How can ophthalmologists accumulate and grow funds to retire?
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“If we command our wealth, we shall be rich and free; if our wealth commands us, we are poor indeed.”
– Edmund Burke
“The greatest wealth is to live content with little.”
– Plato
Image: Adobe Stock
The majority of ophthalmologists I meet are pretty good at earning money. They are not, however, very good at planning for their financial future.
One simple way of looking at the money you earn in your practice is that it partitions into just a few buckets:
- Money you invest back into the practice (if you are an owner).
- Money for taxes, which you can creatively reduce but never eliminate.
- Money for current personal living costs.
- Money for future living costs.
Each of these buckets needs its own special attention and, in some cases, advisory support.
You, your partners and administrator — with help from various business and legal advisors — handle the first bucket, of course. The second bucket falls under the purview of your accountant and perhaps a tax attorney. The third bucket, including household budgeting, is something you and your family can typically navigate on your own. In most client settings, these first three buckets are well covered and wisely managed.
It is the fourth bucket — accumulating and growing the funds you will need when you retire — which is so often neglected. Fewer than one in 10 of the new surgeons we work with is getting personal financial planning advice from a firm they would recommend to others. So, when a financially astute Colorado client recently raved about his financial planner, Lido Advisors, I took a closer look.
Lido Advisors is a national wealth management firm based in Los Angeles with an interesting history. Lido was launched through the collaboration of several LA-area family offices. (A “family office,” like it sounds, is a private company that handles investments for a wealthy family, generally one with at least $50 million in investable assets, with the goal of growing and transferring wealth across generations.) This collaboration grew into a new firm that applied the tools of the uber-rich to the merely well-off.
I tracked down Luke Daniel, CFP, in Lido’s Denver office, for a chat.
How would you describe the current financial planning landscape, especially the different types of firms that are suitable for people who are ophthalmologist-scaled financially? (With $300,000 to $1 million-plus in annual income; $3 million to $15 million in net worth; average age of 50-plus years.)
Luke Daniel: You are right that the landscape can be daunting. The complexity of choices reflects the complexity of needs of investors seeking advice. “Wealth management” is a specific discipline within the investment advisory spectrum. Think of it this way: The ophthalmologists who will read this interview have very different needs than a teacher in their 20s or a newly retired engineer. Wealth managers focus on preservation, income and growth. So step one is to simply recognize that you have a complex set of needs.
In the current wealth management landscape, there are various types of firms suitable for individuals with ophthalmologist-scaled finances. The industry has witnessed a shift from traditional investment managers associated with brokers, banks and insurance companies to independent, fee-based registered investment advisors (RIAs.) These RIAs, acting as fiduciaries, often utilize custodians like Charles Schwab or Fidelity for investment management, while offering a range of financial planning services.
Within the RIA space, there exists a wide range of firms differentiated by assets under management, team size, investment strategies and planning services. Smaller firms may have limited offerings and resources, while larger firms with billions of dollars in assets under management might struggle to provide highly customized investment strategies.
For ophthalmologists seeking wealth management services, it is crucial to find a firm that can cater to their specific needs at their current life stage. Physicians at different points in their careers have different considerations, from wealth accumulation to wealth protection, tax minimization and legacy planning. Not all firms have the capabilities to address these evolving needs effectively.
As wealth grows, some physicians may initially utilize the services of custodians like Schwab or Fidelity, which have services for all levels of wealth. However, as financial complexities increase and investment assets grow, a firm offering customized investment solutions and in-house planning becomes more suitable. Later, as physicians accumulate more, their focus shifts to protecting assets, minimizing taxes and planning their legacy. Not all firms can adequately address these evolving needs.
Many RIAs employ a fee structure based on a percentage of assets under management. With this fee model, it is common for RIAs to have a minimum initial asset level requirement for clients to qualify for their services. For example, Lido serves clients with investable assets of $1 million or more. We focus on helping clients protect their wealth and provide comprehensive planning services, particularly in the areas of tax and estate planning. Our resources are positioned to meet the needs of reasonably successful, hard-working professionals.
Lido occupies a space between the large wirehouses (full-service firms like Morgan Stanley) and the small independents. We have more flexibility than most wirehouse advisors and greater capabilities than most independents.
Our family office-style approach means that every aspect of your financial life, from tax to legacy issues, short-term and long-term goals, income and liquidity, is at the heart of every investment decision. Lido can work with a client’s broader financial team to ensure everyone is on the same page. We also have substantial in-house financial planning capabilities, and our network of affiliated legal and tax professionals can streamline financial management and create closer coordination across an individual’s financial life.
We notice in working with MD clients that very few have a formal financial plan or a relationship with a financial planner or wealth manager. They will ask their friends and their CPA for retirement savings and investment advice, but it is often hit and miss, with a shortage of attentiveness and long stretches of neglect. Why is this? Why don’t otherwise smart people plan ahead or seek out advice in this complex area?
Daniel: There are a few possible answers to this. The first is that physicians are incredibly busy and often have exhausting schedules. Even doctors who have a passionate interest in investing are not able to find the time to seek out an advisor, much less consistently manage their own complicated financial lives. The second answer is that managing wealth is a highly specialized discipline within an increasingly complex investment universe. And the landscape has changed. Standard approaches to investment management no longer deliver historic results.
