The Dark Side of Physician Finance: Why You Have a Target On Your Back

Today’s guest post comes from Ryan Inman, a fee-only financial planner who specializes in helping physicians and their families build a solid financial future through his firm, Physician Wealth Services. As the husband of a pediatric pulmonologist, Ryan has a unique insight into what it’s like to be a part of a physician family and thoroughly enjoys helping his clients.

 

Ryan Inman

 

Additionally, Mr. Inman has recently launched the Financial Residency podcast. Our conversation has been recorded and will be shared in an upcoming Sunday Best, but you can see his intro and listen to the first few episodes here.

Now, let’s learn about The Dark Side.


 

There is no such thing as a rotation in personal finance. I wish there was.

The truth is, unsavory salespeople know physicians get very little, if any, financial education, and they use that fact against them. They realize many physicians have high incomes but don’t know the differences between certain types of financial products and actual investments.

They also know physicians are short on time and use that against them through hard sell tactics. For this reason, it’s important to educate yourself on these common sales tactics and the financial products that dishonest salespeople will try to sell you.

Here’s how:

“You must unlearn what you have learned.”

 

The first step to understanding personal finance is, in many ways, to start fresh. Many physicians depend on their peers for financial advice, but unfortunately, their peers don’t have significant financial knowledge, either.

If you’re going to listen to other physicians’ financial advice, make sure you choose someone who is actually interested in finance, who enjoys educating people, and preferably someone who is independently wealthy or on their way to financial independence due to their financial decisions. (Physician bloggers like PoF and WCI are a great place to start.)

You need to protect yourself because you’ve spent the last decade (or more) of your life getting formal training in something completely different than personal finance. You’re not expected to know what a Backdoor Roth IRA is or the best mutual funds to invest in through your 401(k), but you can absolutely learn.

A great place to start your financial education isn’t even through researching investments. It’s better to simply learn the basics of budgeting, tracking your spending, and making sure your lifestyle isn’t too “inflated”. Getting to know how much your earn, how much you spend and assigning a job to every dollar (whether that’s to spend or save) should be at the top of your priority list.

I’m married to a doctor, so I know doctors (for the most part) are incredibly kind and giving people. I know you didn’t go through all of this hard work and training for the money — after all, you’re bright enough to make a great income in a number of different professions. You became a doctor to help people.

Many doctors actually enjoy helping people most days, and they also have a habit of seeing the good in people. This is a great quality, but it’s also a quality that makes it hard to spot a financial advisor or salesman whose entire goal in life is to pitch products to physicians knowing they don’t have a strong financial background.

 

“Use the Force for knowledge and defense, never for attack.”

 

To spot those who belong to the Dark Side, you need to educate yourself on some of the common phrases or techniques that salesmen will use against you. Here are some examples:

 

  • The “Safe Investment” Trick: These salesman will try to sell you insurance by telling you it’s a safe investment. Keep in mind that insurance is insurance, not an investment. Never mix the two!

  • The “Now or Never” Trick: This is a scare tactic where a salesmen will tell you that if you don’t do this now, you might lose your opportunity forever. They’ll tell you that the premium will double or triple when you leave training (as they try to sell something to you while you’re in residency).

 

  • The “Sensitive” Approach: This is where a salesman will ask you, “Do you really want your family or your children to suffer if you die?” They’ll talk to you to try and find your “pain point”. It might not be direct, but they might start by asking if you have kids or if you’re married. It seems like a nice, casual conversation but it’s an information finding meeting on their part. If you start getting off topic, they’ll bring you right back to your emotions and try to prey on your sensitivities.

 

Remember, these salesmen aren’t thinking about truly helping you. You’re a number, a sales goal. They’re trying to get a bonus because the vast majority of them are commission based or fee based.

 

Pearl Harbor Battle Ship

bringing out the big guns

 

Hidden Fees Can Thwart Your Plans

 

Many insurance salesmen make a significant amount of money selling whole life or variable life insurance policies. I’ve had many clients with these policies, and sometimes, it was family friends or friends of friends who sold it to them.

Little did they know, the person that sold it them made 80-120% of that sale in commission when he sells that product. They also make a trail on the policy, meaning that they get a certain percentage every year that the policy remains active. That money comes from your premium that you pay the insurance company and, in the early years, can be as high as 20%. That’s a lot of money!

Actually, in my years of being a financial advisor to physicians, I’ve never actually found a situation where a variable or whole life policy is the best “investment” for someone. Term insurance is always preferred.

In addition to being wary of bad advice and pushy salesmen, you should always be on the lookout for hidden fees as well. These fees might come from your fee based planner (not a fee only planner). They could also come from your mutual fund company.

