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“I have a huge cash flow… but atthe end of the day it’s what youhave after expenses in yourhand… and what you do with it”
John, urologist.
DIAGNOSIS FOR FINANCIAL SUCCESS Creating Financial Independencefor Medical Specialists
Level 2, 52 Davenport Street
Southport, Queensland 4215
Level 10, 60 Carrington Street
Sydney, New South Wales 2000
T: 07 5591 7900
W: www.pertassoc.com.au
TABLE OF CONTENTS
1. EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. THE ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3. THE SOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4. CASE STUDY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5. YOUR PERSONAL CFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2
6. CHOOSING YOUR PERSONAL CFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2
7. ABOUT THE AUTHOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3
8. ABOUT PERT & ASSOCIATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3
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1 EXECUTIVE SUMMARY
Pert & Associates performed extensive research into the
financial well-being of medical specialists in public and private
practice. Their findings revealed a number of common themes
and challenges. Notably, many specialists find themselves
totally reliant on ongoing cash flow for their wealth and
financial independence. That means their biggest asset is the
money they will make in the future – an amount that
diminishes over time.
A key challenge for medical specialists – both public and private –
is to transform their cash flow into productive wealth.
PRODUCTIVE WEALTH – assets that generate income to fund retirement or
other needs. These are different to lifestyle assets such as a fine home, beach
house, jewellery or art.
Most practices are purely cash flow businesses – their value relies solely on the
skill and expertise of the medical specialist. That means the value of their
business cannot grow independent of their labour.
“The problem is we are sole traders. I guess that is a big challenge. We cannot build businesses.” Stephen, Oncologist.
With a typical medical specialist working in excess of 70 hours per week, they
are extremely time-poor. That makes tackling the important issues of cash flow,
investing and lifestyle protection difficult. Furthermore, specialists pride
themselves on being medical experts but may not have the time or inclination
to become financial markets experts as well.
“It’s not something you would want to worry about. You wouldrather go to the beach and spend time with your kids than sit down and read some financial papers.” Simon, Anaesthetist.
To overcome these problems, some medical specialists have found a way
to manage lifestyle expenses and transform cash flow into productive wealth.
In the following paper we outline how a dedicated professional can use a holistic
approach to help you manage your superannuation, debt, business structure,
taxation, risk, estate planning and lifestyle goals. In essence, become your
personal Chief Financial Officer (CFO).
“I want one phone number, one person that does everything forme…tax, insurance, super and investments… I don’t want fourpeople. It’s a headache.” Michael, Orthopaedic Surgeon.
Your personal CFO can establish an integrated, tailored approach and project
manage a team of experts in each field (tax, law, investments etc) to transform
your high income stream into independent wealth. The use of a fee for service
model (rather than commission) means you pay professional fees only for the
service you require.
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2. THE ISSUES
In 2007 Pert & Associates interviewed a wide range of medical specialists both
public and private to uncover the financial DNA of medical specialists. Detailed
below are some of the most common themes and financial challenges.
2.1 CASH IS K ING
For medical specialists, public or private, managing cash flow wisely is vital. It’s
a matter of simple arithmetic. While other businesses can generate goodwill and
grow their value independent of the owner’s participation, medical practices may
produce high cash flow yet build little or no equity over time.
“I have a huge cash flow…but at the end of the day it’s what youhave after expenses in your hand…and what you do with it” John, urologist.
2.2 TIME POOR
Daily work demands coupled with family life leaves most medical specialists
little time to focus on their finances.
“I work at least 60 to 70 hours a week, twelve hour days, Monday to Friday and on call in the public sector alternate weekends…the last thing I want to do when I am free is study financial markets.” Paul, Surgeon.
“Time pressure is a big thing with doctors, and I don’t think everyonewants to use their time to consider their financial future.” Ross, Vascular Surgeon.
By neglecting financial matters medical specialists may not be adequately or
appropriately addressing many wealth management issues. This can compromise
their long-term financial wellbeing. It may mean that it takes more years of hard
work to achieve financial independence than it should. Sometimes financial
independence is not achieved at all.
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2. 3 COMPARATIVE ADVANTAGE
Most medical specialists are passionate about their specialty and do not seek –
or have the time – to become financial markets experts. Despite high and
growing cash flows, it is not uncommon for medical specialists to lack the
financial skills they need to make the most of that financial wealth over time.
