By Dr. Jim Dahle, WCI Founder
[Editor's Note: This originally ran as a column for MD Magazine and discusses six reasons why doctors frequently get burned financially. Yes, there is a big target on your back. Yes, you didn't get any training in personal finance in med school. But there is a lot more to it and this post will discuss that. At the end of the post are three tips to help you correct these six issues. The original article can be found here.]
I was having a discussion with one of my entrepreneurial friends recently and he asked me, “Why is it that doctors are always getting scammed?” Unfortunately, his observation is true, doctors do get scammed frequently. This post will explain the reasons why and give some suggestions about how to avoid being a victim.
6 Reasons Doctors Get Scammed
1. No Training in Business, Finance, or Investing
Attending medical or dental school is an experience in “drinking from a fire hose.” There’s no way you can get all the knowledge taught into your brain. Adding additional information to the curriculum, such as business, finance, or investing topics, would make that process even worse. Something would have to be removed from the curriculum to make room. While I have certainly seen a medical school institute a Business of Medicine curriculum as an elective for its MS4s (which over half of them enrolled in), it is incredibly rare. Doctors for the most part simply lack the financial knowledge required to avoid bad investments and outright scams. When you don’t know what a good investment or a good advisor looks like, it is difficult to tell a bad one from a good one.
2. Doctors Are Busy
In training, many physicians are working seventy, eighty, or even more hours per week. Even after training, many physicians continue to work 50-100 hours per week. This not only leaves little time to learn about finance and investing, but it also leaves little time to do anything with that knowledge if they had it. By the end of a long day of clinic or OR time, a doctor is wiped out mentally and emotionally. A doctor is more likely to simply go along with a recommended investment without doing the proper due diligence simply because he does not have the time or energy to do it.
3. Overconfidence
Some doctors make the mistake of assuming that because they are good at one thing, that knowledge and ability will bleed over into other fields. They fail to realize that other fields can be just as complex and take just as long to learn as medicine. While it is entirely possible and reasonable to have a very simple do it yourself investing plan using index mutual funds, understanding more complex investments pitched to physicians requires far more expertise. Most physicians don’t have anything more than a medical student or intern level of understanding of other specialties in the house of medicine, much less any kind of a significant understanding of real estate, the tax code, or even the general principles of investing.
4. Trust in Professionals
As a general rule, physicians trust other professionals far too much. Perhaps this is because they are used to consulting with other medical specialists and receiving an intelligent, thought-out response from a true expert who has committed his life to putting his patients’ needs before his own. Unfortunately, that code of ethics is present to a far lower degree in other professional fields, including law and accounting, but especially the giving of financial advice. William Bernstein, neurologist turned financial theorist, has wisely noted that “You are engaged in a life-and-death struggle with the financial services industry…. If you act on the assumption that every broker, insurance salesman…and financial advisor you encounter is a hardened criminal, you will do just fine.” That mindset is crucial in avoiding scams. If yoiu want to be confident that you won't get ripped off, we have a list of vetted recommended financial advisors.
5. Accredited Investor Income Without Accredited Investor Experience
An accredited investor is defined as an investor with an income of over $200,000 per year (or $300,000 combined income if married) or more than $1 million in investable assets. Accredited investors are considered to need fewer protections from regulatory agencies. Some investments can only be pitched to accredited investors due to their high risks (which may or may not be connected to high returns.) The assumption behind the regulations is that such wealthy investors are both more sophisticated and more tolerant of potential losses. They assume that the investor has the skills, knowledge, and ability to properly evaluate these investments. Unfortunately, a physician comes out of residency and has to negotiate the jump from a resident salary of $50,000 to an attending salary of $200-300,000, which is difficult enough in and of itself. But there is no way a brand new attending, who despite having a negative net worth qualifies as an accredited investor, has the financial sophistication to properly evaluate these sorts of deals.
6. Physicians Are Specifically Targeted
Tip- Don't pull on the green rope until AFTER you're done rappelling
To make matters worse, even if physicians aren’t, financial professionals are well aware of the above issues. They specifically target physicians due to their naivety, trust in professionals, lack of sophistication, and especially high incomes. There are hundreds of financial firms in this country that specialize in serving physicians and dentists, yet almost none that cater exclusively to attorneys, accountants, pharmacists, nurses, and other professions. You would be wise to spend a few minutes thinking about why that is. It is fascinating to watch these financial advisors work. They often flatter the physicians to their face, despite the fact that their income is twice or even ten times that of the doctors. Then, behind closed doors, they refer to the doctors as “whales,” fat and ready to harpooned and harvested. When you see Captain Ahab poised above you with his harpoon, don’t feel bad pulling a Moby Dick.
