Ophthalmology Business

Will a defined benefit pension plan save physicians taxes? | W. Ben Utley CFP® answers in Ophthalmology Business magazine

Will a defined benefit pension plan save physicians taxes? | W. Ben Utley CFP® answers in Ophthalmology Business magazine
Will a defined benefit pension plan save physicians taxes? | W. Ben Utley CFP® answers in Ophthalmology Business magazine


I’m a 45-year-old eye surgeon and I own my practice. This year I got nailed with a huge tax bill despite the fact that I maxed out my 401k and bought new equipment last year. I took home about $500,000 last year pre-tax. I  have 10 employees who earn about $40,000 on average, and I’m carrying all of them in my profit sharing plan too. In your last column, you said that a defined benefit pension plan might save me taxes. I know there’s no free lunch out there, and I’ve heard these plans are kind of risky. Is it true? If so, what are the risks? Or are they actually a decent deal?


Looking at the headlines these days, you might begin to believe that “pension” is actually a four-letter word. Recent data from the Pew Center on the States showed that the country’s 100 largest pension plans are facing a combined shortfall of almost $1 trillion. That means employees in these plans are going to get a nasty surprise when they hit retirement age: way less money than promised.

But when I spoke with a few of the nation’s top “pension geeks” (that’s what they call themselves), I got an entirely different impression, especially about pension plans for small business owners.

“It’s kind of a shame,” said Michael D. Hughes, an employee retirement benefits attorney and pension guru based in St. Petersburg, Fla. “I think a lot of people are missing the boat by overlooking these plans,” he said. Defined benefit plans, particularly the new breed of plans known as “cash balance plans,” are often a slam dunk for high earning professionals, particularly those who already max out their 401(k) and profit sharing plan contributions like you do.

The Employee Retirement Income Security Act (ERISA) calls these “hybrid” plans, said Dan Kravitz, author of Beyond the 401k, and president of his own cash balance plan design firm in Los Angeles. They combine the features found in both defined contribution plans (e.g., 401k) and traditional defined benefit pension plans. As the business owner, you get a tax deduction for making contributions to the plan. As a taxpayer and a physician, your portion of the plan gains asset protection from bankruptcy creditors and can grow tax-deferred since this is a qualified plan under ERISA.

One more feature of cash balance plans makes them a win for your employees, too. Mr. Kravitz, who worked as a teacher before he began doing pension stuff back in 1989, still has an “old school” pension plan from his days as an educator. He said the school district’s plan is so complicated that, “I still have no idea how much money I’m going to get at retirement.” Since this is a benefit for your employees (not just a fat tax shelter for you), it’s nice for them to be able to look at their annual statement, see the cash balance, and know what it’s worth to them. It’s a nice feature if you’re aiming for higher rates of staff retention.

Unlike 401k plans, you as a business owner bear responsibility for the performance of the investments in your plan, and that’s where the risk comes in. By design, the plan assumes a rate of return or “interest crediting rate” that may be pegged to a benchmark (like the yield on the 30-year U.S. Treasury bond) or it may be set arbitrarily, usually at a rate near 4%. If your investments earn less than the interest crediting rate, you as the plan’s sponsor are responsible for making up the difference. That’s the bad news.

The good news is that eye surgeons can contribute way more money to a cash balance plan than they could contribute to a standalone 401k/profit sharing plan. According to Norman Levinrad, a pension actuary with Summit Benefit & Actuarial Services, Eugene, Ore., you might contribute as much as $120,000 more to a cash balance plan than if you had only a 401k plus profit sharing plan alone.

That extra contribution could save you about $48,000 in state and federal taxes, depending on where you practice and pay taxes.

There is one more catch but it’s manageable. The feds wants to make sure that everyone in the plan is treated fairly, so you will be required to include your employees in the plan and make a contribution for them as well. In this case, you’re contributing to their profit sharing plan accounts, so you may have satisfied the contribution requirements already.

So yes, there are some risks but the benefits far outweigh the costs. This is indeed a good deal for someone in a situation like yours.

Mr. Hughes believes now is a good time for physicians to consider setting up a cash balance plan, and he should know. He has been at this game a long time, having started his law practice just one year after ERISA became law, almost 40 years ago. “When you look at the tax and compliance issues surrounding these plans, it’s just about as good as it’s been since the 1980s in terms of what you can do and how you can design these plans.”