Paradoxically, their high cash flow gives them access to a wide range of
investments. These investments may be sophisticated and attractive but if
deployed without some kind of coherent investment strategy can achieve
disappointing, even counter-productive results.
“We need to invest our monies in real estate or stocks etc…and I think the majority of us have no idea how best to do this.” David, Dermatologist.
2.4 DEBT
This lack of financial skills is compounded by the way in which debt quickly
becomes a part of a medical specialist’s financial profile. It costs a lot of money
to become a medical specialist. Many specialists find themselves burdened by
the debt they incur through long years of study. Compared to many other
professions, their peak earning years occur later in life.
“By the end of training, most people I know are usually about$40,000 behind. If you go to somewhere like Bond University, you’re probably more than $100,000 behind.”Roger, Surgeon.
“Most people I know, when we finished we all have had five figure debts.” Denis, Ophthalmologist.
Debt quickly becomes a habit. In the early years of practice it is a hangover
from a long and expensive medical education. In later years, with a steady stream
of cash coming in and credit readily available, a habitually heavy debt load can
delay investment and have a corrosive effect on savings throughout a career.
“We always seem to be buying stuff we don’t necessarily need andalways have around $10,000 on the credit card.” Brent, Surgeon.
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“I feel like I am always behind the eight ball. I’ve always got $5,000on the credit card, until I get that paid off and then there is anotherbill and another bill…” Tim, Registrar.
“In the first ten years of practice, you’ve just been poor for so long – you justlive it up…” Gordon, A&E Specialist.
2.5 GOING PRIVATE
Pert & Associates interviewed a number of medical specialists in the public
system that are thinking about going into private practice. There are a number of
benefits to both public and private practice, and the biggest challenge in moving
from public to private surrounds cash flow.
“If I go private and I don’t earn an income in the first threemonths…the first 12 months are leaner, then I earn lots of money.” Ian, Paediatrician.
For medical specialists contemplating the move, careful consideration and
planning is needed to manage this cash flow situation wisely.
2.6 A CENTRAL POINT OF CALL
Our research showed that medical specialists spread their financial affairs across
a number of different and often uncoordinated providers, such as accountants,
lawyers, investment advisers, stock brokers and insurance agents.
“The trouble with using different experts for different issues, such astax, legal, investments etc, is that they aren’t working together to get youthe best overall outcome.” Robert, Dermatologist.
Many medical specialists commented that it would be far easier (and more effective)
to have one central point of contact to handle all financial management issues.
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2.7 BEHAVIOURAL BIASES
There is a whole branch of science known as behavioural finance which has
evolved to study interaction between human behaviour and economics1.
According to this theory, many human behaviours are hardwired and we often
act in ways which are not in our best financial interest. Often, motivated by fear
and greed, we respond erratically and irrationally, reducing our investment returns.
Some of the most common investor behavioural biases include:
2.7A OVERCONFIDENCE
Many professionals think that because they are good at what they do,
they will also excel in managing their investments. Medical specialists
have a tendency to overspend to fund an affluent lifestyle, assuming the
cash flow will last forever.
“Because we have access to high cash flow, it sometimes createsa lifestyle that’s beyond what’s reasonable for us.” Julie, Cardiologist.
2.7B RISK AVERSION
Academic research has shown that investors are more troubled by a loss
than pleased by an equivalent gain. However, by being so afraid of losing
money, investors can often reduce their opportunity for gain. In other
words, sometimes not taking risk can be risky itself.
2.7C REGRET
We tend to judge ourselves quickly if our actions do not immediately
generate a positive response. Fear of regret can lead investors to hold on
to losing investments for too long in the hope they will ‘come good’.
Alternatively, if you have invested for sound reasons, as part of a long-
term asset allocation strategy for example, it pays to stick to your
investment objectives rather than engage in costly, knee-jerk trading.
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2.8 MONEY PERSONALITY
According to the financial services research firm, CEG Worldwide LLC, investors
can be divided into a number of different money personalities. Family Stewards
for example, invest to provide for their family but are not deeply interested in
how investments work2. Many doctors have what is known as an Innovator
Money Personality. CEG research suggests Innovators are always looking for the
latest, leading edge investment products. Given the many years doctors spend
looking at the latest research and seeking better medical solutions, this tendency
is understandable. However, when it comes to investing, many doctors are prone
to chase the latest investment product rather than build and stick to a
disciplined, long-term investment strategy.
