by Charles Blair, DDS and John McGill, MBA, CPA, JD
In the past, doctors seeking investment assistance secured the services of a broker employed by a full-service brokerage firm. The broker would periodically call the doctor with "hot" investment tips (he was usually "pushed" by the brokerage house to do this), and would then place trades in exchange for a hefty commission.
Unfortunately, there are hundreds of "horror stories" about investment brokers. The scenarios include brokers who talked doctors out of more conservative investments and into higher-commission, more speculative investments; those who pushed doctors into investments that were clearly inappropriate for the doctor's age and risk tolerance; and those who "churned" the doctor's accounts by continually buying and selling in order to rack up huge commissions.
As a result, the use of high commission, full-service brokerage arrangements has been on the decline for some time now. This mode of investment assistance is being replaced by financial planners offering a broader array of services in exchange for fee-based compensation not related to product sales or commissions.
What services do you need?
For those doctors who do not wish to handle their own investing, selecting the right advisor to assist them can be an arduous task. The first step is to determine what services the doctor needs. Investment advisory services include the following:
• Determining the doctor's appropriate investment asset allocation (between stocks, bonds, real estate, etc.), based upon the doctor's age and risk tolerance.
• Reviewing the doctor's existing portfolio and recommending changes in order to improve investment performance. This service also includes ensuring that the doctor's actual asset allocation agrees with that determined by his current risk profile and age.
• Reporting the doctor's true investment returns on all accounts (retirement plan, IRA, personal, family limited partnership, etc.) at least quarterly and comparing the actual results against appropriate benchmarks to determine investment effectiveness.
• Recommending the sale and purchase of investments (individual stocks, bonds, or mutual funds) as needed, if this is not handled through a money manager.
• Meeting with the doctor at least semiannually to review and discuss investment performance and any needed changes.
• Maintaining availability to speak and consult with doctors between regularly scheduled meetings in order to recommend needed asset-allocation changes (e.g., sell stocks and move to bonds when the market is high; do the reverse when the market is low), and proactively counsel doctors to avoid "emotional" investment errors (such as buying high and selling low).
Beyond this basic level of investment services is a higher tier of investment-advisory and financial-planning services now being offered by more sophisticated advisors:
• Proactively reviewing the doctor's personal investment portfolio to suggest strategies to reduce federal and state income taxes by maximizing charitable contributions (as an example, gifting appreciated securities to charities in lieu of cash), fully utilizing the doctor's investment losses from the current year and those carried forward, and developing strategies to transfer investment gains among family members (e.g., 5 percent maximum capital gain rate for children age 14 or older.)
• Developing and implementing an automatic monthly savings program for the doctor to meet retirement, educational, and personal savings goals. This is done to make sure the doctor is meeting his goal of fully funding his retirement plan annually, as well as IRAs for the doctor, spouse, and children where appropriate.
• Accurately tracking the cost basis for nondeductible IRA contributions and other personal investments, and transmitting this information to the doctor's CPA to ensure that the doctor's tax return is prepared accurately and tax liabilities are minimized.
• Developing an investment-policy statement for the doctor's retirement plan to comply with ERISA requirements.
• Providing the doctor's retirement plan administrator with complete investment information and results annually through electronic download. This will save the doctor time in reporting investment results, allowing a quicker retirement-plan-administration turnaround and saving money on the administrative costs related to his or her retirement plan.
• Assisting the doctor's retirement-plan administrator in making retirement-plan distributions to departing employees and calculating proper withholding, as well as depositing federal and state income taxes on distributions.
More sophisticated financial planning/investment advisors also provide the following value-added services:
• Assisting the doctor in refinancing home and building mortgages, as well as practice debts, to obtain the lowest interest rates possible.
• Providing estate-planning guidance, including review of retirement plan and IRA beneficiary-designation forms.
• Acting as Section 1031 tax-free exchange accommodators to assist the doctor in selling practice real estate without federal or state income taxes.
Once the doctor has determined the level of service that he or she needs, the next step in the process is to select the right advisor to fill those needs. Doctors should take the following steps to select the best advisor:
1) Talk to others — Obtain referrals from advisors you trust and from other doctors and/or friends.
2) Check the advisor's work history — Since the financial planning specialty is fairly new, determine what advisors you are considering did in their "prior life," since this can heavily influence the advice they give. For example, individuals trained at stock-brokerage houses will likely focus more on investment vehicles such as stocks and bonds.
Those with insurance backgrounds will typically recommend insurance-based products and annuities. Attorneys are likely to be strongly into estate-planning, while accountants' long suits probably will be tax-planning.
3) Investigate professional competence — Over 650,000 individuals now claim to be "financial planners," yet very few have professional designations assuring basic competence, according to Bob Sytz Jr., CPA, CFP, and president of Select Consulting (www.sconsult ing.net (866) 727-6100), a firm providing specialized investment advisory services for the dental profession. Only 40,000 have earned the prestigious Certified Financial Planner (CFP) title, indicating that the advisor has completed a rigorous program covering more than 100 topics in seven areas, including estate-planning, taxes, and investments. The CFP exam requires a much broader base of knowledge than the Series 7 examination taken by most investment brokers.The Series 7 exam consists solely of security issues. Moreover, CFPs are required to undertake a mandatory 15 hours of continuing education each year. To locate a CFP in your area, contact the Financial Planning Association at (800) 282-7526 or visit the Web site at www.fpanet.org. Other noteworthy credentials for financial advisors include Certified Public Accountants (CPAs), with a specialty designation as a Personal Financial Specialist (PFS).
4) Check professional credentials — The Securities and Exchange Commission (SEC) now has a new Web site to check out investment advisors at www.sec.gov. On file are registration documents filed by more than 9,000 investment-advisory firms that manage at least $25 million in assets, including information about which services the firms provide, their fees, and disciplinary problems that have occurred during the past 10 years. You can obtain more information and request copies of investment advisor registration statements by calling the SEC Public Reference Branch at (202) 942-8090 or your state's Securities Regulator.
5) Find out more — Ask for the investment advisor's registration or disclosure statement (such as Form ADV), detailing his or her compensation methods, conflicts of interest, business affiliations, and educational qualifications and experience.
6) Interview more than one advisor — Ask potential advisors to describe not only their educational background, experience, and specialties, but also what expertise they have in the areas that you need help with the most. Also, find out the size and duration of their practice, how often they communicate with clients, and whether an assistant handles client matters. More importantly, make sure that the personal chemistry is good, so that you will feel comfortable discussing your finances with the advisor you select.
7) Get it in writing — Request a written Advisory Contract or Engagement Letter, documenting the nature and scope of services provided, as well as how the advisor will be compensated. While most of the fees charged by financial advisors have historically been commissioned-based, the trend has changed to charging on a fee basis to avoid conflicts of interest and an incentive to churn the doctor's account. Many sophisticated firms now allow doctors to pay all management fees through the practice to maximize deductibility. Most also allow payment by credit card for maximum rewards to the doctor.
8) Reassess the relationship regularly — Doctors need to make sure that their advisor not only understands their goals and is meeting them, but also is making any necessary changes as their situation evolves over time.
Selecting the right advisor
* Talk to others
* Check the advisor's work history
* Investigate professional competence
* Check professional credentials
* Find out more
* Interview more than one advisor
* Get it in writing
* Reassess the relationship regularly