Speaking of design, I want you to know you will need a small team to make a cash balance plan a reality in your practice. First, you will need an actuary to calculate how much you can contribute to the plan. Next you will need an attorney to draft the plan documents. Once the plan is in place, you will need a bank, brokerage or mutual fund company to hold or “custody” the plan’s assets. If you’re crazy, you will manage the plan’s investments yourself, but if you’re smart, you’ll hire a registered investment advisor to do it for you. You will need a third party administrator or “record keeper” to keep track of the value of each participant’s balance in the plan. And you will need an accountant to file the plan’s Form 5500 each year, which is a report to the Department of Labor.

Sound overwhelming? Don’t fret. You can acquire each one of these team members independently (like you might if you called Mr. Hughes), or you can get them all in one place (like you might with Mr. Kravitz or Mr. Levinrad), though none of them offer investment management or custody services.

The all-in administrative cost for a cash balance plan might run you as much as $7,000 per year or maybe just a couple thousand more than you already pay for your 401k and profit sharing plan. All three of the pension gurus I interviewed for this column said that they would generate a free proposal to help you determine the costs and benefits of a plan for your practice, as is the custom in their line of work. At the very least, you or your office manager should make an effort to get further details.

Keep an Eye on Your Money

The key to financial security is vigilance. Get curious. Ask questions! Dig for answers … or email your questions to me so I can do the digging for you. If I use your question in “Eye on your money,” I will send you one of my favorite personal finance books to feed your head and a cool “Eye on your money” coffee mug to satisfy your thirst for answers.

Mr. Utley is president and founder of Physician Family Financial Advisors Inc., which delivers fee-only financial planning and independent investment advice to clients coast-to-coast. Contact him at 541-463-0899 or visit www.physicianfamily.com.

This article originally appeared in the July 2013 ezine of Ophthalmology Business, pages 12-13. To download a PDF version, click here.

Should physicians buy Variable Universal Life insurance? | W. Ben Utley CFP® answers in Ophthalmology Business magazine

Should physicians buy variable universal life insurance?
Should physicians buy variable universal life insurance?


"I just became a partner in a small group practice. My tax person tells me the bump in pay is going to mean a lot higher taxes. I am maxing out my 401(k) but still I got a huge tax bill last year. The agent who sold me my disability insurance policy says I should buy some variable universal life insurance from him because it will save me taxes, but I already have $2 million in term coverage from USAA for my wife and kids. One of my partners thinks VUL is a bad deal. What do you think?"


Since it’s early in your career and you have a family to think about, it makes sense to have life insurance. Based on what I have seen in similar cases, $2 million is a good start but it’s not enough to provide everything your family might need to pay off the house, send kids to college (or private school), and pay ongoing costs of living without you. So I do think you need more coverage, but I do not believe variable universal life insurance is the answer.

As a form of cash value insurance, VUL combines the benefits of life insurance with the features you might find in a mutual fund investment. The word “variable” refers to the fluctuations in the cash value as a result of changes in the value of the investments it holds, while the word “universal” means that premium payments are flexible (like a universal joint is flexible).

I would have named this product “variable flexible life,” or VFL for short, but I figure the “F” might be misinterpreted to stand for “fallacious” since misguided physicians who buy this stuff suffer from the mistaken impression that they will save taxes while making a great investment that will protect their families.

The promise of tax savings is more fiction than fact. Sure, the cash value has potential to grow tax-deferred and the death benefit might be income tax-free, but these benefits are not the same as true, permanent tax savings. Since Congress closed most of the loopholes with the Tax Reform Act of 1986, permanent tax savings have grown increasingly scarce, particularly for medical specialists and other taxpayers in the top brackets.

A VUL policy’s tax deferral feature—arguably the only attribute of any value to an investor—may actually cost physicians more money in both the short and long term.

Under current tax law, long-term capital gains and qualified dividends are taxed at a lower rate than ordinary income, but the gain on complete withdrawals from a VUL policy will be taxed as ordinary income. Given that the top federal tax rate on ordinary income is fully 23 percentage points higher than the capital gains rate, equity-based investments made in a variable universal life product may result in taxes that are twice as high as those paid on gains from investments in an after-tax account (a jointly held mutual fund account, for example).

