FINANCIAL PLANNING FOR DOCTORS
Chapter 1 - Doctors are different
Where are the profitable practices
Financial planning and doctors
The rules for successful investing
GPs are the highest earning occupation group in Australia. The Australian Bureau of Statistics estimates the average full time adult earns about $73,000 a year. That’s not a lot, and many earn much less: income statistics tend to be skewed up by a relatively small number of (much) higher income earners. We do not know any GPs who only earn $73,000 for a full working week. Registrars start on more than this, and with overtime often earn twice this much in their first year.
Averages are deceptive, and exceptions occur, but a realistic range of average incomes for Australian GPs looks like this:
These incomes are competitive internationally: Australian doctors, including GPs, are amongst the highest paid in the world. These figures are also competitive with other professions: medicine is the highest paid occupation in Australia.
To give context, 2014 research from Melbourne University says only 1% of the population report taxable incomes of more than $211,000 a year, and those in the top 1% average $400,000 a year.
In summary, almost all working GPs are in the top 1% of income earners.
But many doctors do not appreciate this. A 2014 report from the Australia Institute explains that no matter how much people earn, they assume their incomes are about average. We see this phenomenon at work all the time: doctors definitely do not appreciate the height of their incomes, either at a personal level or as a group.
So please remember: medicine is the highest paid occupational group in Australia, with virtually every doctor working a normal week easily in the top 1% of the income population.
Can GPs control their incomes?
Many GPs choose to work less than a full working week to accommodate their preferred family lifestyle. Older GPs might cut back consciously to do other things while they still can. Many other GPs, often overseas trained GPs, are keen to set up their financial future and choose to work much more than a full working week.
The medical profession is flexible. It accommodates all choices. GPs can control the number of hours worked each week and there is no minimum or maximum hours, or sessions (a session typically running for between three and four hours depending on the practice).
Do you know what this means? It means standard financial advice has little relevance to most GPs.
This is because GPs are different. Their incomes are higher, more stable, more scalable and longer than any other occupation in Australia. This difference is a major theme of this book, and we will return to it and repeat it constantly. GPs are different to most people and this means their financial plans should be different too.
Throughout this book we return again and again to the characteristics of a GP’s income. But let’s summarise the characteristics of a GPs income here:
Height. GPs have high incomes, much higher than almost all other occupations. The average 40-year-old GP makes $200,000 to $300,000 a year. This is 3-4 times the national average of about $73,000 for a 50-year-old male and up to six times the average for a 50 year-old female.
Stability. GPs do not face unemployment. There is a shortage and GPs can choose their working hours and conditions in a way others only dream about. This is not to say GPs have it easy: general practice is stressful and gruelling. But, happily, most GPs can control their hours and are not compelled to work by the fear of never working again. Often GPs do not understand that. They bring the same (over) work ethic to their practice that they applied to their studies, making burn out a real possibility.
Scalability. Most GPs can increase their incomes whenever they want to. Most have found the patient rate and weekly time commitment that best suits them. Both can be increased on demand. For example, a GP facing a short term cash flow strain can arrange to work Saturdays, and increase income by as much as $2,000 a week, or more than $100,000 a year. Or see an extra half a patient per hour, for ten hours a day, to increase daily income by say $250, or $1,250 a week, or more than $60,000 a year. GP incomes are very scalable.
Length. Think of your patients. Most men are retired by age 58 and most women are retired by age 50, even though they do not want to be. Age discrimination and youth bias do not apply to GPs. GPs routinely keep working productively and happily into their sixties and seventies, probably cutting the hours back a bit, but otherwise its business as usual. This means the GP’s income has a greater longevity then most, perhaps as much as an extra fifteen or even twenty years on average.
Throughout this book we will repeatedly stress how the height, stability, scalability and longevity of the GP’s income creates great financial planning opportunities for GPs at all stages of their careers.
The GP’s working life should be paced and spaced to enhance their prospects of working at their preferred level of intensity into their seventies, maximising economic potential and contribution to society, while making sure there is plenty of time and opportunity for things other than work.
Balance is needed, and this is achieved by control. That is why wealth is so important: wealth confers control. It just takes time.