1Two of its pioneers, Daniel Kahneman and Vernon Smith received the 2002 Nobel Prize in Economics for their work.
2“High Net Worth Psychology” Russ Alan Price and Karen Maru File, 1999, USA 0-9658391-3-3
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3. THE SOLUTION
Unlike other businesses, ‘selling out’ is not a viable retirement solution for
medical specialists. So instead of banking on selling your private practice at the
end of your career, a wiser strategy is to manage the substantial amounts of cash
you are generating now to build income producing capital outside your practice.
Without this type of structure you are effectively “spending down” your wealth
in lifestyle expenses over time – and as you get older, you have fewer years to
make these earnings. As the chart below illustrates, while the present value of
your future earnings is your biggest asset, your lifestyle is your largest liability.
You also need to carefully manage your lifestyle expenses. In that way you can generate
productive wealth that offsets the tendency to ‘spend down’ your wealth over time.
The economic principle of comparative advantage suggests it is perfectly rational
for medical specialists to focus their time on what they are good at – that is
where their time is most valuable. The link that many medical specialists miss
is the need to outsource financial issues to an expert in that field – just as they
would with an IT specialist or an architect.
Essentially, medical specialists need help to make smarter decisions with their
money. They need a dedicated professional who can manage their finances and
allow them to stay focussed on their career.
They need a personal Chief Financial Officer (CFO).
A personal CFO is first and foremost oriented towards their clients. Working
for professional fees rather than product-related commission their interest is
in building long, mutually-rewarding relationships with clients whose wealth
expands over time. The following case study illustrates how a CFO can help you.
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CURRENT VALUE OF FUTURE EARNINGS OVER TIME FOR A MEDICAL SPECIALIST
TIME
CU
RR
EN
TV
AL
UE
OF
FU
TU
RE
EA
RN
ING
S
$$
LIFESTYLE ‘SPENDS DOWN’ EARNINGS
CLIENT PERSONALCFO
Banker – Debt Management
Super, DIY, Admin, Actuarial
Cash Flow
Solicitor, Estate Planning
Accountant, Tax Adviser
Investments
Broker
Risk Adviser
4. CASE STUDY (based on a real life example)
Simon is a recently qualified anaesthetist. He is employed as a VMO at a
hospital on the Gold Coast and does some private work with a local group.
He is married to Jennifer, a qualified physiotherapist, who is not currently
working as she is raising their two young children.
Last financial year Simon earned over $350,000 as a VMO. With the additional
private work he is now doing, his annual income is predicted to rise to around
$500,000.
In the past, Simon and Jennifer found it hard to do much long-term planning –
partly due to the financial demands of Simon’s study and raising two young
children. The recent strong cash flow has given them enough capital to look at
buying their first home, it has also raised some questions about their financial
wellbeing.
“Will we have enough money by the time we are 50 to make work optional?”
“What is the best structure for our investments?”
“Should we be putting money into Super?”
“What happens if one of us dies”?
“What happens if Simon is injured and cannot work for a period of time?”
“What is asset protection?”
Taking a friend’s advice, Simon and Jennifer set up a meeting with a personal
CFO to find answers and solutions to their questions.
To help them, the personal CFO:
1. Undertook a discovery process to find out their attitudes to money. This
process revealed that Simon would like to take a year out within the next
ten years to use his medical skills working for a charity overseas.
2. Identified their financial goals – which included buying the family home,
becoming financially independent by age 50 and having an income outside
of work which can fund their lifestyle choices.
3. Acknowledged that a number of financial ‘projects’ needed to be completed
to lay the foundation to reach their goals and objectives. This would require
a variety of outside experts (lawyers, taxation experts etc) – but that these
experts would be project managed by the personal CFO.
4. Coordinate their new home loan, taking into account their situation –
ensuring the property was purchased in the right entity in order to protect
their equity due to Simon’s profession.
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5. Engaged a risk specialist to put the appropriate level of insurance cover in
place. Since their greatest asset is the cash flow generated by Simon’s skills,
the right level of insurance was vital to protect Simon and Jennifer’s wealth in
the event of his death, disability or temporary ill health.
6. Establish an estate plan – the risk discussion led towards the important issue
of protecting their two young children. The personal CFO discussed issues
such as guardianship, asset protection measures, testamentary trusts and
enduring power of attorney. The personal CFO then contracted an estate
planning lawyer to create all required documentation.