 

Here are some examples:

 

  • The 12b-1 Fee: This fee is a marketing or a distribution fee that a mutual fund company charges to the people who invest in it. This fee could be from 25 basis points to 1%.

  • The Indirect Fee: When a fee based (vs. fee only) planner sells you insurance, a product, or recommends a mutual fund, you’re paying a higher fee indirectly to them for that advice. Essentially, that policy is going to cost you more because they get a kick back.

 

  • Expense Ratios: Expense ratio is the fee charged by all funds or ETF’s to their shareholders. It covers the 12b-1 fee mentioned but also covers all management fees, administrative fees and operating costs of the fund. Of course, when it comes to the expense ratios inside your 401k or 403b, you can’t really change them since it’s a work sponsored plan. Still, it’s important to understand what your expense ratio is on all of your investments. Your portfolio shouldn’t have an expense fee of greater than 0.2%, if it does, you should find cheaper options!

 

So, how do you know which advisor is honest?

 

This is tough question. I mean, after what I just told you, it’s seems like it would be hard to choose a person to manage your finances at all (or to even give you wise financial advice).

Probably the most important thing you can do is know the difference between commission based, fee based, and fee only financial advisors.

Commission based and fee based advisors can sell you products and insurance, receive kickbacks from referrals to other professionals (CPA’s, Attorney’s etc.), use affiliate links, and more. NAPFA did a study and less than 3% of advisors are fee only.

Fee only is when the only way an advisor can make money is from the fees that come directly from their client, rather than from selling insurance or investment products.

To put it another way, if an advisor sells insurance, they are fee based, not fee only. This is the easiest way to tell the difference (and yes, I realize it’s confusing because the phrases are very similar.) Really, the entire finance industry is built on trying to confuse the consumer, and this is one of the main reasons they have to write laws to force fee based advisors to act as fiduciaries to their clients. I know it sounds ridiculous, but it’s the truth.

 


You’re still not using Personal Capital? Track all your accounts in one place like I do.


We All Make Financial Mistakes

 

Ultimately, if you’re reading this and realizing perhaps you’ve purchased financial products you shouldn’t have or you’re questioning your current advisor’s ethics, take a deep breath.

All of us, myself included, make financial mistakes from time to time. No one is perfect, but with the right amount of financial education, you can absolutely learn how to make the best personal finance and investing decisions for you and your family.

All you need to do is keep reading, scour the blogs run by physicians who love personal finance, and if you’re looking to work with an advisor, remember to work with someone who is fee only and who understands the needs of physicians.

Also, ask a potential advisor why they are qualified to give advice to physicians. This will help you determine if they’re just in the business because they know physicians make good incomes or if they have another reason, like if they’re a member of a physician family themselves.

Hopefully this will help you prepare for the next time an “advisor” comes to the hospital and does a presentation on insurance to try to sell to you. When it comes down to it, you have all the tools at hand to learn what’s best for your finances, and if you can avoid the Dark Side and protect your money in the process, all the better.

 

PoF: Have you been exposed to The Dark Side? Have you had to “break up” with a member of The Empire? Please tell us about your experience in the comment box below!

 

40 comments

  • GYM

    In Canada there’s a company called MD management that targets medical students with incentives to invest with them by giving them a cool looking MD Management backpack. The company is owned by the national Medical Asssociation but it’s an example of the “target on the back” as they have mutual funds (some with MERs of 1.5%) they sell to their members.

  • Nice post. Even if physicians don’t work with a financial advisor for their investments, they will need to work with an insurance agent if they want to purchase term life or own-occupation disability insurance. Therefore, they should try to learn as much as they can about these products before meeting with an insurance agent or financial advisor. This enables them to be an “informed physician investor” who can make the financial decisions that are correct for them.

    Important medical decisions should be a shared decision between the patient and their physician after considering a treatment’s risks and benefits. We’ve all had patients who tell us: “You’re the doctor. I’ll do whatever you think is best.” Don’t do that with your money. Such a laissez-faire approach with an unscrupulous “advisor” could have expensive consequences.

    -WSP

  • I had to break up with my FIL’s evil empire. It was awful the amount of terrible investments the guy had put him into. When we asked him to explain what he was doing and what the models were trying to do, he couldn’t explain them. So at that point we decided to move on and pick some passive index funds that we felt comfortable with. I always share nobody cares more about your money than you do. Even if you outsource something you still have to keep your head on a swivel and look closely at what is going on.

  • I was sold on permanent life insurance when I was 21 and I kept the policy for 6 years. I “invested” over $19k into the policy. Luckily, I found the personal finance community and educated myself. I took the cash value, which was only $12k – yes that is a horribly negative return – and I started a brokerage account in Vanguard.