WHERE ARE THE MOST PROFITABLE PRACTICES?
As a general proposition the less fashionable metropolitan suburbs and most rural regions are more profitable. This is due to supply and demand forces and, in some cases, government incentives to encourage GPs to set up shop in these areas.
The western suburbs of Sydney and Melbourne are more profitable than the leafy more fashionable eastern and beachside suburbs. It’s not uncommon for GPs in these suburbs to make 50% more than the average. This can come as a shock to the doctors in the ‘better’ suburbs.
Rural areas are very profitable too, with lower labour costs, lower rent costs and government subsidies adding further to profitability. It’s not uncommon for GPs in these suburbs to make 100% more than the average. But they work for it.
This came as a great shock to a GP who had been commuting from a city to a rural location for the last nine years. After ten years he can work in metropolitan areas. His eyes popped when it was explained that St Albans in Melbourne’s west is twice as profitable as Kew in Melbourne’s east, and that he could buy a good practice for less than $50,000 if he wanted to.
FINANCIAL PLANNING AND GPs
Most financial planning books start out with a predictable list of ‘do’s and ‘don’ts. There is nothing wrong with these lists; they make good sense and, coupled with their wholesome and happy examples, even make good reading. In fact we recommend you read them: most contain at least one gem that can make a real difference to your financial fortunes.
For example, Paul Clitheroe in his classic book “Making Money” (Penguin 2011) provides “ten steps to financial security”. They are:
1. Have a plan
2. Budget and take control of your money
3. Save little and save often
4. Avoid punting and silly risks
5. Don’t plan to save cash
6. Plan to own your own home debt-free
7. Super is good – invest in it
8. Minimise tax
9. Protect your assets
10. Take advice if you need it
These are excellent rules, and they echo through this book, adjusted to the circumstances of GPs. If GPs follow these rules there is every chance they will end up wealthy. We basically say the same thing: take advice on setting a long term plan to invest regularly in safe growth assets, minimising tax and maximising superannuation and other asset protective strategies.
THE RULES FOR SUCCESSFUL INVESTING
Our rules for successful investing aim to maximise investment returns and minimise risk. These rules have been learned the hard way: Dover has decades of experience working with GPs and has seen first hand what can go wrong if the GP works with the wrong adviser.
The rules are:
1. Never trust anyone else with your money;
2. Anyone who is dogmatic about a particular product is probably a salesman. Avoid them;
3. Managed funds are typically poor ‘investments.’ Avoid them too;
4. The best investment is your practice, and the next best investment is your home.
Following these four rules may mean you miss out on one or two good investments. But you will also miss out on many more bad investments, and on balance you will do much better. The math is in your favor. It is like smoking: smoking does not kill everyone. But not smoking does not kill anyone. So, not smoking is a sensible rule. Let’s look at each of these four rules in turn.
Never trust anyone else with your money
There are many ways to lose money. They include fraud, stupidity, bad luck and bad judgment. One popular method involves trusting others with your money.
Trusting others with your money is a precursor to misfortune. If you trust someone often enough your trust will eventually be betrayed. Financial planners are no exceptions.
Do you know a lot financial planners can access their clients’ bank account user names and passwords? Think about it: at any time another person can log on to your bank account and transfer your money wherever they want. Sure, they probably won’t. But they might, and putting them in a position where they can is asking for trouble.
Other financial planners demand the discretion to buy and sell shares for clients, and to only tell them what they have done after they have done it. Day to day the client has no real idea where their money is, or is not. Sure, when the “managed discretionary account” was set up they were told “trust me, its blue chips only”. But read the fine print: their money could be anywhere, and there is nothing they can do about it.
Other financial planners constantly switch between funds on the same platform. Typically the platform belongs to the institution that controls the financial planner. Sounds innocuous enough, until you find out your adviser switched you from a safe, conservative low risk fund to a risky, high geared and high cost (read “bigger payments to planner”) fund, and the market has fallen by 5% which means you have lost 20%. Believe me, it happens more often than you will ever know.
