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.
Additionally, Mr. Inman is the voice behind the Financial Residency podcast, on which I’ve been a guest.
Now, let’s learn about The Dark Side.
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.
“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.
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.
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!