securities. We did all of the selling in the tax-sheltered account. Had we not done it this way, the doctor would have had a taxable capital gain of $400,000. Assuming a 20 percent federal and 7 percent New York state tax, this strategy saved him $108,000 in taxes.

"To minimize his future tax bills, we then allocated the bond and cash positions to the IRA account, so the income on them wouldn't be taxed. The taxable account was comprised of index funds, individual securities in blue-chip companies, international funds, and growth funds, since those generate mostly capital gains, which would be taxed at a lower rate."

Steer clear of unnecessary risk

In March 2000, before it became clear that the market had fizzled, a 45-year-old family physician insisted he should be in higher-risk assets, says Richard Bellmer of Deerfield Financial Advisors in Indianapolis.

"We warned him against taking this unnecessary risk, which he didn't need in order to achieve his goals. He finally decided not to touch the assets that we managed, but he wanted to take $2 million from his bank investment accounts and put it in the technology sector through an annuity with another adviser. We convinced him to place only $1 million in the annuity and put $1 million directly into technology assets.

"Last summer, he brought what was left of the money back to us. The regular account, which had been worth $1 million, was down to $610,000, but at least the doctor could use the losses to offset other gains. The annuity value, however, had dropped to $400,000, and rarely can annuity losses be written off.

"During the same period, the assets that remained invested with us dropped from $10 million to $9.6 million, only a 4 percent loss. His portfolio was based on an asset allocation of 30 percent domestic stock, 8 percent international stock, 6 percent real estate, and 56 percent fixed income. The doctor was grateful that the bulk of his funds had remained in a portfolio with a sensible asset allocation."

Investigate deals thoroughly

"Some doctors lose big money because they jump into venture capital deals and direct investments without carefully evaluating them," says John E. Sestina, an investment adviser in Dublin, OH.

"One 42-year-old allergist was excited about a real estate deal, but it sounded to me like a pyramid scheme. He was hoping to invest with the contractor who had proposed the venture. The contractor convinced the physician that with an initial investment of about $30,000, they could rehabilitate a residential property and sell it for a substantial profit. The doctor thought nothing could go wrong."

Sestina probed for key information, such as how much money was required to fix up the property, whether the location could deteriorate or become undesirable, and who would handle the management responsibilities. "The doctor didn't realize that he'd be required to co-manage the property before it was resold, and that quick resale wasn't guaranteed," he says.

"The tax implications were also less attractive than the doctor believed. The deductions he was anticipating might even have been disallowed, given the partners' high incomes," says Sestina.

"As a result of our discussions, my client realized that the time required to handle the details and manage the property would be better spent seeing patients, and that the rosy outcome he envisioned might not happen," says Sestina. "He turned down the deal. We subsequently heard that it went through with other partners, hit snags, and ended up costing far more than the partners anticipated."

 

Leslie Kane. Top tips from top financial advisers. Medical Economics Apr. 25, 2003;80:39.