Why physicians should be wary of financial media, many ‘traditional’ financial strategies

ByDavid B. Mandell, JD, MBA

ByAndrew Taylor

One important success factor for physicians when it comes to investing is understanding how they are unlike most U.S. retail investors. Physicians have a level of education, income and, typically, net worth that far exceed those of most investors in our country. It is also important to recognize all investors, regardless of education or experience, are influenced by the media. The combination of these factors can create added challenges for physicians when deciding how to allocate their assets.

Media advice

The goal of the media is to maximize ratings or clicks. Why? Media companies are compensated by selling advertising — more eyeballs equal more dollars. To maximize viewers, the obvious strategy is to appeal to our ever-powerful emotions of greed and fear.

PC_RR0122Mandell_Media_Graphic_01 — Physician investors are unique as they have a level of education, income and, typically, net worth that far exceed those of most investors in the United States. Source: David B. Mandell, JD, MBA

David B. Mandell

Andrew Taylor

One does not have to watch financial television, as an example, for long to encounter a breathless segment on the next “hot” stock (greed) or one focusing on negative financial news in flashing red headlines (fear). This makes perfect sense for their business model. If you tune in and hear that the economy is strong, the markets are stable and your strategy is working, you are not likely to continue watching.

When was the last time you heard, “Stay the course, remain diversified, ask yourself if your goals have changed”? We are guessing ... never.

How physicians are different from most investors

As a physician, you are different from the average American retail investor in several ways. This is important to realize because most financial news, whether in print, online or on television, is geared to the typical retail investor. Therefore, media messages on investing often will not apply well to your situation.

Financial circumstances are the most significant factor separating physicians from the typical investor. Physicians tend to work longer hours, generating a higher rate of compensation with less free time. The combination of those factors means the implementation of time-consuming trading strategies is often not practical. Consequently, the focus is likely to be on delegated products or strategies that can be easily carried out directly by a physician or their advisor.

Let’s examine income as a differentiator. The median household income in the United States in 2020 was $67,521. Slightly more than 10% of the population had a household income exceeding $200,000, which means nearly 90% were under that threshold. According to Medscape’s 2020 physician salary report, the median compensation was $243,000 for a primary care physician and $346,000 for specialists. The top eight earning specialties had incomes exceeding $400,000.

Why is the income difference relevant? The federal marginal tax rate for a married couple with the median household income is 12% and the effective tax rate is likely to be much lower. Many physicians find themselves in the top federal tax rate (currently 37%). Adding the net investment income tax of 3.8% and potentially state and local taxes, one can easily recognize the importance of tax-efficient investment strategies for physicians. However, most of the country does not have a tax problem. Most media advice and most investment products fail to focus on tax management. They are targeting the masses and not the top 1% of earners.

Net worth is another financial differentiator. As net worth increases, so does the complexity of one’s circumstances. Target date funds (asset allocation funds implementing a glide path strategy), Robo advisors and online financial planning software are useful tools that may be ideal for the average investor. Unfortunately, these products or services are not designed to handle the unique circumstances of high-net-worth individuals. You may own an interest in your surgery center, office building or another piece of real estate representing a significant portion of your net worth. Perhaps you have a secondary income from speaking engagements or consulting for a medical device company. You may have had the opportunity to invest in a separate private venture outside of your current employer or practice. The previously mentioned tools and products lack the sophistication to integrate your nontraditional circumstances into an appropriate risk-managed investment strategy or comprehensive financial plan.

What strategies or products may not be appropriate for physicians?

The following list is not meant to be comprehensive. We intend to focus on the vehicles we have frequently found to be problematic for physician investors. The products or services listed are suitable for certain individuals; therefore, appearing on the list below is not a broad indictment of their existence.

Mutual funds with a lack of focus on tax efficiency. Funds (by law) must distribute income and capital gains to shareholders for the entity to receive favorable tax treatment. If you own mutual funds in a non-retirement account, pay attention to the fund’s turnover and the tax cost ratio. Another option is to look at the fund’s distribution history over the last several years. A fund that is trading frequently may pay out short-term capital gains to its shareholders. Short-term capital gains are taxed as income, which means you could be paying a 37% federal tax rate on a large portion of your gains in a year in which you did not sell the fund.
Separately managed accounts (SMAs). Like a mutual fund, the SMA will invest in a specific category such as large-cap growth stocks, international equities or corporate bonds. The difference is that an investor will own the underlying individual stocks or bonds within the defined strategy. SMAs are marketed to investors as a way to invest tax efficiently, realizing losses of individual securities to offset gains. The reality is most (not all) SMAs have a very high turnover rate. Frequent buying and selling results in large capital gains and significant tax liability for a physician in one of the top tax brackets. Overcoming a 37% (or higher) tax on realized gains is a very high and likely unrealistic bar for an active investment strategy.
Any active trading strategy. Whether it is a “do-it-yourself” strategy pitched by a newsletter or a fee-based managed approach using exotic investments, you should be cautious. You are unlikely to have the time to implement a strategy yourself. More importantly, consider the tax drag. Long-term capital gains rates are capped at 23.8% at the federal level, while federal short-term capital gains rates can reach 40.8%. Regularly paying tax on your gains via an active strategy rarely results in an optimal outcome for any investors, let alone one in a high tax bracket. The advice to avoid active trading extends beyond that of a packaged strategy. The inherent conflicts in the media’s financial model can influence the behavior of investors who are casually tuning in with the intent of becoming more informed.

Each of these bullets places an emphasis on tax efficiency. We recognize physicians typically have assets in tax-advantaged accounts where tax management is irrelevant (from a trading perspective). The larger point of both media messaging and the creation of products or services for the masses remains true. Leveraging target-date funds, hiring a Robo advisor and utilizing inexpensive financial planning services all have a place for the average investor – but may not make sense for many physicians.

Conclusion

Understanding the business model of financial media outlets should make any rational investor hesitant to follow the news too closely. This is especially true for physicians, who are generally in a different financial position than the typical media consumer. Physicians should avoid financial tools and strategies designed for the masses and choose an advisor team accustomed to working with high-net-worth investors.

For more information:

Wealth Planning for the Modern Physician and Wealth Management Made Simple are available free in print or by ebook download by texting HEALIO to 844-418-1212 or at www.ojmbookstore.com. Enter code HEALIO at checkout.

David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group www.ojmgroup.com, where Andrew Taylor is a partner and wealth advisor. You should seek professional tax and legal advice before implementing any strategy discussed herein. Mr. Mandell and Mr. Taylor can be reached at mandell@ojmgroup.com or 877-656-4362.