Investment Management For Doctors

Investing for Doctors is Just Like Any Other Kind of Investing

Investing for doctors or “physician wealth management” is the same as investing for everyone else but doctors have less time and more money which results in higher taxes and more investment options. Doctors also ask fewer questions before they invest, so investing mistakes rank among the biggest financial mistakes doctors make.

These factors, combined with the public’s love of watching smart people do dumb things, brings media attention to physician investing mistakes, fueling public ridicule. “Doctors are terrible with money,” they say. We hope this guide will help healthcare professionals avoid embarrassment, make more money, pay less taxes, save time and avoid large losses as they manage their money and lead their families toward financial security.

Mutual Fund Investing for Doctors

Mutual funds save time for physicians since each fund employs a manager whose job is to capture returns available in the market. While it still takes time to choose a fund from the thousands of available options, this list can help physicians narrow the field of mutual fund investments.

Vanguard Funds Save Physician Investors Time and Guesswork

Vanguard is the low cost leader in mutual fund investing, which means physician investors keep more of what their funds earn. Vanguard Group founder John C. Bogle launched the nation’s first index fund in 1975. The company has consistently reduced their operating expenses such that their mutual fund expenses are only one-fifth the industry average, Today, Vanguard is the largest provider of mutual funds, managing more than $7.7 trillion (with a “t”).

Vanguard’s index funds take the guesswork out of passive investing for doctors by making it easy to gain broad exposure to US stocks, foreign stocks, US bonds and foreign debt. Vanguard’s LifeStrategy and Target Retirement series of funds repackage Vanguard’s core “total” index funds with no added cost so that doctors can meet some, if not all, of their investment objectives by owning a single mutual fund. While index funds like these still expose doctors to investment risks, they diversify away the emotional burdens and risks that go with picking stocks and individual bonds.

Fidelity is the One Doctors Choose Most When Investing for Retirement

Fidelity provides retirement plan services to more doctors than any other financial services company. On average, physicians may pay more for Fidelity funds than funds offered by Vanguard but Fidelity’s integrated approach to retirement plan services means the total cost of ownership (including the costs of plan administration) are lower than most other providers of physician retirement plans.

Fidelity’s Spartan series of index funds compete fiercely with Vanguard’s index funds when it comes to low operating expenses, so physicians choosing funds in their workplace retirement plan should consider these among their most favorable investment options.

Fidelity’s Freedom series of lifecycle or “target date” funds help physicians avoid investing mistakes with professional management that gradually shifts the fund’s asset allocation to a more conservative mix of stocks and bonds as retirement approaches. Doctors investing in Fidelity’s target date funds should be aware that they come in two flavors: the original Freedom funds (sometimes shown as “Freedom K”) and the Freedom Index funds (sometimes “Freedom Index W”). Only the Freedom Index series of funds offers the advantages of low-cost index investing.

DFA Funds Let (Some) Physicians Invest Like a Nobel Laureate

Dimensional Fund Advisors or “DFA Funds” use a scientific approach that promises higher expected returns by focusing on small cap and value stocks. While few physicians have heard of the DFA Funds, some may recognize professor Eugene Fama, the firm’s leader and winner of the 2013 Nobel Prize for economics. Fama’s research also inspired John Bogle to create the first publicly available index fund.

To protect their funds’ investors from “hot money,” DFA rigorously vets financial advisors before allowing them to offer DFA funds to their clients, so physicians can only access these funds through an approved advisor. One exception is the Utah Education Savings Plan, which features both DFA and Vanguard funds in its lineup of investment options that are available to the general public in all states. Physician Family Financial Advisors is a DFA-approved advisory firm.

Passive Investing for Doctors Who Pay Taxes

All physician investors pay taxes but many have yet to catch on to the power of tax-aware investing available through robo-advisors like Betterment.

While human advisors, particularly those who manage hundreds and even thousands of investment accounts, might thoroughly review a portfolio annually for tax loss harvesting opportunities, the advanced algorithms of robo-advised accounts can run daily sweeps to harvest losses more efficiently.

To keep investment-related taxes in check, robo algorithms typically use a trio of passively managed index mutual funds or exchange-traded funds (ETFs) for each asset class in a strategy. For example, the domestic equity allocation might rely on the Vanguard 500 Index Fund ETF (VOO) as its primary holding, the Dimensional US Core Equity Market ETF (DFAU) as its secondary holding, and the Vanguard Total Stock Market Index Fund ETF (VTI) for a tertiary holding. If VOO’s dip in value results in an unrealized loss, the account management algorithm might sell VOO to buy DFAE, thereby capturing the tax loss and maintaining the target asset allocation without running afoul of the wash sale rules.

Beyond consistent risk exposure, busy physicians also gain speed and convenience from a robo-advisor. Betterment’s onboarding experience is so slick that any physician with a smartphone and about 15 minutes between cases can open and fund an account with the app: no signatures required!