    • So painful, TGE. And the market performed extremely well during that time, I believe. You lost $7,000 when you could have gained at least that much with an index fund.

      Being sold that policy was probably a $15,000 mistake, which is no small sum for a guy in his twenties. Or anyone, for that matter.

      Condolences,
      -PoF

  • This doesn’t even include high-fee investment vehicles like BDCs that are marketed heavily to doctors and lawyers through financial advisors, many of whom don’t fully understand the products they are selling.

    I’m with MSM, always remember that no one cares more about your money than you. Also, never invest in something you don’t feel like you understand well enough to explain to your 13 year old.

  • Indeed it is a painful mistake. And $15k is not a small sum, but hopefully people can learn from my mistake! I try not to dwell on the past too much, and I’m happy now that I have that money in my brokerage account. Now, I have to catch up to a similar balance that you have in your brokerage account 😀

  • Sandy

    Is the 12b-1 fee included in the expense ratio, or not? The point about 12b-1 seems to imply that it’s not, but the point about expense ratios implies that it is.

    • Good catch. I’ve thought of 12b-1 fees as “hidden” fees, but from what I’ve read from a few sources, it should be included in the expense ratio. The post will be edited to reflect that.

      Best,
      -PoF

    • Sandy,
      12b-1 fees are included in the expense ratio but typically are displayed separately to show if the fund has them or not. I have been asked numerous times what that fee is, why is it shown and if it is an extra fee on top of the expense ratio. I should have included in the post saying that it was included. Sorry for the confusion.

      • Delivery Boy

        12b-1 fees are the “load” on load vs. no-load mutual funds. They can be as high as 5% in my experience. For example, a $100.00 investment in a front load mutual fund with a 5% 12b-1 fee means you will see only $95.00 working for you on your initial investment. A 12b-1 fee can also be back loaded in a mutual fund and may slowly be waived depending upon how long you keep that investment. Of course, load or no-load mutual funds have annual expenses/fees which should be compared. Know what you are buying!

  • My husband just sat through not one but two BS presentations at the hospital trying to sell him whole life and a bad disability insurance product. Luckily he knows better but it’s infuriating to me how these expert salesmen really take advantage of the other residents.

  • I had an opportunity to go work for the Dark Side once. A friend from school was an advisor for a big name brokerage that I won’t name. She gave me the inside scoop on commissions/fees earned for various products.

    It became clear to me pretty quickly that the products that earn the advisor the most money are exactly the ones we are telling people to avoid: actively managed mutual funds, variable annuities, etc.

    How could I in good concience recommend investments to clients that I wouldn’t invest in myself? Needless to say, I ended that inquiry pretty quick and happily do not work on the Death Star.

  • This is good stuff. Thanks Ryan Inman for giving us some insider information. If any of you readers are looking for more information like this, “How to recognize bad advice” is the 4th chapter in my book “The Doctors Guide to Eliminating Debt.”

    Ryan, what do you recommend we do if we are sitting down with an advisor and begin hearing some phrases from the dark side?

    • Dr. Fawcett,
      It’s best to do a good amount of research up front before sitting down with an advisor. During your research it will be easier to discover what type of an advisor they are and what they will be able to help you accomplish.

      If you are talking with an advisor already, it’s best to confirm how they are paid and to ask directly what conflicts of interest do they have in your potential relationship. I’d be also asking if they sign a fiduciary oath for their clients and I’d request to see it before signing on with them.

      On other point, the conversation should be mainly focused on you and your needs. If you start to feel the conversation shift (or keep shifting) back to be more emotional than facts, just stop for a second, formulate your thoughts and bring it back to how you want the conversation to go. The client should drive the conversation, not the advisor. This tactic of emotional selling what shared to me on my first day of my internship at Merrill Lynch during grad school. Clearly it works so the more prepared you are for it, the less likelihood of you making the mistake and choosing an advisor that doesn’t have your best interest first.

  • HarjotSingh

    One of the best articles on the topic – thank you Ryan, and thank you PoF for finding Ryan for us. This article should be a must read in Medical Schools.

  • Was this a scare story for halloween….it is true though. When I was attending in an academic institution these financial advisors came in and provided lunch for the fellows. Then they proceeded to scare the bejesus out of them….I was kind of pissed but did not feel it was my place to say anything at the time. Later on when my fellows asked me personally I laid it out for them.

    Great post Ryan! and keep up the good fight.

    • Thanks DDD, appreciate it.

      It wasn’t meant to be a “scare” post, just to inform. What’s scary is that it is true and very real. The industry knows physicians do not have any formal training in personal finance and they have developed some really good sales pitches to prey on those that are unprepared.

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  • Finally, a financial adviser who isn’t on the fence about term life vs “other life insurance products”!