How to Avoid Bad Deals and Bad Advice
So what can a doctor do to avoid falling into these sorts of scams? Keeping all your money invested in your savings account and bank CDs isn’t a reasonable option. You will need to interact with the investment industry on some level to reach your financial goals. There are really three very simple steps that will avoid most of these problems.
1. Learn About Finance and Investing
Just as you should do Continuing Medical Education every year, so should you do Continuing Financial Education each year. Read at least one good book per year. Follow a good blog. You only need to learn that portion of finance that applies to your situation, which is far easier than learning all of it. Just like many of our patients are experts in their disease, you can be an expert in your financial situation.
2. Get Second Opinions
It is so routine for patients to get a second opinion, that most of us aren’t offended a bit by it. In the financial world, second opinions are extremely rare, but would reveal the vast majority of scams. Take the time to run investments and advice by a second, independent, fee-only advisor before purchasing.
3. Realize There Are No Called Strikes
You do not have to invest in every investment that gets pitched to you. In fact, it is probably impossible to do so. Evaluate every investment to see how it fits in with your written diversified investment plan. If there is anything fishy about the investment whatsoever, let that pitch fly right by. There will be another one coming next week.
Physicians are targeted for investments because they are naïve and have a high income. The high income is a good thing, but the naivety is not. Eliminate it as soon as possible.
What do you think? Why do doctors have such a terrible reputation for financial ineptitude? What have you done to overcome that? What can be done for the profession as a whole? Have you ever obtained a second opinion from another financial advisor? What happened? Comment below!
Physician awareness and edification of financial matters is key. Medicine has been a business for a while now, and its only best for the profession as a whole to take steps to improve decision making with the full consideration of cost implications. Efforts should start from early on, from when you first don the short coat and get questioned about differentials to becoming a life long learner as an attending, the financial cost of those choices should also be in the thought. It will help the doc, and the patient, and help the cost for the system. Those habits will carry over into other financial decisions and hopefully the decision fatigue that currently definitely plays a role in burnout and being susceptible to being scammed will be somewhat curbed. The great thing is many of the analytical aspects that are enjoyed in medicine, are in finance and investing as well, so it doesn’t have to be a chore but instead an enjoyable and fun process.
My wife and I are still pretty young and just recently reached the level of income to qualify us as accredited investors. I would be very curious, via a poll or comments, to understand what percentage of WCI leaders, who tend to be more savvy investors, choose to pursue these investing opportunities. WCI – do you have any information on this from past posts?
No, never did a poll. Lots of WCI readers are fairly hard-core indexers though, so I bet the percentages may not be any higher than the percentage of high-income professionals overall.
I have no need or desired to be an accredited investor. Dealing with medical accreditation is enough dealing with accreditation for me:)
I have been involved in several deals that required me to be an accredited investor. In retrospect I think investing in the market via passive indexes is better for most people. As I get older I value liquidity and transparency rather than flattery and the promise of a quick buck.
We would qualify, but have zero interest. If you qualify by salary or asset criteria and are relatively young, it means you basically “won the game”, after that you can be relatively conservative (ie – stay away from accredited investments) and have some reasonable asset allocation for your risk tolerance – and just concentrate on not messing things up rather than chasing potential for higher return/ higher risk. I’d rather increase our index fund equities vs. fixed income percent, or add some percent of sector index funds than have anything to do with accredited investments (or even individual stocks) – that’s my own risk tolerance level.
My father went the accredited investor way, and probably didn’t even know it. Lost more money than even I like to think about, with little recourse.
I stick with the indexes, that way, when I loose a ton of money, everyone else is in the same boat with me and we can just wait for the tide to come back in.
Thanks for the perspectives. I am also inclined to stay the course with low-cost, well-diversified, relatively aggressively-allocated index funds. Just curious about people’s experiences and how they have navigated the accredited investor arena. Sounds like unless it’s something you want to become an expert in, you’re better off staying away.
I am a hospital employed urologist but also have an ownership share in a lithotripter. Buying into the lithotripter requires that one meets criteria as an accredited investor. While the majority of my investing is with tax deferred, diversified, low cost index funds through my 403b and solo 401k, my investment in the lithotripter has been very good for me. I suppose one could argue that I am an “expert” in it by nature of my training and job, but all of the partners are aware that there is a very real risk of loss in any physician owned entity. Our predominant concern is around regulatory change/Stark exemptions.
Why was being an accredited investor necessary? Is it just how your deal was set up by the partners?
You avoid a lot of regulatory hassle if all the investors are accredited. Getting approved so “Joe Schmoe” can invest in your investment is not necessarily easy or cheap.
It is a large partnership (about 100 docs) that serves two states. It is a PLLC and I am paid on a K-1 but have never met many of the other partners. While I am certainly no expert on investment law, my understanding is that it was set up as an investment open only to accredited investors to avoid the documentation requirements and filing regulations of the Securities and Exchange Commission.