Unlike traditional brokerage accounts where doctors have to first make a deposit and then come back to make an investment, cash invested in a robo-advised account goes to work as soon as it is received.

Until recently, robo-advised accounts were only suitable for young physicians who had only cash to invest and no concerns about legacy positions with low-cost bases. Today, Betterment offers a way to budget a limited amount of capital gains to be realized each year giving older physicians with larger accounts a way to gradually diversify out of concentrated positions.

10 Questions Every Physician Should Answer Before Making An Unconventional Investment

As highly visible figures who earn more than the average worker, physicians are approached for unconventional or alternative investments from time to time, and that’s where most doctors will make a major financial mistake. Fear of “missing out” causes many doctor to take the plunge while a promised tax benefit causes others to veer away from tried and true investments like mutual funds.

While there is a chance that you might get in on “the next Microsoft,” there’s also a chance that things will not go so well in an unconventional investment. Before you put your capital at risk in the next deal, ask yourself these ten questions. You might increase the odds that you will receive a return OF your investment in addition to the return ON your investment.

1. “Why am I being asked to invest?” The obvious answer here is, “because they need the money” with “they” being the people who are asking you to invest. But there’s more to it than meets the eye. In a capitalist country like the United States, there’s a ton of money out there seeking excellent deals. What makes you so special that you have been tapped to tackle this deal? Is it your background and experience with similar deals? Or is it your obvious wealth and your naiveté? Seek a convincing answer that stands up to logic.

2. “Why is the opportunity being presented in this way?” Most deals offer to make you a shareholder or a partner, while others may offer to let you be a lender. Some offer a choice of both. Your position relative to the investment will dictate your property rights, and your property rights will determine both the return you might expect and how to unwind the deal if it goes badly. Your position in the deal also gives you some idea about the offering party’s motivation and a clue about how the deal will be handled.

3. “What will they do with my money?” If you are expecting them to be the stewards of your money then you need to know what—exactly—they will do with it. Will your money be used to build a building? Or tide them over until more cash comes in? Or refinance an existing loan? Or develop a product? You want an answer that tells you how they plan to create wealth with your money. If there are written materials available (like a business plan, prospectus, or private placement memorandum), you should dig through it to find the answers.

4. “How do I know they’re telling me the truth?” When you judge the quality of an investment opportunity, consider the quality of the people involved with the deal. Take a look at the names of the people involved. Try to determine if they are who they say they are, and find out how long they’ve been doing what they say they’ll do for you in this deal. It may be tempting to accept a colleague’s appraisal of their character but you should do your own homework to verify the offering party’s credentials. Insist on a background check if you’re not absolutely certain about their integrity.

5. “What’s my recourse if things go wrong?” Try to find out who you’ll be dealing with when things don’t go according to plan. Are they in a financial position to make you whole again? What does their backing look like? Is there any form of bond or assurance? And do they have the means to lawyer you to death? While a risk is a risk and you should expect some chance of loss, you need to know how things might wind up if the deal does not go as promised.

6. “What are my alternatives?” While this particular deal might sound appetizing, you may be surprised to learn that deals like this are done all the time, and that similar deals are done on better terms. Once you’ve been enticed to consider unconventional physician investments, you might find yourself living in a whole new world as an investor. And as long as you’re there, you might as well explore the alternatives and consider diversifying by investing in more than one deal like this one.

7. “Do I really need to bear this risk?” Unconventional investments for doctors sometimes promise greater rewards than plain vanilla offerings like publicly-traded stocks, bonds and mutual funds. And by the same token, they usually entail more risk. Since many non-traditional investment opportunities require large sums of cash, you may already be in a financial position that puts you within easy reach of your goals without the need for higher returns (and higher risk). Double-check your financial plan to make sure this risk is truly necessary.

8. “How do I get my money back?” This is perhaps the “dumbest” question of all, but even smart physicians fail to ask it. And surprisingly, the answer can be somewhat elusive. Perhaps there will be an initial public offering of stocks or bonds and you’ll be cashed out. Or maybe you will receive your capital back in periodic payment over a number of years. Investors are occasionally stunned to find out that the investment they’ve made has no ready market (as may be the case with private placements and some real estate investment trusts) so they cannot sell their new-found investment because there’s no one who is ready to buy it.

9. “Could I lose more than I invested?” If you are being asked to buy a liability-generating asset like real estate and leased equipment or if you become a partner in a business that goes belly up, your investment might sue you, or at least run up some nasty legal bills. Don’t assume that only your invested capital is at risk; sometimes an asset becomes a liability.

10. “What are the political risks?” When you put your capital to work, you may find that it competes with the interests of others close to you. Consider the value of your business relationships, family ties, and friendships… and take the long view when you do. These people may be more valuable to you over the years than the money you could make from an investment that pushes them away from you.

To protect your hard-earned money, there are many other questions you should ask before making an unconventional investment. Check with your attorney or investment advisor before you commit your capital.

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