Not the Average Investor

For physicians to invest successfully, they should first understand the ways that they are unlike most US investors and choose to work with advisors who understand these differences. Ahead, we explain the differences in several key areas and examine how these factors affect a physician’s approach to investing and wealth management.

Physicians vs Most Investors

Income and Tax Liability

Doctors typically have an income level that far exceeds that of most investors in our country. The median household income in the US in 2020 was around $67,521.¹ Slightly more than 10 percent of the population had a household income exceeding $200,000,² which of course means nearly 90 percent 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 $400,000.³

This enormous income difference has implications in all disciplines of wealth management but is especially relevant in tax planning. The average retail investor cares little about tax planning because they do not have a significant tax problem. Compare the average US taxpayer’s effective federal income tax rate of 12.1 percent with the top marginal income tax rate of a physician. Many doctors find themselves in the top federal tax rate bracket (currently 37 percent). Add the net investment income tax of 3.8 percent and potentially state and local taxes, and one can easily recognize the importance of tax efficient investment strategies for doctors. Consider these three points:

• Outside of the April “tax season,” the financial media generally ignore taxes, yet it is top-of-mind for most physicians throughout the year.
• Almost all performance data for an investment fund show pre-tax returns, when post-tax returns are all that really matters to a heavily taxed investor like a doctor.
• Many financial products are designed for investors who are subject to a lower amount of taxes than physicians are.

Net Worth

Net worth is a financial differentiator. 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. These products or services are not designed to handle the increasingly complex circumstances of high-net-worth physicians. A doctor may own an interest in a surgery center, office building, or other piece of real estate, or have a secondary income from speaking engagements or consulting. The previously mentioned tools and products lack the sophistication to integrate the physician’s non-traditional situation into an appropriate risk-managed investment strategy or financial plan.

Amount of Free Time

Ask almost any physician what their scarcest resource is and the answer is likely to be “time.” The data back this up, as a Bureau of Labor Statistics report published in October 2019 reveals that the average non-farm work week in the United States was 34.4 hours. For “private-sector production and nonsupervisory employees,” it was 33.6 hours.⁴ Conversely, in 2015 the AMA reported that fewer than 15 percent of physicians worked less than 40 hours per week.⁵

Because of this lack of time, focusing on the financial, tax, legal, risk, and insurance issues that must be understood in order to adequately manage a family’s finances in general, and investments in particular, is a significant challenge. Add to this the consequences of managing a physician’s higher-than-average income and net worth in less-than-ideal circumstances and the issue becomes even more important.

We are not saying that physicians cannot or should not take an active role in their wealth planning and investing. However, compared to the average investor, physicians have much less time to do so and there is more at stake.

Highest and Best Use of Time

For the few physicians who have the spare time to actively invest on a continuing basis, the question becomes, does it make economic sense to do so?

Certainly, most physicians are able to research investments if they have the time. Thus, the most important question is not whether a physician can do-it-yourself (DIY) invest, but whether they should. In other words, would a physician be better off putting his or her time to its highest and best use—treating patients and being paid well to do so—and then spending a portion of that income to hire investment and wealth management expertise?

This highest-and-best-use analysis could just as easily be applied to other services, like preparing tax returns, repairing a leaky sink, and mowing the lawn. Each physician must balance his or her interest in doing these and numerous other tasks with the opportunity cost of spending time on endeavors that they can pay other people to do for less than their own effective hourly earnings. Some physicians are natural DIYers and will gravitate to performing such tasks themselves rather than delegating, especially when the tasks are low-risk and failure or suboptimal outcomes can easily be seen and remedied (the sink doesn’t stop leaking, the lawn isn’t well-mowed). But consider tasks where it is more difficult to determine if the job was done well, such as designing an investment portfolio. Basic economics may dictate that delegation makes financial sense.

Most physicians work around 200-250 days a year and make $250,000 to $1 million annually, so they earn between $1,000 to $5,000 per day.

If we estimate that the work involved in actively managing a portfolio, including researching public and private investments, assessing portfolio risk, trading and rebalancing, harvesting tax loss, and locating tax-efficient assets, would take one to three days per month, this equates to a time cost of between $12,000 and $180,000 annually.

This range is extremely large, with the highest-income physicians incurring the greatest opportunity cost because they are paid so well for the highest and best use of their time. Even for the lowest-income physicians, their time cost almost always exceeds what they would pay a professional to handle these tasks.

This “highest and best use” concept is also the one that dictates why physicians should not answer their own phones, book patient appointments, do the coding and billing, or perform medical tasks that a nurse or physician’s assistant can competently handle.

To avoid the time cost of doing their own financial planning and investment management, most physicians elect to outsource these services. However, if you make the decision to hire an advisor, that does not mean you can completely ignore your finances and become disengaged. Ask difficult questions, check for conflicts of interest, demand transparency, and expect regular communication.

To receive free print copies or ebook downloads of Wealth Planning for the Modern Physician or Wealth Management Made Simple, text AESMAG to 844-418-1212, or visit www.ojmbookstore.com and enter promotional code AESMAG at checkout.

Disclosure: OJM Group, LLC. (“OJM”) is an SEC registered investment adviser with its principal place of business in the State of Ohio. SEC registration does not constitute an endorsement of OJM by the SEC nor does it indicate that OJM has attained a particular level of skill or ability. OJM and its representatives are in compliance with the current notice filing and registration requirements imposed upon registered investment advisers by those states in which OJM maintains clients. OJM may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements. For information pertaining to the registration status of OJM, please contact OJM or refer to the Investment Adviser Public Disclosure web site www.adviserinfo.sec.gov.

For additional information about OJM, including fees and services, send for our disclosure brochure as set forth on Form ADV using the contact information herein. Please read the disclosure statement carefully before you invest or send money.

This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice, or as a recommendation of any particular security or strategy. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.

1. https://fred.stlouisfed.org/release/tables?eid=259515&rid=249

2. https://www.statista.com/statistics/203183/percentage-distribution-of-household-income-in-the-us/

3. https://weatherbyhealthcare.com/blog/annual-physician-salary-report

4. https://www.bls.gov/news.release/empsit.nr0.htm

5. https://www.ama-assn.org/practice-management/physician-health/how-many-hours-are-average-physician-workweek