"Despite all of their wealth, physicians are not fully satisfied with their financial situations"

Rx for Affluent Physicians

By John Bowen

One of the surest ways for advisors to become more successful wealth managers is to focus on serving a niche market—a single group of affluent investors with common characteristics. We know this both empirically from our research as well as anecdotally—we have seen it happen time and time again.

To see how this strategy can play out in the real world, we'll consider the wealth management challenges and solutions for one attractive niche market: affluent physicians. By understanding the issues involved with serving this group, you can see the types of strategies you might use to address the specific needs of your own niche market. Such broad understanding is crucial for any wealth manager. What's more, you'll see that the problems that physicians deal with may be similar to the challenges that many other affluent investors face.

KNOW YOUR NICHE

We define affluent physicians as doctors who are currently practicing, who have at least $5 million in net worth and who built that wealth themselves (that is, they didn't inherit their money). There are approximately 43,700 of these physicians practicing today, and this group has a total combined net worth of nearly $375 billion, based on estimates by CEG Worldwide's Senior Managing Principal, Russ Alan Prince.

According to Prince, who surveyed 941 affluent doctors, nearly all of them (88.2 percent) were age 45 or older. Also, most (84.3 percent) had a net worth of $5 million to $10 million. The rest (15.7 percent) were even wealthier, with more than $10 million in net worth.

And yet, despite all of their wealth, physicians are not fully satisfied with their financial situations. In fact, every single doctor surveyed had at least some level of dissatisfaction, and more than half said they were highly dissatisfied with their financial situation.

What's the problem here? The answer lies in the biggest concern among affluent doctors: losing their wealth. Consider that 95.1 percent of those surveyed said that losing their wealth is a primary concern. What's more, this issue intensifies along with physicians' level of affluence. A full 98.6 percent of doctors whose net worth exceeded $10 million said they're concerned about losing their wealth.

Where does this primary financial fear come from? It is the end result of the three other major concerns that affluent physicians say they have.

The effect of regulations on profits. Navigating the complicated regulatory environment is expensive, and the negative impact of rules and regulations is a major issue for 77.5 percent of physicians in our survey. Meanwhile, 85.3 percent of physicians said the effect of regulations on profitability will grow worse going forward.

Liability issues. The significant risk of malpractice lawsuits makes liability a key concern for 81.1 percent of these doctors. Roughly the same percentage (82 percent) said the difficult environment for liability issues will get worse.

Downward pressure on incomes. Given the previous two issues, it's not surprising that 85.8 percent of physicians said they're worried about their incomes being reduced.

Despite their wealth, affluent physicians clearly see themselves as financially fragile and are aware that the current medical environment is not on their side. This is important to know, of course, if you're serving this group. But the bigger point is this: You need to understand your chosen target niche on a deep level—recognizing the group's biggest financial concerns—if you're going to attract and serve those clients well.

The main financial goal of affluent physicians is to preserve wealth—which also happens to be the most important aim of many other affluent investors. This objective makes them ideal candidates for wealth protection services. A closely related secondary goal is transferring wealth. Wealth enhancement and charitable giving may be important to some members of this niche, but it's much less crucial to offer these types of services. Again, the lesson is to understand your target clients in order to offer the most value and avoid focusing your efforts on less vital areas.

WEALTH PROTECTION

Based on this knowledge, we know that wealth protection is key to high-net-worth physicians. Wealth protection involves strategies that ensure that people's wealth is not unjustly taken from them by creditors, litigants, children's spouses, ex-spouses and others.

In particular, effective wealth protection motivates creditors to avoid litigation. An additional goal is to minimize or eliminate the financial impact of a judgment against a physician. If a creditor does sue and win in court, wealth protection strategies can help ensure that most of the physician's assets are not legally available to satisfy the judgment, thereby reducing the overall financial burden.

So how are wealth managers who serve this affluent niche market addressing these asset protection concerns? Although each case is unique, we see several common strategies.

Use of state law exemptions. Some state laws contain exemptions that let physicians protect wealth from creditors' claims. These exemptions might include the cash value of life insurance, an annuity contract, a retirement plan or disability insurance.

Forms of ownership. Real and personal property can be held in many ownership structures that put the assets out of reach of creditors or in an unattractive form. One example is property owned by married couples in tenancy by the entirety. Translation: A creditor would need a judgment against both husband and wife to get at the assets.

Use of business entities. Setting up shop as a limited liability partnership or corporation can avoid liability.

Trusts. One type of asset protection trust is a "self-settled trust" in which the person who creates and funds the trust remains a discretionary beneficiary. The effectiveness of such a trust depends on each state's laws.

Gifting. Gifting assets or cash to a spouse, children or grandkids can do a lot to protect assets, especially if gifts are made when there are no issues with creditors. In addition, advanced gifting strategies such as charitable trusts and installment sales can protect wealth while also reducing or eliminating gift taxes.

WEALTH TRANSFER

Wealth transfer is the other main issue for affluent physicians, who can benefit from the advanced estate planning strategies offered by wealth managers. Although most physicians surveyed do have estate plans, most of those plans (52.4 percent) are more than six years old and are likely out of date due to changes in tax laws or the physicians' personal situations (births, deaths, divorce, etc.). Among the many transfer strategies available, wealth managers serving affluent doctors often focus on the following options.

Revocable trusts. To ensure maximum protection against creditors, doctors should use revocable trusts and keep their assets in those trusts for as long as possible. The trusts also should authorize an "absolute discretion" standard for distributions to gain maximum creditor protection.

Life insurance planning. Life insurance can provide liquidity for estates with assets that are tied up in real estate, art, etc. Policies should be owned in trusts, such as an irrevocable life insurance trust, because assets in these trusts are not included in the taxable estate.

QPRTs. Physicians often use qualified personal residence trusts to pass their residence or vacation home to heirs tax-efficiently by removing it from their estate.

GRATs. Investors can place assets in a grantor-retained annuity trust, receive an annuity payment over time and reduce the gift tax in the process.

Sale to a grantor trust. This strategy involves forming a grantor trust and selling assets to it in exchange for a promissory note. The trust pays back the note over a fixed period of years (usually at the lowest allowable interest rate). At the end of the term, the remaining trust assets are excluded for estate tax purposes.

The point here is not to provide all the details on these strategies. Nor am I encouraging everyone to target affluent physicians as the future drivers of their business growth. Instead, realize that the wealth protection and transfer challenges that wealthy physicians face are shared by many other members of the affluent community, and the strategies above may be the same ones that your niche needs. By deeply understanding your niche, targeting it effectively and implementing advanced wealth management strategies, you'll help your ideal clients achieve their most important financial goals—and you'll build a world-class business in the process.

Reprinted from: FINANCIAL PLANNING