To be clear, a VUL policy will not save you a dime in taxes but it may cost a fortune in fees. The mutual fund-like “separate account” investment options available inside these policies are laden with costs, including operating expenses for underlying funds, management fees layered on top of that, plus an annual policy fee. “Paying those expenses is like rowing a boat with a hole in it. No matter how fast you row, you’re gonna sink,” says Lawrence Keller, an insurance expert with Physician Financial Services, Woodbury, N.Y.

There’s a huge incentive to push these policies. Since it’s common for agents to receive at least half of the first year’s premium as commission, your $50,000 investment means the agent will walk away with $25,000. Not a bad payday… for him. But when you try to walk away from the policy yourself, you will trip over one last expense that physicians often overlook: the surrender charge. Since the insurance company pays the agent up front, it can only recoup the cost by locking you into the policy or charging you heavily if you pull out before they’re done, which may be 10 or 15 years. “Buying a VUL policy is a lot like buying a new car,” said Mr. Keller. “The day after you buy it, it’s worth less than you paid for it.”

Your partner had it right when he cautioned you against VUL, especially when there are so many other vehicles that might be a better fit for you.

Consider term life insurance. Like auto or homeowner’s coverage, term life is pure insurance without cash value. Term life costs far less than VUL on a dollars-per-thousand basis, so every premium dollar buys you more coverage than it would with VUL. You will send less money to the insurance company and keep more for your family.

What can you do with the money you save?

Look into a Section 529 college savings plan. Contributions grow tax-deferred (just like VUL) but withdrawals from a 529 plan are free from income tax when used for qualified higher education expense. Some states will even give you a break on your state income taxes when you contribute—a real, permanent tax savings. (See “Section 529 plans: The best way for doctors to save for college” in the July 2012 issue of Ophthalmology Business.)

Check out a “back door” Roth IRA contribution. Given the average physician’s income, it’s unlikely that you can make a direct contribution to a Roth IRA, and you probably cannot deduct contributions to a Traditional IRA (not unlike VUL). However, you can still make non-deductible contributions to a Traditional IRA, and your spouse can too. After you have made your contribution, ask your tax advisor if it makes sense to convert your Traditional IRA to a Roth, where those contributions can grow tax-free for retirement, no matter how much Congress amps the pain on taxpayers in the top brackets.

After you have maxed out your 401(k), your IRAs, and your 529 plan, think about investing in low-cost, tax efficient equity index funds or exchange-traded funds (ETFs) from companies like Vanguard, Barclays, or Dimensional Fund Advisors. To keep the balance right (and avoid the dreaded Medicare surtax on unearned income), you might also pick up some tax-free income from a municipal bond fund. Finally, you and your partners might want to adopt a defined benefit retirement plan (a “pension plan”) to soak up excess cash that can grow tax-deferred for the long haul.

Keep an Eye on Your Money

The key to financial security is vigilance. Get curious. Ask questions! Dig for answers … or email your questions to eyeonyourmoney@physicianfamily.com so I can do the digging for you. If I use your question in “Eye on your money,” I will send you one of my favorite personal finance books to feed your head and a cool “Eye on your money” coffee mug to satisfy your thirst for answers.

Mr. Utley is president and founder of Physician Family Financial Advisors Inc., which delivers fee-only financial planning and independent investment advice to clients coast-to-coast. Contact him at 541-463-0899 or visit www.physicianfamily.com.

This article originally appeared in the April 2013 ezine of Ophthalmology Business, pages 12-13. To download a PDF version, click here.

Section 529 plans: The best way for doctors to save for college | Ophthalmology Business magazine

You went to college, and your kids are going to college, too. But their education will cost far more when they attend than when you did. The College Board's recently released Trends in College Pricing report shows that the total average cost at in-state public colleges rose to an average $21,447 per year, while the average annual cost for private colleges rose to $42,224. Given that costs increased at a rate of 5.6% per year over the last decade, a young physician family with three children might expect college to cost about $1.2 million in the future. It's unlikely that your kids will qualify for substantial student aid and impossible for them to earn that much, so you'll need to do some financial planning to help them matriculate. When saving for college, a Section 529 college savings plan is the best vehicle for most physician families.