    My dad works for New York Life and wants to see me whole life. He was taken aback when I chose term a few years ago. He believes in the product, but I think there are many reasons for that….

    Great guest post.

  • Can’t say I disagree with much here. Been preaching this for years!

    It isn’t that there aren’t great advisors out there offering good advice at a fair price, but they’re few and far between and by the time you know what good advice looks like and what is a fair price, you may very well be qualified to be your own financial planner and investment manager if you so wish.

  • Gasem

    I’m going to ask a blunt question, but it’s not meant with any disrespect. I can buy a 60/40 Bogle portfolio for almost nothing. I can add to it every year and rebalance. I recently made a paper portfolio out of VTI and EDV 60:40 and tracked it from 2007 to yesterday. I wanted to see it’s performance across a recession. I created the portfolio in google finance. I started with $100k and added 100K per year using the value of each ETF on Jan 5 of each year, so I had $1.1M basis and ended with a $2.26M portfolio. So the question is what value does a financial advisor add to this scenario?

    To be clear I use a financial advisor, Phil DeMuth and I know what value he adds to my portfolio. He charges me 0.5% and I consider it money well spent. He’s made me a lot of money with lower than average market risk, and if I die my wife and kids will have their assets managed. Plus the guy is a hoot, very smart and writes good books. Reading his books is what sold me on his investment style.

    To me this is the #1 question when engaging a financial advisor, how does he justify his 0.5% cost over a 60:40 Bogle portfolio? Thanks for the article.

    • Gasem – I LOVE your post. This is a question every advisor needs to answer themselves before answering it for others. If your only reasoning for hiring an advisor is for investment purposes, and you like Vanguard funds and can remove emotion from your investing, then you probably don’t need an advisor.

      I have some investment only clients that rely on me solely to manage their money, but I prefer to work with financial planning clients that rely on me for much more.

      IMO, the value a good advisor provides is giving our clients more free time and peace of mind. Throughout my career I have seen many individuals that do a good job of investing their money, but only one that did a good job of investing his money and financial planning. I have now seen 3, WCI and POF are two of the best that I have seen that aren’t in the profession.

      Elaborating more on the value of time and peace of mind, there are many aspects of financial planning that are involved such as:
      asset allocation
      debt planning
      tax efficient investing
      efficient giving strategies
      cash flow planning
      risk management
      coordinating with attorneys and CPAs
      college planning
      retirement planning
      peace of mind knowing loved ones are taken care of

      One simple example is a new attending that I helped with his student loans. In one meeting with him, I was able to answer his questions and tell him what to do going forward. He could have found the information on the internet, but he said he has called his loan servicer 10 different times and still wasn’t able to get a clear answer. How much time did he spend doing his research? And how often do things like this come up?

      Most of what we do can be found on the internet, but my question to clients and prospects is, “what is your time worth?”

      And THAT, sir, is the value I provide.

      • Gasem

        Good response and thanks for taking on the question. I think the #1 thing a good advisor brings to the invested is a understanding of the complete portfolio and how it operates. Portfolios over time become scattered accounts of 401k’s Sep IRA’s profit sharing plans, post tax broker acct. Bank accounts etc, maybe the same myriad of accounts for the spouse, but each of those are really parts of one portfolio, and it’s the one portfolio that needs proper asset management and risk management. Read through your list and my post and develop white papers or even a book you can share with people and you will become an invaluable financial asset well worth what you charge. Include instruction on tax loss harvesting. When I FIRE’d tax loss harvesting saved me 90k in taxes the first year. I consider it a separate asset class.

        Good luck

        Goo

        • I agree, asset allocation and rebalancing across all accounts as one accumulates multiple accounts is no small task. I was including tax loss harvesting in tax-efficient investing, but is definitely something I have seen people struggle at.

          Thanks for the feedback!

  • I just started reading The Millionaire Next Door, and the authors actually point out that physicians are often the targets of investment advisors. I never really thought much about it but I guess doctors and lawyers are known to be well paid. So sinister. It’s so important regardless your profession to understand enough about money to see if someone is really trying to take money out of your pocket by providing crap advice!

  • Gasem

    One thing I love about WCI and POF is they are not agenda driven advice givers intent on separating you from your money. Many financial blogs are pushing a product but these 2 guys are pushing independence and self reliance based in knowledge. Typical of the altruism of physicians

  • Tim

    Thx for the post. Up in Canada, considering getting into (my) corporation owned whole/universal life products. I had initially decided against it because of fees and inefficiencies, however do to recent policy changes the tax benefits are now very hard to ignore. I am assuming your advice is targeted just at US docs? If one was going to do whole life with plan of loan from it down the road, any tips? self directed investment within vs pars dividends? Best questions to ask brokers?

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