Written by: Dennis McNamara
In a profession where it is expected that the practitioners embody the highest degrees of empathy, intellect, and work ethic – all for the benefit of others (and really, society at large) – why is it that doctors get the shaft when it comes to their finances?
Answering this question requires us to look at both the personal/financial circumstances many doctors face after graduating and the financial industry’s systemic shortcomings (or, outright inability) to provide fair service offerings to new doctors.
The Triple Whammy: Doctors Playing Catch-up
Let’s begin with the most significant financial circumstances that doctors are faced with, also known as the “Triple Whammy” – a term coined by author Dr. James M. Dahle MD of The White Coat Investor. The triple whammy is comprised of three factors that set doctors behind their non-doctor peers:
- Significantly higher-than-average student loan balances
- Delayed earnings due to schooling and residency/fellowship
- Higher-than-average income tax brackets once finally earning
Dr. Dahle illustrates this uphill battle faced by doctors by describing a one-on-one race towards financial independence between a physician and their non-doctor peer:
If you compared the earnings/savings race between a physician and his college roommate to a 400-yard dash, the physician might be the faster runner, but he has to start fifty yards behind the starting line (student loans), he has to give his roommate a 15-second head start (lost earning years), and he has to run with a parachute tied to his waist (higher tax burden). It turns out the doctor has to be REALLY FAST (high earner with a very high savings rate) to still win.
Outside of the infrequent cases where medical school costs are paid for via family and/or scholarship, this triple whammy is inevitable for most doctors.
A fourth circumstance faced by doctors is burnout – we might as well amend the “Triple Whammy” to be a “Quadruple Whammy” – it’s that significant. In fact, a survey of 15,000 physicians cited in a Wall St. Journal article (Abbott, 2020) noted that 42% of the physicians surveyed across 29 specialties reported feeling some sense of burnout.
It is not uncommon for doctors to lose interest in working in medicine. This is understandable as doctors are constantly asked to do more and more with less and less. Over time, this overloading can have significant consequences. Besides the impact on personal well-being, patient care, and the health care system, burnout can derail doctors’ financial futures (decreased productivity, increased risk of malpractice, higher rates of divorce, early/forced retirement).
By acknowledging both the a) high likelihood and b) personal/financial consequences of burnout, doctors need to plan accordingly. By living intentionally during peak earning years, doctors can aggressively repay their student loans, build a nest egg, and craft a lifestyle that can be sustained if/when there’s ever the desire/need to shift into a lower paying career.
Being handcuffed to a job simply for the pay, despite feeling drained, disenchanted, and possibly depressed, is a not a recipe for personal fulfillment or success.
Perhaps at some point a doctor wants to teach, work part-time, or spend some years on the “mommy/daddy track.” Others may desire working in a location that doesn’t pay as well, volunteering more, or walking away from medicine as a whole. While money is not the key to happiness, it can be an empowering tool for pivoting toward a role that is more fulfilling.
Getting finances on the right track early in a medical career is a great defense to combatting burnout and can make nearly any conceivable career transition more realistic.
So, what is a newly minted doctor to do?
Our best recommendation is to begin with education, some personal finance 101. For starters, whether it’s student loans, retirement planning, or being tax-savvy with your hard-earned dollars, The White Coat Investor is a quick read and great primer for getting familiarized with personal finance. If interested in scratching beyond the surface, the whitecoatinvestor.com has forums, articles, and vetted guest contributions that weigh-in and expound on additional topics. If reading and learning about finance feels like learning another language, that’s understandable – but do know that taking this time to understand the basics may be one of your better long-term investments.
Besides getting familiarized with finances, a newly minted doctor should invest in a professional consultation on their student loans. For many doctors just entering their residency, a student loan analysis may result in pursuing an income based repayment strategy and/or Public Service Loan Forgiveness. For doctors who have already completed their residency (or dentists who have shorter residencies), it may mean refinancing.
Questioning how much a student loan analysis could save you? Assuming you don’t qualify for any loan forgiveness, consider a basic refinancing scenario. If a doctor with $200k of student loan debt with an interest rate of 6.8% and a 10-year repayment schedule was able to refinance to a rate of 4.8%, their monthly payments would be reduced by $200. Over the 10 year repayment schedule this would save nearly $24,000 in interest payments.
The Financial Industry’s Shortcomings: Doctor beware!
This brings us to the next obstacle for doctors – the finance and insurance industries. Bill Bernstein, author of The Intelligent Asset Allocator, once noted, “If you assume that every financial professional you interact with is a hardened criminal, you’ll do okay.” As a financial planner, and it pains me to say, Bill’s quote is accurate. All investors, not just doctors, should approach the financial and insurance industries with antennas up. In many fields there is a code of conduct or standard of ethics to adhere to. In medicine, the common example of this is the Hippocratic Oath. Thought to have originated in c.a. 500 BCE, the Hippocratic Oath was a response to the charlatans who posed as doctors to swindle patients and make a quick buck. Though many medical institutions have moved away from the original Hippocratic Oath, many modern versions maintain the same theme: putting patients’ best interests first.
When it comes to the financial industry, like Bernstein’s quote alludes, Caveat Emptor – “let the buyer beware.” In a field saturated with mutual fund salespeople, insurance salespeople, and stockbrokers – how does one find a financial professional they can trust?