Three reasons to consider 529s

The tax benefits are a good fit for doctors. In many states, you get a tax deduction for making a contribution, including Colorado, Georgia, Idaho, Iowa, Kansas, Louisiana, Maryland, Michigan, Mississippi, Missouri, Montana, Nebraska, New Mexico, New York, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Virginia, West Virginia, and Wisconsin. No matter where you live, your account grows tax-deferred until you withdraw the money. Then, when you use the money to pay qualified higher education expenses (QHEE), the money can be withdrawn tax-free. Qualified higher education expenses include tuition, fees, books, supplies, equipment, andfor students pursuing a degree on at least a half-time basisa limited amount of room and board. The cost of a computer is not QHEE unless it's required by the school.

Section 529 plans yield one other valuable break: estate taxes. Contributions to the plan are seen as a completed gift by the estate tax code, so your contribution qualifies for the $13,000 annual gift tax exclusion amount. In fact, you can contribute up to $65,000 per child and then elect to treat the contribution as if it were made over a 5-year period. So a physician family with two children could move as much as $260,000 into the planand out of their estatein a single year.

Worried about getting sued? You might want to move a chunk of cash into a 529 plan to get some creditor protection. Under Section 541(a)(6) of the federal Bankruptcy Code, certain contributions may be exempted from bankruptcy, depending on how much you contributed, when you contributed, and the relationship between you and the beneficiary (student). Some states also protect 529 plan accounts from creditors. Consult with your estate planning attorney before relying on a 529 to shield your assets.

One form of protection for 529s is certain: The account is protected from your kids. When you open an account, your name goes on the account application and your child/student's name goes on the blank labeled "beneficiary." In this case, the word beneficiary doesn't mean "the person who gets your money if you die" (that's the "successor account owner"). The beneficiary is the child who's going to college. Unless you crack open the account and give the money directly to your child, he cannot spend it himself. Unlike other arrangements including the Uniform Transfers to Minors Account and the Coverdell Education Savings Accountthe money is beyond his reach. This means your college money goes to college, not the local sports car dealer.

Saver beware

Section 529 plans are right for most doctors, but not all. For example, I've seen one case where a physician was intent on sending his children to a religious-based school that did not qualify for accreditation. As a result, tuition paid to that school does not meet the test for qualified higher education expense, so a 529 plan would not have been the best savings vehicle.

There is also a chance that you might end up with too much money in your account. For example, if you saved enough in your 529 for your daughter to attend Brown but she decides to go to Michigan State instead, you'll probably have two times as much money in the account as she needs. To get the excess balance out, you could either use the balance to pay for a family member's college expense or make a nonqualified withdrawal, incurring taxes and a 10% penalty.

Steps toward saving

1. Calculate how much you will need to save. A number of online calculators help you get the right answer. Be sure to include money you've already saved and money that grandparents have promised.

2. See if your state offers the best option. Compare the investment performance of your state's plan with options available from other states. Weigh the benefits of the tax break that may be available in your state at www.savingforcollege.com.

3. Open an account and decide how to invest. Caution: The yearsto- college option is easy to use but it may bring more risk than you're prepared to bear. Investment options geared for younger children are front-loaded with exposure to the stock market. Ask your registered investment advisor to help you choose the option that's right for your family.

4. Start saving. Most plans allow you to open an account with as little as $100 per month. A married couple can easily contribute up to $26,000 per child each year without running afoul of estate tax issues. Joe Hurley, the leading expert on saving for college, calls the 529 plan "the best way to save for college." Even though the tax benefits, creditor protection, and kid-friendly usability were intended for everyone's benefit, these features make 529 plans the best way for physician families to save for college, too.

W. Ben Utley, C.F.P., helps young doctors get on track with a personalized one-page plan to own a home, save for college, invest for retirement, and become financially secure. Physician Family Financial Advisors Inc. delivers fee-only financial planning and independent investment advice to clients coast-to-coast from its headquarters in Eugene, Ore. Visit www.physicianfamily.

This article originally appeared in the July 2012 ezine of Ophthalmology Business, page 23. To download a PDF version, click here.

7 questions all doctors should answer when they plan to invest | Ophthalmology Business magazine

It's easy to make an investment. Just take your money and buy something with the hope it will be worth more tomorrow than it is today. It's just as easy to make an investment mistake, and most people do. According to an annually revised study by Boston-based investor research firm DALBAR Inc., both equity and fixed income investors have underperformed the broad market indices. Over the 20 years ending December 31, 2008, equity investors experienced average annual returns of only +1.9% while the S&P 500 Index of U.S. stocks averaged +8.4%. Fixed income investors experienced average annual returns of +0.8%, while the benchmark Barclays Aggregate Bond Index averaged +7.4% per year.