It doesn’t end there. Projects planned for year two include the following topics:
7. Superannuation – this may involve establishing a DIY Super Fund.
8. Investing outside of superannuation and the family home, this could involve
establishing trusts for asset protection.
9. Strategies for funding private education for the children.
10. Regular review of cash flow to ensure productive wealth is being built to
achieve their goals.
11. Advice on trusts should Simon decide to move into private practice.
12. Securing the services of a book keeper should Jennifer decide to return to the
workforce.
Simon and Jennifer have laid the foundation for a successful financial future.
They have answers to their questions, but more importantly, they have a personal
CFO they can turn to who will work with them through whatever financial issues
life throws up.
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5. YOUR PERSONAL CFO
Your personal CFO will offer you a variety of benefits, including:
1. Project management – managing a team of experts while remaining focussed
on what is in your best long term interest.
2. Discipline – helping you avoid wealth-damaging biases and behavioural traits.
3. Longevity – they will be there for the long haul. The relationship between
you and your personal CFO is ongoing and built on trust.
4. A deep understanding of your core values, goals and objectives.
6. CHOOSING YOUR PERSONAL CFO
Your choice of personal CFO is critical. You need to be comfortable delegating
to them wealth management issues that directly affect your financial security and
that of your family.
You need to consider the following criteria when choosing such a professional.
1. Strong relationships with other professionals such as accountants, insurance
experts, estate planning lawyers and business consultants.
2. Comprehensive understanding of the specific needs of medical specialists.
3. Limited client numbers, to allow them the time necessary to build a sound
relationship with you and to understand what is important to you.
4. Fee for service rather than commission based. This allows the CFO to align
their interests with yours.
5. Client focus.
This last point is difficult to quantify, but not difficult to understand. You should
go with your gut feeling. In your initial meeting you might consider raising a list
of issues which you feel are important such as the points listed below:
1. Frequency of contact – how often does the personal CFO meet their
clients, speak with them on the phone and communicate via email?
2. Personal rapport – do you feel that you can have a good working
relationship with this person?
3. Time and patience – is he or she spending enough time with you
explaining issues and fully understanding questions?
4. Attention – does he or she listen to your concerns and take the time to
understand you and your goals?
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TIME
CU
RR
EN
TV
AL
UE
OF
FU
TU
RE
EA
RN
ING
S
$$
LIFESTYLE ‘SPENDS DOWN’ EARNINGS
CLIENT PERSONALCFO
Banker – Debt Management
Super, DIY, Admin, Actuarial
Cash Flow
Solicitor, Estate Planning
Accountant, Tax Adviser
Investments
Broker
Risk Adviser
7. ABOUT THE AUTHOR
Brian Pert is a director and adviser of Pert & Associates. His mission is to help
clients use their wealth to achieve their most important life goals, such as establishing
legacies for their families, contributing to their communities and pursuing their
passions. He specialises in helping medical specialists and Qantas pilots.
Brian is a certified Financial Planner, a status that requires comprehensive
knowledge and continuing education. He has a Degree in Economics and has
been advising clients on financial independence for more than 15 years.
8. ABOUT PERT & ASSOCIATES
Pert & Associates is a boutique firm with offices on the Gold Coast and in
Sydney. The number of clients is limited in order to ensure a high level of
personalised attention and direct access to the partners’ expertise.
Clients include medical specialists, Qantas pilots, professionals and high net
worth individuals.
Pert & Associates
Level 2, 52 Davenport Street
Southport, Queensland 4215
Level 10, 60 Carrington Street
Sydney, New South Wales 2000
T: 1300 730 381
E: enquiries@pertassoc.com.au
W: www.pertassoc.com.au
Do you want to know more about the unique issues facing medical specialists, or
about how to achieve long-term financial success?
Pert & Associates would be happy to discuss your specific situation with you and
help you work towards true financial independence.
IMPORTANT INFORMATION: This document has been prepared to provide you with generalinformation only. It is not intended to take the place of professional advice and you should not take actionon specific issues in reliance of this information. In preparing this information, we did not take into accountthe investment objectives, financial situation or particular needs of any particular person. Before making aninvestment decision, you need to consider (with or without assistance of an adviser) whether this informationis appropriate to your needs, objectives and circumstances.
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