Thanks. You taught me something new today. I hadn’t heard of a PLLC before. Our physician related investments haven’t needed that entity before and haven’t needed accredited investor status. PLLC’s are not that common yet in our state. Interesting stuff.
It seems part of the purpose of the accredited investor status is to relieve the entity of potential liability if the investment doesn’t work out. Am I thinking about that correctly?
We have to use PLLC in my state for anything professional, ie. dentistry or medicine. I haven’t noticed any difference in how it works from my other LLCs, but they do charge more to form it and make changes…
At the risk of exposing my ignorance, I’ll try to explain as I understand it:
I actively treat patients with the lithotripter and am reimbursed a dollar amount per case treated. You do not have be an owner to treat, you just have to be
credentialed with the organization. This makes up a small portion of my patient practice (think 50 hours per year). This income is 1099 income.
The pllc employs about 25 people (nurses, coders, secretaries, truck drivers) including a CEO and CFO (not members of the pllc). Because the day to day operation of the business is essentially by the employees, the partners are passive partners. There is a cash buy in for the partnership, and each person holds 0.2 of a common share of the partnership for each year of buy in. Quarterly distributions are paid out to the partners based on revenue of the pllc. This is reported on a K1 at year end.
Because we are passive partners purchasing shares/ownership interest, the pllc would have to register the offering with the SEC, the same as a mutual fund or corporation selling shares on the stock exchange. Restricting the offering to accredited investors only relieves the obligation to register and file an annual prospectus.
I am not sure about liability limitation with this approach and I think it is more paperwork reduction. In our state, a PLLC is simply an LLC owned entirely by licensed professionals and has similar liability limitations to a standard LLC.
Nice explanation. Thanks!
In all but CA, PLLC is the version of LLCs owned by licensed professionals (doctors, CPAs, architects, attorneys, etc.) In CA, professionals cannot form LLCs and have to be RLLPs (Registered Limited Liability Partnerships) or PCs (Professional Corps). Maybe that is the state that DR. MOM practices in?
Not CA. Other end of the U.S. We just haven’t been in any deals where a PLLC was used. We have our own LLC for husband’s eye toys for his ophthalmology practice that we set up about 15 years ago. His surgery center deal didn’t use it either.
“Accredited investor” is not a good term…even though it is the one that is used. There is no “accreditation” involved. Just a high enough net worth or income. I have been involved in 3 different entities that require one to be an “accredited investor”. 2 of those three have done far better than the majority of my investing which is indexed tax sheltered funds. 1 of those 3 is in the oil industry which just happens to be crap right now. I think that investment will still do well long term, but right now it is not doing so well …last year it was still a 2% return. I use these investments to try and boost the returns of my overall portfolio and so far have done wel. There is more risk and I wouldn’t recommend them until your net worth is close to 1 million dollars.
Good luck
Several years back my brother asked I set up as an accredited investor with a company so he could operate there as my surrogate. SOmehow he was able to use his funds as well there so long as my finances were connected (obviously I trust my brother extensively)- maybe he just told them semi truthfully that he managed our portfolio for us so qualified as an accredited investor as manager of a sizable amount. Either he tired of such stuff or is now wealthy enough to do it on his own, but when he decided he didn’t like that company any more he didn’t need me to attest to it again. This is totally separate IIRC from him running an Etrade option selling concern with some of our money, which I’ve opted out of- 4 extra hours doing taxes for slightly higher returns but not every year- forget it! He still does that for himself, different company, with variable success (but hasn’t yet had to go back to ‘work’.)
Number 4 is the main issue. The % of “financial advisers” you should trust is very very small. It isn’t intuitive that a “professional” isn’t a professional.
I would also add that doctors don’t like conflict and, as a result, don’t know how to say “no”.
In my experience, even when doctors realize that the advice and/or products being recommended are not what they want, they are afraid to say “no” and send the “advisor” packing.
This is the equivalent of either knowing that you should have never walked down the aisle, knowing you should get divorced but subsequently deciding to renew your vows .
I have a local private banker just itching for my business. I keep telling him I don’t really think it is something I would use or need. He just won’t give up. He has his hooks in quite a few of the local physicians. They all think he is great, and use his ‘money guy’ at the bank for wealth management. I shudder to think what they are charging.
He is very charming and flattering. Telling me he is such best friends with Dr.X and Dr.Y. I don’t think I would want to be best friends with my banker.
You know this already but it bears repeating – your financial adviser is not your friend. He or she is someone you are hiring to do a job. There has to be distance between you so you can objectively judge how that job is being done.
When I joined a group here I was also directed to ‘the guy” all the other physicians use. Luckily I always felt he was annoying so never had to worry about the friend aspect. He still managed to get me to spend much more on life and disability insurance than necessary (totally my fault, I was the dummy that listened to him).