Why do so many investors fail to garner the returns that can be had by simply buying and holding indexbased investments?

The answer lies in the way investors behave when they handle their investments, a phenomenon known as "the behavior gap." Simply put, most investors experience poor investment results because they make investment decisions based on hope or fear, not logic.

To bridge the behavior gap, all you need is a well-reasoned plan and the will to follow it. Here are a few questions you can answer as you develop a plan for your investments.

1) How will this money be used?

When you take the long view, you'll realize that all the money you have today will either be spent or shared. You can't take it with you. So ask yourself, "What do I want this money to do for me?" Sample answers might include:

  • Retirement: "I need my money to support me until the day I die."
  • College: "I need my money to pay for 4 years of college starting [when the kids enter school]."
  • Charity: "I want to see my favorite charity be able to [do good in the world]."
  • Legacy: "I want to make sure my kids have enough money to [do something great]."

2) Do I really need to invest it?

If you have a whole bunch of money, it might not be necessary to invest at all. For example, if you're a 60-year-old ophthalmologist who lives on $120,000 per year and you have $12 million in your portfolio, you can stuff your money under the mattress, spend the principal, and never run out of money. Even safe savings vehicles might yield enough interest to support you. Don't take risks if you don't have to.

3) How much should I NOT invest?

The business cycle, or the boombust- boom phenomenon that you can see when you watch the economy, typically lasts at least 5 years. During that time, stock and bond prices may gyrate wildly. If you happen to make an investment during the wrong part of the cycle, then you may have a very long wait before you can recoup your capital.

For this reason, you should only invest money if you plan to use it in more than 5 years. Everything else might be better kept where it is undoubtedly safe.

  • Planning to pay for your 20-something daughter's wedding? Take that money to the bank.
  • Buying a retirement home for yourself with plans to move in soon? Stash that cash in some certificates of deposit.
  • Planning to retire in the near future? Put a few years' reserves in a high yield checking account.

Once you've covered the bases for your near-term spending, you're set to invest the rest.

4) How much risk should I bear?

The answer to this question will make or break you as an investor. Get it right and you'll sail through the stormiest economic seas with your capital intact. Get it wrong and you'll jump overboard as your hardearned money crashes into the rocks.

You can approach the answer from two angles.

Measure your risk tolerance: To make an objective decision about this emotionally subjective issue, you might take a risk tolerance exam. The best-known exam is produced by FinaMetrica (www.finametrica.com), a company founded in 1972 by psychometric researcher Geoff Davey. An exam like this can help you begin to allocate your investments between high-, medium-, and low-risk options.

  • Target a level of risk based on required returns: This approach looks not at who you are but at where you're trying to go. For example, let's say you've decided that you need a 6% rate of return in order to make your financial goals a reality. If you assume that high-risk investments can garner a 10% rate of return while low-risk investments garner a 4% return, then a 50/50 blend of high-risk and low-risk investments might deliver the return you are targeting.

You may find that the amount of risk you need to bear is more than the amount of risk you can actually stand, in which case it would be wise to target the tamer mix. It will be easier to stick to your plan, but it may also mean you need to save more, spend less, or reach your goals at a later date than originally planned.

5) How will I control risk?

In theory, the best way to manage risk is to select the best investments and buy them at the best time. If you do this successfully, you can avoid the losers, protect your profits, and reap the reward with less risk. In practice, stock picking and market timing lead to subpar and even disastrous results because you're more likely to pick the wrong stock and sell it at the wrong time.

A better way to control risk is to sort potential investments into two categories or "buckets":

  • Your "high-risk" bucket includes anything that looks or acts like a stock. Stock mutual funds and certain bonds also belong in this bucket, like emerging market bonds, junk bonds, and small cap mutual funds.
  • Your "low-risk" bucket includes pretty much anything that's not in your high-risk bucket, like shortterm corporate bonds, investment grade bonds, intermediate duration bond funds, and certain municipal bonds (which yield tax-exempt interest).

Each bucket has its role in your portfolio. High-risk investments give you a chance to earn returns that exceed inflation. Low-risk investments reduce the chance that you'll abandon your investment plan altogether.

