What five financial steps should ophthalmologists take during the COVID-19 pandemic?
David B. Mandell | | Longer Read
Tensions have been high since the onset of COVID-19 for all investors, including ophthalmologists. For the first time ever, many ophthalmology offices closed in the spring of 2020, decimating practice revenue and personal income. On top of this came a stock market downturn in March, where values plummeted more rapidly than seen in decades. Though the US market rebounded well, eventually hitting new highs, much of this can be attributed to the federal government stimulus. Further the real economy continues to struggle and COVID hospitalizations and deaths are at record levels.
As a result of these factors, you might be among many ophthalmologists asking “What can/should I do to manage and protect my finances?” Here, I lay out five actions you can take to proactively manage your wealth during trying times. Ideally, you will do so with your trusted professional advisor – a financial planner, wealth manager, attorney, or accountant.
One: Focus on the long term – macroeconomics
One of the topics we encourage doctors to discuss with their trusted financial advisors is the long-term history of the US stock market and economy. Looking at 100+ years of data can help nervous investors reduce stress when seeing previous serious shocks to the system, such as world wars, the Great Depression, and the Great Recession, as well as subsequent recoveries. Doing this can help physicians apply the ancient wisdom “this too shall pass” to the financial arena.
Two: Focus on the long term – microeconomics
Perhaps more valuable than reviewing long-term macroeconomic history is re-examining your personal (microeconomic) long-term future. This means reviewing your long-term financial model with your financial advisor, using assumptions that reflect our new reality – ideally, through adjustable, iterative software where variables can be altered, and best/medium/worst cases saved for future review. Once again, most ophthalmologists who are years away from retirement may see that even the short-term pain of today will have a relatively minor impact on their long-term plans. This realization can be burden-relieving.
Another benefit of looking at one’s personal planning model is to re-focus on cash reserves and personal spending. In good times (such as the last decade), many physicians reduced their concentration on personal spending and maintaining a sufficient “rainy day fund.” Times likes these can lead to an appropriate re-emphasis on these two key elements of financial modeling.
Three: Make tactical investment changes… Or don’t
Moving from the long term to the short term, there may be tactical investment changes to implement during this crisis. For some, this will simply mean rebalancing asset class allocations to their long-term strategic percentages. As an example, an investor with a long-term strategic model of 70 percent stocks and 30 percent bonds and alternatives might see those percentages move significantly from those benchmarks during a stock downturn, especially if stocks lose value when bonds and alternatives remain steady or gain in value. Simply rebalancing back to the 70/30 split would require some trading – even if both the client and advisor agree nothing should change for the long-term model.
For others, who need cash to maintain their practices or pay personal bills, securities may need to be sold regardless of, or in addition to, rebalancing. Determining which assets to liquidate and how to minimize tax implications is extremely important in these situations.
Finally, many investors may make no changes to their portfolios. In all three cases, of course, physicians should be driven by rational decision-making, ideally with the assistance of a professional advisor.
Four: Make sure your financial advisor is acting in your best interest
Understanding the distinction between a financial advisor operating under a fiduciary or suitability standard is crucial – yet it is one that even many experienced investors do not comprehend.
Stated succinctly, one set of investment advisors operates under a professional standard that requires them to makesuitablerecommendations to their clients without having to place their interests below that of the client. This type of advisor can, for example, choose among a set of suitable fund choices for a client and choose the one that has the highest charges and pays themselves the highest sales commission. Doing so would not violate any professional duty – as the advisor has still provided a “suitable” investment.
A key distinction in terms of loyalty is also important, in that this type of advisor’s duty is to the firm he or she works for, not necessarily the client served.
In contrast, another set of investment advisors operates under the fiduciary standard, meaning they have a fiduciary dutyto their clients; they have a fundamental obligation to provide suitable investment advice and always act in their clients’ best interests. Using the same example above, if this type of advisor selected the most expensive among a choice of suitable funds based on a higher commission payout, they may face professional liability for doing so.
Even more profound is the fact that, for a fiduciary advisor, such a conflict typically will not even arise. Why? Because fiduciary advisors are typically compensated by a management fee and take no sales commissions on the financial products they may recommend for a client. In this way, the fiduciary advisor’s business model encourages the advisor to choose the lowest cost among equal options for a client – as they get absolutely no benefit from recommending anything else. In fact, as many fiduciary firms charge their fee based on their client’s assets, they are incentivized to reduce the client’s product costs as much as possible, so the client’s investments grow as rapidly as possible.
There is no better time than during this crisis to understand how one’s advisors make money and to whom they owe their duty. Ask the right questions and you will learn the answers.
Five: Protect against other risks
As we all deal with COVID-19, we are primarily attentive to the healthcare, practice, and personal financial risks directly impacted by the crisis. For those who have the capacity to do so, this can be a good time to focus on protecting against other risks as well. Physicians can re-examine their insurance policies, from disability insurance and life insurance to long-term care coverages for themselves or family members. Others may finally get around to legal planning that they have put off, including asset protection and estate planning.
The author recently published “Wealth Planning for the Modern Physician” – his first book for physicians in five years. To receive free print copies or ebook downloads, text OPHTH to 47177 or visit www.ojmbookstore.com and enter promotional code OPHTH.
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