Donald – I cannot believe this guy is betraying the confidentiality of his clients by dropping their names. He is obviously not an RIA, but not ethical in my book regardless. You should let them know he is using their names – and you can be sure your privacy would be violated if you were his customer, also.
ANd are those guys even his clients?!? Obviously most docs are less vulnerable than older retirees, but the whole neighborhood where my in-laws live- just hit with a bad hail storm- got cold calls from repair men saying “I was just talking to your neighbor Lucy about the bad storm”. Sure, because you just cold called Lucy prior to cold calling me! DOesn’t mean Lucy is someone the worker actually knows nor that Lucy chose to hire him!
While playing catchup and learning about personal finance in one’s 30s-50s is the norm for a physician the solution should really be:
1) Taught as growing up by parents
2) Learn in college. I will encourage all my children towards personal finance/investing minors if not majors.
3) Learn in grad school/med school (not ideal for reasons started above) but all medical schools should really have a required personal finance class that focuses on student loan management, smart/index investing, insurabce (basically everything this site covers)
I think #1/#2 is really the way to go here. Pay attention all parents on this board. Start a Roth IRA early for your child and let them see how money can grow. Teach them about finance and simple index investing. Make them confident enough to be DIY investors from the get go. Encourage/force them to take personal finance classes in college. May be worth more then the actual college degree 🙂
The other reason there is no investing/personal finance training in Medical School, which you have written about before, is the “money taboo” found there. It doesn’t seem to be acceptable to talk about money in the context of medicine. Efforts to give just a 30 minute talk on investing to the final year residents at our University have lead nowhere, despite the help of a fairly senior colleague.
That makes me sad.
Not surprising since Medicine has always been made out to be a selfless, altruistic pursuit where you sacrifice all personal gains for the good of your patients. You know, it’s a “calling”, one so special you should be willing to do it for free.
The other factor is that it’s hard to learn about something so abstract – remember first 2 years of med school when it was almost all textbooks? Don’t you feel like you had a much better grasp of clinical concepts when you’re dealing with actual patients? Well how can you understand how to manage large sums of money if you’re making negative money (med school) or minimum wage (residency)?
Opportunity is knocking Jim
Opportunity knocks 3 or 4 times a week. No called strikes though.
I am starting a 4-5 hour lecture series on personal finance for our medicine residents (50+/year) and pediatric residents (30+/year) at my institution. It’s with the full support of the residency directors (and higher up), and all the fellows from both departments are going to be invited as well. The lectures are going to be integrated into the mandatory noon conferences along with their other didactics, so attendance will be good (and I know the trainees all want the education).
I’m at a well known private academic institution that underpays its faculty and generally gets people to come because of prestige and other non-monetary “perks.” So if we can get this off the ground then there is hope for everyone.
Nice job! Please share your observations, feedback, recommendations etc.
How’s this going, PEMDoc?
A short three hour course, if that, plus reading a few BIBLES on the subject is all one needs forever
After I read Random Walk Down Wall St I KNEW INDEXING IS THE ONLY WAY TO INVEST and it has proven tpo be true since I started with VANGUARD(love the company) in l976
A lot of doctors think that they can time the market since they did well in school and are probably well above average for intelligence.
As for me, I love low expense ratio index mutual funds and am riding that Vanguard train until I retire. Well, with appropriate asset allocation and less risky investments as I approach investment age.
It always amazes me how people think they can beat the professionals when fund managers who *do it for a living* cannot beat the market long-term. The University of Michigan posted a good study to this effect many years ago.
People don’t think about the short-term capital gains fees they incur and the (usually they incur them) commissions they pay for their “day trades.”
Passive all the way with a sprinkling of dollar cost averaging for me. 🙂
If I’m going to actively manage something, it’s going to be a side business that is far more likely to add to my returns than trying to pick stocks successfully.
The time commitment is there, and if I did anything next, it would be P2P lending – you inspired me.
Only the uneducated financially think they can beat the mkt and that includes most doctors and dentists
We should have a book of Kennisms- truths most people can live by, happily and wealthily.
I agree!
Just yesterday, after reading about the virtues of the real estate crowdfunding company ‘Patch of Land’ by a poster on this site, I became interested in becoming an accredited investor and called the company for more info. Reading this article today makes me refocus on my original path with index funds at Vanguard, but to be honest, it did seem enticing. Any opinions?
I wouldn’t view it as an alternative path, more of a “core and explore.” I have a little money in P2PLs and syndicated real estate, but 90% is in a portfolio of low-cost, passive, mostly index mutual funds and ETFs.
The professional associations just make it easier to be scammed. They share mailing lists with life insurers. We often receive solicitations for life insurance, on ADA letterhead, with special ‘rates’.
So true
Even worse are the ones they allow at meetings
Yup. That’s what I got for being an AMA member…special “rates”.