Set a target for how much you'll invest in your high-risk and low-risk buckets, then write it down. This step is what the investment pros call "establishing your target asset allocation," and the document you're creating is known as your "investment policy statement" or "investment guidelines."

6) When should I make a change and why?

From time to time, you may feel the need to exchange an old holding with a new one. For example, if a stock in a taxable account has lost ground, you may decide to sell it and write off the loss against ordinary income. Or you might sell a mutual fund that has had a change of manager. In either case, you would probably turn around and reinvest the proceeds in something with a similar level of risk.

No matter what you do, resist the temptation to tamper with your target asset allocation. If the stock market is going through the roof, don't plow everything into the highrisk bucket. If the bond market looks like it's going to collapse, don't trade all your bonds for cash. While things may look rosy or horrific now, the most important thing you can do is stick to your plan.

Really the only good reason to change your target asset allocation is because something in your life has changed. For example, maybe you had a big family or a big divorce and you have been investing in an aggressive manner over the past several years as you try to catch up to your peers. Recently your Aunt Mabel died of a stroke (you told her to stop smoking, right?), and she's left you a large estate. So now you may have enough money to retire, and you might be able to reach your goal by taking less risk with your investments. It's time to reconsider your target asset allocation.

However, if your Aunt Mabel didn't actually die but she's been dying to share her stock market secret with you, beware. When she encourages you to sell all your dowdy low-risk investments and pile into the XYZ Opportunity Fund, what will you tell her?

7) Things look bad. Shouldn't I make a big change?

The answer is "no." Remember that your investment plan is supposed to guide you through thick and thin. If you've done your homework, thought things through carefully, and you've put a great plan in place, the odds are against you if you decide to make a big change. The key to success lies not in your ability to make better investments but in your decision to become a better investor by making and following a plan.

Mr. Utley is a Certified Financial Planner with Physician Family Financial Advisors in Eugene, Ore. Contact him at 541-463-0899 or visit www.physicianfamily.com.

This article originally appeared in the June 2012 ezine of Ophthalmology Business, pages 16-18. To download a PDF version, click here.

Ophthalmology Business talks to experienced financial planner and advisor W. Ben Utley about how physicians can find the best advisor

In today's stress-filled world, having good financial health is an important aspect of overall physical health. Finding the right advisor to achieve and maintain this is just as important as finding the right doctor. According to W. Ben Utley, C.F.P., president and founder, Physician Family Financial Advisors Inc., Eugene, Oregon, it is crucial for doctors to find a financial planner who understands their specific path in life.

"Doctors are cut from a certain fabric, they're formed in a certain crucible and that becomes part of their life," he said. "Financial planning is how to make certain things happen in your life. As a result, when you hire a financial planner, that financial planner really needs to understand physicians' lives, where they've been or where they're going."

Making a list

The first step in finding the right financial advisor is to make a credible list, Mr. Utley said. Two good places to start your search are the National Association of Personal Financial Advisors (www.napfa.org), the leading professional association of "fee-only" financial advisors, and the Financial Planners Association (www.fpanet.org), the largest membership organization for personal financial advisors in the U.S.

Mr. Utley recommended physicians start with a fee-only advisor. "A fee-only financial advisor, financial planner, investment advisor is compensated with a fee, which means that you pay him with a check, a credit card, or with authorization to deduct money out of an account; all compensation is fully disclosed and invoiced. The same way that you would pay a doctor or attorney, it's a professional fee."

Everyone else charges something that is less clear, he said. For example, they may sell a product and receive a commission. Usually when there is a commission involved, Mr. Utley said, there is a potential for conflict of interest because various products give different levels of compensation.

Searching outside one's community increases the odds of finding the most qualified advice. Many financial advisors work with clients by telephone, fax, and email on a regular basis, so distance is not a problem.

To round out your list of prospective advisors, Mr. Utley recommended contacting friends, coworkers, an accountant, and/or attorney to find financial advisors they might recommend.

Look for certification

"Beware of generic pseudo-credentials like 'financial advisor,' 'financial consultant,' 'wealth manager,' and even 'vice president,'" Mr. Utley warned. These merely signify that an advisor is in the business and may have a license to operate.

"While most licenses require an advisor to pay a fee and pass an exam, these may be easily acquired with a minimal commitment of time and effort," he said. "In contrast, certifications usually require a higher level of commitment and dedication. Formal training, rigorous examination, continuing education, years of experience, and oversight by a board or governing body are part of attaining and keeping a certificate, so certification is an outward indicator of the quality of advice you may receive."