Dealing with household names will not protect you. For example, recently CBA clients have suffered at the hands of rogue advisers who threw out the rule-book and rampaged through their clients’ funds, all the while being feted internally and even promoted by the CBA because they were bringing the money in. This matter escalated to a Senate Enquiry and there were even calls for Royal Commission. The CBA formally apologised to the 400,000 customers in July 2014. But its apology did not extend to ending “sales targets’ for its advisory staff.
Don’t expect ASIC to protect you: it took nearly three years for ASIC to start investigating the CBA. It took a Senate Enquiry and the threat of a Royal Commission for any real results to be achieved.
It’s not just the CBA. Most of the big financial institutions have been subject to enforceable undertakings from ASIC. These mostly relate to churning, ie recommending product switches not in the clients’ best interests to achieve higher fees. For example, refer to the article in the Sydney Morning Herald by Adele Ferguson and Chris Vedelago dated 18 June 2013 “The bank, the whistleblowers, the regulator and the lost savings”, and numerous similar articles
It is dishonest. But ASIC does not have the resources to stamp out dishonesty in the funds industry. The simplest way to avoid dishonesty is to not create situations where it can occur. You do this by staying in control of your own money: not trusting anyone with money is a basic principle of successful investing.
This does not mean a GP should not use advisers. Some of the best investors use advisers and use them well. They understand we all need coaching sometimes, and one person cannot know everything. But successful investors do not allow the coach to play for them. Successful investors make decisions themselves, stay in control and eliminate unnecessary middle-men.
Many commentators thought we would see the end of conflicted advice when the new Future of Financial Advice (“FOFA”) rules were announced. These rules started on 1 July 2013 with a best interests rule and a rule against conflicted remuneration.
Many of the original announcements have now been watered down, and although most commissions are banned, commission like payments abound, still.
In early 2014 the new Liberal government announced further changes to allow unqualified bank officers to be paid commissions on products provided they do not provide “personal advice,” that is, do not consider the personal circumstances of the client. It’s hard to see any logic other than a free kick to the banks at the expense of consumer protection.
A person who is dogmatic is probably a salesperson
There are thousands of investments out there, and it is impossible for anyone to know for sure which will be the best. Yet some “advisers’” refuse to admit any asset class other than the one they earn a living from has any merit. This includes financial planners who refuse to acknowledge that residential property has some attractions, stockbrokers who tell GPs to only buy shares, and real estate agents who insist that shares are always second best to property, particularly the properties they have listed for sale.
The institutional financial planners will be dogmatic because the institution that controls them only allows them to say certain things, and does not allow them to really advise clients. More than 80% of the 17,500 financial planners in Australia are controlled by an institution.
In 2013 Morgan Research interviewed 3,000 clients about who controlled their financial planner, and who was really “advising” them. The study recorded a poor understanding of the extent of institutional ownership, and the related institutional bias in product recommendations.
For example, more than half of Financial Wisdom’s clients considered their financial planner “independent” rather than “working for a financial institution”, despite Financial Wisdom being owned by the Commonwealth Bank. Similarly, nearly half of the NAB-aligned Godfrey Pembroke group’s clients perceived the group as independent, and 37% of Retireinvest (ANZ) clients and 33% of Count (CBA) clients believed their adviser was independent, respectively.
These results are consistent with an ASIC report dated 30 July 2013 on institutional control of the financial planning industry. ASIC says “around half” of the 21st to 50th largest licensees are “either wholly owned or majority owned by a product issuer” and that the “majority of licensees’ income is received from product issuers”.
ASIC says these two factors “give rise to both potential and actual conflicts of interest, especially where advisers recommend products issued by related parties”.
Managed funds are not good investments
Managed funds are an indirect way to own each of the three major asset classes, shares, properties and fixed interest, and the various derivatives of them. The managed fund industry is huge and much of its explosive growth has been driven by mandatory super contributions. The industry directly and indirectly employs tens of thousands of people, from research analysts to marketing consultants to financial planners.
Despite this, most managed funds have not beaten the market average over the last 40 years. Perhaps unsurprisingly, this is largely due to high operating costs. Even if a particular manager beat the market one year, it usually did not the next year. Picking successful fund managers is a challenging task. Few do it well. This is the basis of all criticisms of managed funds: that the fees payable for active management actually reduce the return to the investor when compared to what could have been accessed via a passive investment strategy.
