Legal matters
Flawed Advice
Many physicians are not getting the advice
they should from their professional advisers.
Read on to see if you’re among them and how to remedy the problem.
Read on to see if you’re among them and how to remedy the problem.
In consulting with thousands of doctors of
all specialties during the last decade, I have become
intimately familiar with the mistakes physicians make when
working with their CPAs, attorneys, and other financial
advisers. Whether it is in taxation, asset protection,
retirement planning, or other areas, the result is almost
always the same. I leave the meetings or conference calls
asking myself, “How could this doctor get such poor,
uncreative, or just plain wrong advice?” It would be
laughable if it weren’t so troubling.
It is not surprising that physicians
do not get the value they should out of their professional
advisers. While the typical specialty physician has nearly
25,000 hours of training in her profession, she has zero hours
of training in business or financial issues related to the
“business” of being a doctor. After learning how to
utilize specialists in other areas of medicine, doctors receive
no training in how to choose or evaluate the advisers whose
advice and experience will be the backbone of the
doctor’s financial plan for her entire career.
I will attempt to point out the
common flaws I see in physician-adviser relationships as well
as explain how to remedy these problems so you can move toward
your goals of minimum lawsuit and tax exposure and maximum
peace of mind.
Fatal flaws
Flaw #1
How physicians choose their advisers
The first mistake most physicians make in
the financial, legal, or tax aspect of their careers is how
they initially choose their professional adviser. Whether it is
their CPA, investment professional, or attorney, many
physicians make poor choices.
Most doctors choose their advisers
while they are in residency—as this is the time when they
begin to make money or have a family. The doctors may need life
or disability insurance, a will, and someone to prepare tax
returns. Working long hours and without the means to evaluate
an adviser, doctors typically do what other busy people
do—they use someone recommended by a colleague or the
local medical society or hire a friend or family member.
Though this un-scientific approach
is obviously flawed, it serves its purpose when there are
bigger challenges at hand, such as 20-hour work days,
graduation, and finding a job. Your life is so hectic you just
need to “get it done fast.” The adviser you choose
at this point simply has to be decent and cheap—and that
is good enough. Like a triage nurse in an emergency room, they
do not have to be a top-trained specialist when all you need
are some basic stitches. This is, in fact, quite
understandable.
What is alarming is not this initial
choice of adviser, but rather the fact that most physicians
actually stay with the same advisers who handled their triage
planning in residency for the rest of their careers. When I ask
doctors why they have done this, they say such things as,
“We have been together so long, I’d hate to change
now,” or “If it ain’t broke, don’t fix
it.” These answers are unpersuasive in my opinion.
Further, this begs the question: How do you know
“it ain’t broke?”
Most alarming to me is when a
physician stays with an adviser when the doctor has clearly
outgrown the adviser’s expertise. Consider the following
real-life example:
Oscar the orthopaedic surgeon
Oscar, an orthopaedic surgeon living in
Nevada, contacted me after reading my book. While his annual
income was over $1 million and he was part of an extremely
successful practice, he used the same New York-based lawyer he
hired to create his wills 10 years ago when he was a resident.
I had a meeting with this attorney.
Not only was this attorney not
licensed in Nevada, but he continued to advise the physician in
areas that were clearly beyond his expertise. While he was
certainly a nice gentleman, and perhaps was competent for doing
basic planning for someone with minimal tax or estate planning
concerns, he had no concept of advanced techniques that a
physician making over $1 million per year should be
considering. He had no knowledge of non-qualified plans, asset
protection planning, or other fairly routine planning that we
implement for high-income physicians. While this gentleman may
have been an acceptable choice for the doctor when he was a
resident, it was a total disservice to this surgeon at this
point to continue to use this attorney as his main adviser.
Doctors advise patients to get a
second opinion before opting for surgery or chemotherapy, but
they don’t get their own “second opinion”
before agreeing to pay hundreds of thousands of dollars per
year in taxes. Oscar’s desire to “not hurt his
attorney’s feelings” has potentially cost him over
$1,000,000 so far.