We believe that is why the smartest approach is to think of each of our clients’ financial lives as a kind of “business,” with our client as the chairperson of that business. Lido and our affiliated professionals act as the COO, CIO, CFO and other roles to create plans for the chair’s approval, execute and then report back to the chair in a structured way.
Studies have shown that both before and after accounting for management fees, only a very small fraction of active portfolio managers outperform major indices like the S&P 500 and Wilshire 5000. No less an authority than Warren Buffett has opined: “My advice to the trustee [caring for my wife’s money] could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.” So, what is the argument for using an active manager like Lido instead of an index fund?
Daniel: The performance results of many active investment managers are not great, and indexing does make sense for most portfolios. But the more complex the portfolio, the greater the need to manage the outcome with tools such as alternatives and select hedge funds, guided by defined outcome strategies.
That may sound unnerving to investors used to traditional thinking about stocks, bonds and cash. It sounds risky or untried. For the most part, however, investors are unfamiliar with these approaches because they have been out of their financial reach. Through our family office-styled infrastructure, we have access to strategies used by some of the largest endowments in the world and by ultra-wealthy families. Many of the strategies we use are conservative and opportunistic, with track records in endowment and ultra-wealth portfolios. They are not traditional active management.
Ophthalmologists are medical scientists. They thrive on data. Most ophthalmologists are conditioned by their professional training to be conservative and risk adverse. How does this innate “ophthalmic personality” factor into how they should select a financial planner and, in turn, how a financial planner should work with them?
Daniel: In working with physicians, we realize the financial planning process needs to be as comprehensive, transparent and straightforward as possible so they can feel confident that the solutions and recommendations offered are based on a thorough analysis of the data. Our team is data driven, just like doctors, and we are “data forward” when communicating with our clients. This allows clients to focus more on their patients and practices and less on their personal financial affairs.
Additionally, clients have access to their data in real time, giving them the information they need to make informed decisions about their portfolios and risk level when updates or modifications need to take place. We always take a customized approach to portfolio formation and strategy, tailoring our clients’ investments to their unique situation. Our goal is to create a strategy that maximizes their chances of success while minimizing risk.
For example, we recently worked with a physician who was very risk adverse because he and his wife lost significant wealth in the Great Recession, which had him pushing back his retirement and fearful of another market downturn. To address their concerns straight on, we did an analysis of their current investments and customized an alternate portfolio that included strategies to provide protection in the event of another major downturn, while participating in the market’s upside. We inserted the proposed portfolio into a financial plan to show them how they could retire earlier. The analysis made them much more comfortable.
It is normal in medicine to seek out a second opinion when the medical stakes are high or the patient wants the reassurance of hearing the same advice from a second expert. Is there a cognate of this in the financial planning world? How does this work?
Daniel: We firmly believe in a collaborative approach. Many of our clients have long-standing relationships with attorneys and CPAs and others they trust. Lido works with them to arrive at the best collaborative strategy and outcome. We never view these outside professionals providing competing or sometimes contrary positions to ours as potential adversaries. Like doctors and their patients, we view varying advice and opinions from outside professionals as part of a collaborative process to arrive at a result for the mutual client.
We typically take the lead in coordinating this process to take the pressure off the client, making the overall process less stressful. We will meet with all relevant experts and professionals so we can openly discuss the potential strategies available to the client. We welcome this approach, knowing that it is not a matter of which professional’s strategy is the correct one, but that in the end, the client received the best possible advice.
For example, after showing a physician client how the sale of their practice affected their long-term financial plan, we shared the results of the detailed plan with their CPA. This led to an in-depth tax planning collaboration with the CPA about the most efficient tax strategies to deploy to minimize the capital gains liability from the business sale. The sale of the business also created new estate planning opportunities that needed to be addressed as part of the plan to sell the business. The client met with our wealth strategies team to discuss potential wholesale changes to the estate plan so that selling the business and the creation of the estate plan would work together. The formation of a series of trusts was deemed the appropriate solution to accomplish the client’s objectives, and we worked with the client’s estate planning attorney to implement those changes. In the end, the client had all phases of their financial plan — the business succession, tax and estate plans — aligned and working together.
- Reference:
- Carlozo L. Can index funds replace an advisor? https://money.usnews.com/investing/funds/articles/can-index-funds-replace-an-advisor. Published Aug. 13, 2019. Accessed June 7, 2023.
- For more information:
- John B. Pinto is president of J. Pinto & Associates, Inc., an ophthalmic practice management consulting firm established in 1979. He is the country’s most published author on ophthalmology management topics, including John Pinto’s Little Green Book of Ophthalmology: Strategies, Tips, and Pearls to Help You Grow and Manage a Practice of Distinction, UP: Taking Ophthalmic Administrators and Their Management Teams to the Next Level of Skill, Performance, and Career Satisfaction (with Corinne Wohl), Simple: The Inner Game of Ophthalmic Practice Success, and Ophthalmic Leadership: A Practical Guide for Physicians, Administrators, and Teams. Available now for purchase at slackbooks.com. Receive 20% off with promo code PINTO20. He can be reached at 619-223-2233; email: pintoinc@aol.com; website: www.pintoinc.com.
- Luke Daniel, CFP, of Lido Advisors, can be reached at ldaniel@lidoadvisors.com.
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