The F-word: “Fiduciary”
Similar to the Hippocratic Oath, the financial professional that you choose to work with should be one who, at a minimum, adheres to the National Association of Personal Financial Advisor’s (NAPFA) fiduciary oath. According to NAPFA, this oath means that the professional shall:
- Always act in good faith and with candor.
- Be proactive in disclosing any conflicts of interest that may impact the client.
- Not accept any referral fees or compensation contingent upon the purchase or sale of a financial product.
To know for sure whether the financial professional you’re working with, or the person that you’re interviewing to hire, is a fiduciary, ask that they put in writing and sign a statement that they will always put your financial interests ahead of their own and the firm they work for. If they are unwilling (or “unable”) to sign this, they are not a true fiduciary.
NOTE: Financial professionals are legally required to act as a fiduciary in ERISA plans such as 401ks, 403bs, IRAs, and pensions. So, if a financial advisor tells you, “Yes, of course, I act as a fiduciary in insert ERISA retirement plan” just know that this is nothing special. You want a professional that always acts as a fiduciary.
However, despite adhering to heightened code of ethics, many of the advisors that you can search for on NAPFA.org charge their clients by a percentage of the assets under management (or, AUM). That is, if you have $500,000 of investable assets and are seeking the advisor to manage those assets, you may be charged 1% (i.e. $5,000), on $1 million of investable assets you might pay that same 1%, or $10,000. These fees also do not account for the underlying expense ratios of the investments you’ll be placed in (oftentimes as high as another 1%).
Hiring an advisor when you have negative net worth
While we could take time to debate whether or not the AUM fee structure holds up under deeper ethical scrutiny when compared to a fixed/flat-fee which is not tied to investable assets (hint: it doesn’t), let’s get back to the point! For most doctors, even if they do their homework on NAPFA.org and find an advisor that acts as a fiduciary, will a young doctor meet the asset minimums to qualify as a client? Perhaps, but probably not.
When it comes to medical/dental school, roughly 80% of students will take on loans to pay for tuition. Out of those who borrow, the largest cohort (27%) take on between $200-300k of student debt (not including any undergraduate debt). Despite earning money during residency/fellowship, it’s likely that most doctors will become an attending while still having a negative net worth. That is, they may be a great saver and were able to accumulate $50,000 of cash/investments during residency, however they still have $200,000 of student debt – or a negative net worth of –$150,000. For an advisor that charges their fee as a percentage of the assets they’re managing, there is no way to be compensated for working with a young doctor.
Here’s when the charlatans of the finance and insurance industries begin rearing their ugly heads. When you hear that they’ll provide you anything for “free” – RUN AWAY!
Some of the worst places to get financial advice:
- Unsolicited emails
- Stock-picking internet forums
- Your TV (turn off Jim Cramer!)
- Your insurance agent
- Your local brokerage shop (Morgan Stanley, Merrill Lynch, Edward Jones, UBS etc.)
- Your bank or credit union
With a negative net worth and no (or minimal) assets to manage, the most unsavory financial and insurance reps capitalize on the opportunity to make a one-time sale of a product that can earn them a commission, score them a kickback, or help them hit a quota (behind the curtain: “one more sale and I win a trip to the Bahamas!”).
One more time for the people in back: DOCTOR BEWARE!
Final Thoughts: Who should doctors work with?
The top qualities that a doctor should consider in a financial planner are as follows:
- Fiduciary: As discussed – someone legally sworn and obligated to always place your interests ahead of their own.
- CFP® Credential: Certified Financial Planner™ marks are the gold standard. Advisors are required to complete extensive coursework and to pass a board administered exam.
- Fee-only: Advisor is compensated only by the client and never earns commissions for product sales or referrals. NOTE: Fee-only and fee-based are not the same!
- Independent: Not affiliated with or hired by any brokerage firm, bank, or insurance company.
Unfortunately, it can sometimes be a challenge finding advisors that check off all four of these. Luckily, there are sites such as FeeOnlyNetwork.com and ACPlanners.org that offer search functions based on your location. As the name suggests, FeeOnlyNetwork.com offers listings of fee-only advisors. On ACPlanners.org, the website for the Alliance of Comprehensive Planners (or, ACP), you can also search for advisors based on geography. While both organizations are reputable and their advisors meet most (often all) of the aforementioned qualities, it’s worth exploring ACP if you want an advisor who offers a broader scope of services (i.e. navigating student loans, starting a solo-401k, preparing you annual taxes etc.).
At wHealth Advisors, working with medical professionals is personal. Having a wife, a brother-in-law, and numerous relatives that have pursued the path of medicine we recognize the nuances of the journey, the challenges, and the endless opportunities – all while upholding the industry’s highest standards. The Ongoing Financial Planning of our website highlights our offerings for doctors in all stages of their careers ranging from residents to retirees. For those still pursuing the search for an advisor: Godspeed, good luck, and we hope to hear from you.
Podcast: Not A Medical Marvel (feat. Dennis McNamara CFP®)
- Episode: Becoming a Financially Fit Physician with wHealth Advisors
Abbott, B. (2020). Physician Burnout is Widespread, Especially Those in Midcareer. The Wall Street Journal.
For any questions or clarifications please feel free to contact us at email@example.com.