Historically managed funds have not performed well. For example, the S&P Dow Jones released the SPIVA Australian score card for the 2014 year and noted that “there is no consistent trend in the yearly active versus index figures, but we have consistently observed that the majority of Australian active funds in most categories fail to beat the comparable benchmark indices over three and five year horizons”. The under-performance is due to the presence of fees. This includes fees to consultants, managers – and financial planners! Some of these fees are disclosed to investors and some are not. For example, few investors know about so called shelf fees. These are fees paid by product makers to AFSLs just to be listed on their approved product list, i.e. the list of financial products financial planners are allowed to recommend to clients. These fees get their names from similar payments made by manufacturers and distributors to super markets. Volume based shelf fees have been banned since 1 July 2013, but non-volume based shelf fees are still common.
As Clancy Yeates wrote in the Sydney Morning Herald on 20 May 2013: “Here’s something many fund managers would prefer wasn’t discussed: most of them are probably failing to create long-term value.”
Despite the billions the industry soaks up every year, statistics show that after fees, most funds underperform over the long term.
Take these figures from Mercer comparing big funds’ returns with the ASX 200. Before fees, the typical fund has posted returns of 7.4 per cent in the three years to March, which is a tad better than the index returns of 7.2 per cent. But this advantage is wiped out once annual fees – which are typically between 1 per cent and 2.5 per cent of assets under management – are taken into account. It’s a similar story for returns over the last year, while over five years pre-fee returns from the typical fund are ahead of the index by a fairly skinny 1.2 per cent a year.”
Some of these high costs are disclosed to clients but many are not. All are paid by clients. High costs mean few managed funds beat the index, and if they do beat it this year, it beats them next year. The fund management industry is inefficient.
The position is made worse by endemic institutional bias: 80% of Australia’s 17,500 financial planners are controlled by a handful of powerful financial institutions, principally banks and life insurance groups. ASIC regularly criticises the financial planning industry for a strong bias to products created by the controlling institution. Clients can never be certain whether they are getting genuine advice or a sales pitch when a controlled financial planner says “buy this managed fund”. ‘This managed fund’ is always an in-house fund. an ‘adviser’ controlled by the NAB simply will not recommend a managed fund owned by the ANZ. It cannot be the case that every institutional, controlled financial planner is working for the best fund manager. That is like saying that all drivers are above average.
This is why we recommend GPs stay in control of their investments and avoid managed funds and institutional financial planners. GPs should invest directly in property, shares and index funds to minimise costs, avoid conflicts of interest, minimise risks and achieve higher net returns. In the long run you will probably achieve average net returns, but your average net return will be better than everyone else’s average net return because you will have much lower costs and your money will be safer.
The best investment is a medical practice, and the next best investment is the GP’s home
We have seen thousands of financial plans for GPs. Not one has recommended a GP buy, create or develop a practice (other than ours).
This is an amazing omission, because the best investment for a GP is a practice.
No other investment performs as well. It does not matter whether you start from scratch or buy an established practice, operate on your own or team up with a group, are in the inner city, the suburbs, the country or a remote rural area. You will always be busy and have a never-ending stream of paying patients. Your practice will be your best investment.
We often see a GP buy a practice, or part of a practice, for less than $100,000, and almost immediately earn $100,000 or even $200,000 extra cash every year. This is the best rate of return they will ever earn. And it is safe and secure, and likely to last as long as they do.
This is the key to creating wealth: create an enduring source of extra cash to systematically invest in new investments, the home, other property and shares. These are owned in safe havens, such as super funds, trusts and companies to protect them from professional and commercial risks.
The most profitable practices are those that are, or are close to being, portfolio investments. Portfolio investment is where the owner is not actively engaged in the practice, apart from overseeing it via several key performance indicators, a structured reporting program and regular site visits.
The successful owner GP is happy for most patients to be seen by other GPs and instead focuses on providing quality services to those GPs.
Few practices become true ‘hands off’ investments. Medical life is not like that. Successful owner GPs delegate as many functions as possible to colleagues, the practice manager and other staff. But few stop seeing paying patients altogether. They love what they do and can’t imagine doing anything else. Successful practices are successful for a reason: it’s almost always the people involved.
