[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.
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.
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
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 InvestingContinuing 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!