The last thing on my mind during the end of residency and first years in neurosurgical practice was financial planning. Certainly, there were many people with keen interest in the earning power of a freshly minted neurosurgeon who were trying hard to sell me products and services. It was very difficult to discern honest advice and recommendations from self-interest driven by “back door” fees.
While there is clearly future earning potential at the end of residency, newly practicing neurosurgeons typically will complete training programs and begin practice well into their 30s, already with growing families. In fact, the transition at the end of training usually heralds a period of increased debt load for young physicians. Typically this involves consolidation of years of accumulated student loans along with new pressure to enter the housing market. After several years in practice, one must grapple with financing a practice “buy-in.” Overall, this leaves the young neurosurgeon in a difficult cash flow situation. There is little motivation and scant resources to address issues such as asset protection, retirement plan design, estate planning and investment management.
With little understanding of neurosurgeons’ career path, those in the financial services community often assume that all physicians, regardless of career stage, have excess cash flow and, hence, big targets on their chests. Frequently the compensation for sellers of financial services products plays a significant role in these transactions, but this role remains hidden to the physician-buyer. For example, a standard arrangement in the insurance industry is that agents are compensated for selling a policy based on a percentage of the client’s first-year premium. An example from the investment side is the use of proprietary funds. Often investment advisers receive better compensation for investing assets in funds owned or managed by the firm for which they work. The investor must understand this relationship and be comfortable that the risk and net return merit the investment.
Four Principles for Sound Financial Management
It becomes the responsibility of the buyer to sort the “essential” from the “nice, but not necessary” and the “patently absurd.” The following principles provide some information on a rational approach for a neurosurgeon at any career stage to manage a sound relationship with the financial services world.
Know what you need for today and will need for tomorrow. Any sound business must have a firm grasp of its operating expenses. This is a key to cash flow management. It is also true for personal finance. It is crucial to know the amount required monthly for all living expenses. This will, of course, determine the amount of surplus remaining for investment toward future needs. Looking to the future, one must estimate a retirement age and a projected income to sustain the desired standard of living. These estimates will be keys to investment and insurance strategies.
Realize one’s own mortality. By the time neurosurgeons finish residency, most have families who depend on their income. A primary purpose of any financial plan should be insuring protection of one’s family from untoward eventualities. This typically would be accomplished through a combination of insurance and estate and trust services. A secondary motivation to the young neurosurgeon is that rates will always be at their lowest while one is in good health and they typically can be locked in for many years.
Invest rationally and with an appropriate time horizon. It is important to appropriately fund retirement and college savings with a plan that factors in projections of risk, return, inflation and time horizon. Once these priorities are met, excess cash flow may then be used for alternative investment strategies and those with more risk.
Prioritize. In medicine, triage is a practice that is utilized to allocate scarce resources. In financial planning at any stage in life, it is important to use similar prioritization to allocate one’s financial resources. For example, the neurosurgeon just out of training might be in the market to lock in significant disability insurance, whereas a whole life policy or investment in oil exploration might not warrant the cash flow or risk involved. As one’s career progresses, it is important to reassess the prioritization to ensure that current and future needs will be met.
Sound financial planning is something that all neurosurgeons should pursue whether at the beginning, middle or end of their professional careers. This can be done with the help of a trusted, consultative financial adviser who can help to evaluate and coordinate appropriate investment goals and objectives. Ultimately it can be incumbent on the motivation of the individual physician to ensure a secure financial future.
Michael Sheinberg, MD, MBA, a neurosurgeon who practices in California, and Kelly Trevethan, CIMA, are financial advisers with the Physicians’ Financial Resource Group of Oppenheimer & Co., Inc., www.opco.com/pfrg.