Flaw #2
How physicians fail to understand
‘sub-specialties’ in tax, law, and finance
If you needed a stent put in your aortic
valve, you would not go to a general practitioner. Moreover,
you would not consult with any specialists outside cardiology.
In fact, you would not even settle with seeing the standard
cardiologist. You would only seek an interventional
cardiologist to handle this procedure. The point is that
medicine is highly specialized. If you have a specific problem,
you want a physician properly trained and experienced in
treatment of that particular issue.
To seek a specialist to help you
with your health concerns may be obvious. However, I can attest
that in the areas of law, taxation, and finance, doctors
completely ignore the lesson they should take from their own
field. An excellent example of this idea is in the area of
taxation. The ever-changing United States tax law is the most
complex set of rules ever created by one society. The lengthy
and confusing Internal Revenue Code is only the beginning. IRS
revenue rulings, private letter rulings, tax memoranda,
announcements, circulars, as well as tax court and federal
court cases make the field all the more difficult to
understand. Suffice it to say, no one person can possibly be an
expert in all areas of tax law.
Nevertheless, each physician will
typically rely on one CPA to serve as ‘tax adviser’
in all areas of tax. Taxation issues that require guidance
typically include retirement planning, income structuring
(salary vs. bonus), payroll tax, whether to be an
“S” or “C” corporation, deferred
compensation plans, taxation on sales of real estate,
individual and corporate tax returns, and others. All of these
areas are actually sub-specialties that require a unique
knowledge base. If this isn’t bad enough, I have seen
many physicians ask their tax adviser to guide them in areas
that are far outside of tax altogether—such as asset
protection or investing.
Looking for an adviser
“certified” in an area may seem like a good idea
until you realize that (1) most states do not offer such
certifications; (2) those that do only do so for attorneys, not
CPAs or financial advisers, and (3) even those who do for
attorneys, certify in very broad areas such as “in
taxation”—which doesn’t really solve your
problem.
Existing advisers are often
reluctant to suggest consulting advisers experienced in other
areas because the adviser is afraid that the new individual
will “steal” the client. Thus, the attorney or CPA
will not admit his shortcomings to the physician and recommend
another specialist. One reasonable solution would be for the
adviser to admit his lack of experience in a given area and
agree to review the area in question, charging the client for
the time needed to “get up to speed.” Most advisers
are afraid to do this. Possibly, they are afraid of the client
seeing them as “inadequate.” Instead, the adviser
will tell the client the idea ‘doesn’t work’
without giving any substantial reason (see the ‘warning
signs’ below). In the end, the physician is unable to
benefit from the use of more creative tax and financial tools.
Ask your CPA or attorney which tax areas noted above are within
her expertise, then ask her how she would handle an issue for
you beyond this area.
Flaw #3
Failing to get a second opinion
Of the four flaws discussed in this
article, this is the most damaging and, unfortunately, the most
common. Despite the other flaws, if a physician gets an opinion
outside that of his traditional adviser(s), the chances of
identifying planning mistakes or noticeable omissions
skyrockets. If a physician has an “If it ain’t
broke, don’t fix it” mentality, getting a second
opinion is the only way to know if the planning is
“broken!”
You encourage your patients to get a
second opinion, yet your business advisers discourage you from
doing the same. This is the only way for you to adequately
judge an adviser’s performance. You are no more qualified
to look at a trust document or tax return and see flaws than I
am to examine a report on a chest CT and see a misdiagnosis! If
your life were in jeopardy, wouldn’t you get a second
opinion? Isn’t your financial life important as well?
Consider this true story:
Self-audit pays off
In 2000, a long-term client retained my
prior law firm to perform a self-audit. The client, an
extremely successful businessman, was concerned when one of his
business colleagues was found liable for back taxes and
penalties because of some mistakes by his accounting firm.