THE RULES FOR SUCCESSFUL INVESTING
Most financial plans are a waste of time and money. They only deal with managed funds and insurance products. They do not deal with the really important assets, ie the practice, the home, other property, direct shares and so on. They rarely deal with real financial strategies based on long term coordinated plans to maximise financial outcomes and happiness amongst the wider family and across the generations.
To be blunt, they just flog second-rate managed funds to GPs. Most GPs are surprised to hear most financial planners are not allowed to recommend investments other than managed funds. Why? Simple: other types of investment do not generate income for the institutional owner.
Most financial plans ignore the practice
Where does most of a GP’s cash come from? Usually it is the practice. So what is the simplest way to increase cash flow? Make the practice more efficient. Time and money spent on your practice, as opposed to time spent in the practice, will generate the best investment returns.
A financial plan is not complete if it ignores the two major creators of wealth for GPs – the home and the practice. Yet most financial planners will not recommend these assets. They prefer clients not invest in residential property or their practices and prefer clients to instead invest in managed funds, so they can make more money.
Most financial plans ignore property
Financial planners rarely recommend residential property as an investment. In the few cases where they do, they usually recommend high rise apartments. Freestanding houses on their own block of land almost never get a mention.
Property has performed well as an investment over the last two decades. In the two decades to December 2015 it averaged 10.5% a year, making it the best performing asset class for this period (followed by Australian shares at 8.7% year).
Australian residential property growth has enjoyed extremely strong growth. Some have suggested that cracks are beginning to show. However, markets are cyclical, and it is the long term trends that investors should be focused on. Property should be viewed as a long term investment, at least 20 years. It is likely, but not guaranteed, that over this period Australian residential property will provide stable and positive returns.
Why do financial plans ignore property? It’s simple: the controlling institution does not get fees It’s blatant self-interest, at the expense of clients.
Most financial plans are not prepared for GPs
The traditional financial planning orthodoxies do not apply to GPs, largely due to the characteristics of GPs’ income: height, stability, scalability and longevity.
One classic mistake is to avoid risk by only recommending capital stable products after age 60. The aim is to avoid a short-term loss of capital, at all costs, because you do not have enough time to recoup that loss. The advantage is capital is protected in the short term. A capital stable product is predominately cash based, with perhaps with a little (say up to 20%) in shares and property. The disadvantage is over time inflation and tax will destroy the real value of the investment: capital stable strategies will not do as well as capital growth strategies in the longer term, say after ten years.
Capital stable products may suit the average 60 year old, since they are probably not working and are living on their savings, a pension or a mix of the two. They certainly do not suit the average 60- year old GP.
At age 60 most GPs have another 15 years of high income to go. They can ride out short- term capital losses. They will not need the capital for another 15 years. They can live off practice earnings and even save an extra $50,000 a year without any trouble. Low risk/low return investment strategies may suit some people. But they generally do not suit GPs.
Another example involves younger GPs and superannuation. Most financial planners say pay off the home loan before paying large super contributions. This is despite the clear mathematical advantage of extra super over extra home loan repayments. Their logic is that the age of 55, ie the earliest access point for benefits, is too far away and GPs, like everyone else, should concentrate on the here and now, the short term. Particularly with the economy fragile, the government cutting back spending and an ever present risk of unemployment. Most financial planners just don’t get it that GPs have a virtually guaranteed average income of $200,000 to $300,000 a year in perpetuity. There is a shortage of GPs. Younger GPs are in a great place. They can pay off the home loan and pay large super contributions, and be 100% confident they will not be unemployed any time soon. GPs can pay super and pay off the mortgage.
Most financial plans for GPs do not consider asset protection issues
Most financial planners are not qualified or otherwise competent to advise on asset protection strategies. We once came across a review of advice from a bank-aligned financial planner. It said interest on a margin lending facility would not be tax deductible in the GP’s family trust, and that the shares should be transferred to the GP to make sure the interest was deductible. The planner was fundamentally wrong about interest deductibility – the interest was deductible in the family trust. He also completely missed the point about protecting assets against patient litigation and similar risks: if the GP becomes bankrupt the assets in the family trust should be outside the reach of the trustee in bankruptcy, and safe for the GP’s family, or the GP’s retirement. We do not want to overstate the risk of patient litigation, but obviously it makes sense to not own any assets in the GP’s own name if at all possible.