Prospective advisors on your list should at least be certified as a Chartered Financial Analyst (CFA) or Certified Financial Planner (CFP). CFAs may delve into matters of personal finance, Mr. Utley said, but most specialize in the management of investment portfolios. He recommended that physicians with large portfolios consider seeking the advice of a CFA.

The CFP mark is the most sought-after credential among advisors who practice financial planning, Mr. Utley said.

"If you need help with more than one issue in your financial life or if you are targeting long-term goals like retirement or college education, make sure a CFP is on your list," he said.

Do a phone interview

Mr. Utley recommended making a preliminary phone call to ask some key questions that may help narrow your list of possible candidates.

1) Who will you be working for when you serve me?

"If your advisor is a 'registered representative' then he owes his first duty to the company that employs him, not you," Mr. Utley said. However, if your advisor is a fiduciary, he owes his first duty to you by law. A fiduciary will offer you an Investment Advisor Disclosure Brochure before allowing you to hire him. Most fiduciaries also use a contract or engagement letter to form a business relationship with you, he said.

2) Do you work for people like me?

Find out if he specializes in working with M.D.s by asking what proportion of his clients is M.D.s, Mr. Utley advised. If you're selfemployed, find out how many M.D.s he works with who are also selfemployed. The same goes if the physician is part of a larger practice.

3) How long have you been in business?

There's no substitute for experience. Look for at least 10 years of experience when seeking advice, he said.

After this round of screening, make appointments to visit advisors who remain on your list, Mr. Utley said.

Find a personal match

Resist the temptation to sign up for services at the first meeting, Mr. Utley said. Instead, collect information and get a feel for how you and the advisor might work together in the long term.

He suggested a few important questions to ask:

  • What does your ideal client look like in terms of age, employment, and financial situation?
  • How does your investment and/or planning process work?
  • Who will I work withyou or an assistant?
  • What one thing do you do better than all the other financial advisors I might encounter?

"Asking these questions will tell you whether or not the advisor might do a good job of serving you," he said.

Knowing some personal details about the advisor can also help you determine if he has similar interests, priorities, and philosophies in life. Some questions include:

  • Are you married? Do you have family or children?
  • What are your interests beyond financial advising?
  • What drew you into the profession? Why did you stay?
  • What's been your best experience with a client? Your worst?
  • What do you expect from me as your client?

The final decision

After meeting potential advisors face-to-face, asking yourself these questions may help you make your final decision, Mr. Utley said.

1) How well did each financial advisor listen to me?

The hallmark of a good relationship with your financial advisor will be your ability to communicate your needs to him. This means he must do an excellent job of listening to you in order to understand how he can help. Consider the amount of time he spent listening to you versus the time he spent selling his services.

2) How clearly did each financial advisor express himself?

Even if you received the very best financial advice from your new advisor, you might not follow the advice unless you fully understand it. Consider whether or not the advisor "speaks your language." Make sure you are comfortable with his style of communication.

3) What promises did each financial advisor make?

In addition to reviewing the questions you asked in your first meeting, consider how each advisor attempted to win you as a client. Some advisors may try to dazzle you with their past performance records or wow you with the big clients they've handled. The best advisors attempt to set clear, realistic expectations about your work with them during the very first meeting. They know the foundation for a great long-term advisor/client relationship is their ability to make promises and deliver on them. Look for promises that include a clear statement of services and fees, regular contact and availability, and a duty to act in your best interest.

The financial advisor for you

Once you've decided which advisor to hire, Mr. Utley said you will realize what good financial advisors already know to be true: The financial advisor you choose may be a lot like you.

"People have a natural tendency to trust others who are much like themselves, so the advisor you choose will likely share your interests, your outlook, your beliefs, and even some of the same financial goals you hold. No matter which financial advisor you choose, make sure the one thing you have in common is an uncompromised interest in your financial health," he said.

Mr. Utley is president and founder of Physician Family Financial Advisors Inc., which delivers fee-only financial planning and independent investment advice to clients coast-to-coast. Contact him at 541-463-0899 or visit www.physicianfamily.com.

This article originally appeared in the June 2012 ezine of Ophthalmology Business, pages 13-15. To download a PDF version, click here.