Nervous that he also might become an IRS target, our client
hired us to do an audit of his personal and various
businesses’ income tax returns for the prior five years.
What we found was shocking.
Even though this client had used
four different accounting firms for his various returns
(including a well-known 500+ person firm), the taxes he had
paid were far from what he owed. Luckily for him, it was an
overpayment—in the ballpark of $5 million. That is
correct. Because of the self-imposed audit that our firm
oversaw, the client filed for a seven-figure refund from the
IRS and state tax agency. It was a savvy move to spend the
money for an audit.
Flaw #4
Failing to insist on adviser coordination
Even if you have a team of highly
experienced advisers in the fields of tax, law, insurance, and
investments working for you, your plan still can be in complete
disarray. If your advisers are not collaborating to utilize
their collective expertise to implement a comprehensive plan
for your benefit, your planning will suffer.
All too often, I see the symptoms of
such a lack of coordination. Physicians who come to my office
often paid a technically sound attorney to create a very
comprehensive living trust ... but the family’s assets
have not yet been titled to the trust (perhaps making the
document useless). I see life insurance policies and life
insurance trusts where proper steps were not taken to combine
the two (thus the death benefit of the insurance may be taxed
unnecessarily at rates of 50 percent). I notice investment
accounts that are managed like they are in a pension (with no
regard for taxation), and the end result is often a 30-percent
to 45-percent reduction in the gain of the investments.
Conflicting advice from professionals in different areas or a
lack of respect for what the other professionals do often leads
to planning inertia or just plain bad planning.
Just as the radiologist, surgeon,
and anesthesiologist must coordinate their work, your CPA,
attorney, and financial advisers must work together.
Warning signs
Do any of these warning signs seem
familiar? If so, you are likely suffering from flawed
professional advisory relationships:
• You have the same advisers for
years and never interviewed prospective competitors.
• Your advisers don’t bring you
detailed analyses of your practice and personal situation,
complete with helpful suggestions, annually.
• You have no idea of your
advisers’ true professional sub-specialties.
• Your present advisers reject ideas
you bring them without detailed written explanations of why
they don’t make sense for you.
• Your present advisers have never
told you that a certain idea required further research for
which they would need to charge you.
• You rarely, if ever, have paid for
second opinions from other professionals.
• You have trusts, partnerships, or
other legal entities which may not be funded.
• Your CPA, attorney, and financial
advisers do not meet periodically to coordinate your planning.
• You stay with your present
adviser(s) out of lethargy, guilt, or an “if it
ain’t broke, don’t fix it” mentality.
The right advice makes a difference
I would suspect that most of you see
trouble lurking in your professional relationships. While you
are right to be concerned, the good news is that YOU are the
client and you have the unfettered right to do what is best for
you. To that end, consider the following as first steps:
• Show this article to your advisers
and discuss the ideas. See how they react.
• Ask questions; talk to colleagues;
explore options.
• Get second opinions on your
existing planning. Get third opinions.
• Force your advisers to explain
decisions they make—in writing—regarding your
planning.
• Force your advisers to meet
together (yes, you’ll have to pay for this time!) to
coordinate your planning. If someone won’t make the time,
replace that adviser.
I have seen numerous physicians of the
same age and similar incomes over their careers have
significantly different qualities of life in retirement and
substantial differences in the sizes of their estates. Often, a
significant factor in this wide divergence is the quality of
professional advice they received during their careers. If you
hope to retire when you can still enjoy it, take the advice in
this article seriously and act on it. You will be glad you did.
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David B. Mandell, JD, MBA is an attorney,
lecturer, and the author of Wealth Protection, MD. He is also a
co-founder of The Wealth Protection Alliance (WPA), a
nationwide network of elite independent financial advisory
firms. For a 40 percent discount on the book, e-mail
info@wealthprotectionalliance.com.