Most financial plans for GPs do not aim for a high enough rate of return
Financial planners often tell GPs that if they average a few percentage points above the inflation rate they are doing well. They say a GP should not expect double-digit returns and that, in the long run, an average 4 to 6% pa is all one can reasonably expect. These expected rates of return are completely out of line with modern investment experiences. Rates of return on blue chip shares and blue chip properties have been significantly higher than this for many years, even after events like the GFC are factored in.
As to what is better, shares or property, the position is not clear, and most commentators tend to muddy it more rather than clarify or confirm. The comparison is not really sensible though: all shares are held for investment purposes, but most residential properties are not. They are held primarily for private purposes and investment is only a secondary purpose. Nevertheless when objective studies are encountered its amazing how blue chip shares come out nearly the same as blue chip properties, somewhere around 9 to 10% return, including capital gains, and tax benefits, every year.
The longer the study the closer the correlation seems to be. The ASX Long Term Investment Report July 2016 summarises the performance of each major asset class over the two decades to December 2015 as follows:
So why do financial planners and fund managers say GPs should expect returns just a few percentage points above the inflation rate, say 4 to 6%? Why don’t they tell GPs to expect long-term averages of 9 to 10% per annum?
The answer is simple: there is a difference between the returns the assets actually generate and the return that gets passed to the investor. This difference is the institution’s fees and commissions, and they do not want to highlight just how much they are charging. This difference, compounded over thirty or forty years, adds up to hundreds of thousands of dollars by the time the GP finally retires.
Most financial plans significantly underestimate the GP’s income security
There is a serious shortage of GPs. The shortage is Australia wide: there is a shortage in Double Bay, Dubbo, and everywhere in between. Virtually every practice is short staffed and would take on another GP tomorrow, if only they could.
In August 2016 the Australian Institute of Health and Welfare reported that the number of GP has not changed in the last 10 years, remaining steady of round 114 GPs per 100,000 people. With a high proportion of GPs over the age of 55, the Health Work Force estimated that Australia will face a massive shortage of doctors by 2025 when a large number of GPs are set to retire. You can read about this here: The Sydney Morning Herald, “More doctors becoming specialists but a shortage of GPS, AIHW report warns” (24 August 2016). Consequently, there are no unemployed GPs in Australia. This means there is plenty of work for GPs, and with the population getting bigger and older, this is not going to change for many years. In fact, the shortage will get worse before it gets better, and the new medical schools will take years to increase the number of new GPs able to practice unsupervised on their own.
Successful financial planning and investing is well within the abilities of most GPs. Simple low- risk strategies over time produce good results and create financial security.
What is the point of being wealthy? If you are to become wealthy, you have to understand why you want to be wealthy. There are many reasons for accumulating wealth. Most GPs will become wealthy by operating efficient practices: the market rewards good medicine and good patient outcomes. The practice income is first re-invested in the practice and then, once the practice is at optimal efficiency, invested in more passive investments, ideally the home, and then other property, direct shares and index funds owned in SMSFs, companies and trusts.
GPs are good investors, but they need GP-centred advice and reliable information. All GPs should:
work with an adviser who is not controlled by a financial institution, who provides objective advice and can act in the GP’s best interests;
maximise their income and tax profiles by developing their practices as businesses;
consume less than they earn, and invest the excess in a mix of diverse asset classes, skewed to producing non-taxable unrealised capital gains;
use spouses, family trusts, companies and SMSFS to protect investments and achieve better after tax rates of return;
invest in a well located good quality home;
prefer direct investments to indirect investments;
carefully use debt to maximise after-tax growth;
emphasis cash flow positive investments to increase net cash flow and decrease risk;
stay in control of their wealth at all times; and
avoid investing in anything that pays anyone a commission or something that looks like a commission, such as asset based fees. ‘