Hospital Phantom Stock Plans

Posted on May 5, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

A Securities Granting Alternative

LaVerne L. Dotson; JD, CPA

As an alternative to granting an interest in stock or awarding stock options, a hospital or healthcare employer may establish a so-called phantom stock or shadow stock plan to its employees.

“Unit” Accounts

Under these arrangements the employee is treated as if he or she had received a certain number of shares of the company stock, but instead of actually issuing shares, the employer establishes an account for the employee.

The employer then issues “units” to the employee’s account. The number of units that the employee receives under such a contractual arrangement is pegged to the price or value of the company’s stock.

Once the units have been credited to the employee, the equivalent of dividends on these units are generally paid to the employee and are reinvested to purchase additional units or deferred with interest.

The plan normally provides for appropriate adjustment in the value of units if changes are made in the capitalization of the stock with respect to which the units are priced. Benefits under such a plan are usually deferred for a specific period of time or an event such as death or retirement. When benefits are payable, they may be paid in cash, either in a lump sum or installments, or in the form of stock.

Tax Considerations

The phantom stock is taxed like any other nonqualified deferred compensation plan. The granting of the phantom stock units is not taxable to the employee. When the cash or stock is distributed to the employee, it is taxed as ordinary income, equal to the amount of cash received or the value of the stock. If the stock distributed is subject to a substantial risk of forfeiture, it will be subject to taxation when such risk lapses in accordance with Code § 83(b).

Assessment

Because a phantom stock plan does not require the actual issuance of shares of the employer’s stock, it may enable the employer to offer much of the practical benefit of stock ownership without causing dilution of equity, securities law problems as to stock that would otherwise have been issued, or other problems such as risking the loss of S corporation status.

Conclusion

And so, what has been your experience with these so-called phantom-stock plans?

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Healthcare Organizations: www.HealthcareFinancials.com

Administrative Terms: www.HealthDictionarySeries.com

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Healthcare Workplace Advice Survey

Posted on May 2, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Employees Want Financial Planners and Benefit Advisors at the Workplace

Staff Writers

Survey Results: [Table]

	2004	2005	2006	2007
Financial Planners (401K) at Work	43%	43%	38%	49%
Benefits Advisors at Work	N/A	36%	33%	47%
Financial Planners (All Needs) at Work	38%	37%	30%	44%

Source: The 6th Annual MetLife Study of Employee Benefit Trends:

Findings from the National Survey of Employers and Employees: Metlife, April 2008

http://www.whymetlife.com/trends/

Assessment: Is this contemporary trend also true for hospitals, medical clinics and the modern healthcare workplace?

Conclusion: Please comment and opine.

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Financial Planning: http://www.jbpub.com/catalog/0763745790

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Healthcare Organizations: www.HealthcareFinancials.com

Administrative Terms: www.HealthDictionarySeries.com

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Margin Exchange Regulations

Posted on April 24, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Government, Brokerage and Margin Exchange Requirements

By William H. Mears, CPA, JD

Under the securities laws (the Securities & Exchange Act of 1934), the Federal Reserve Board is authorized to allow brokerage firms to lend against securities positions and charge interest, up to a legal limit, as outlined in Regulation T of the 1934 Act.

Regulation “T”

Under Regulation T, physicians and clients can borrow from a brokerage firm up to 50% of the long position value of their brokerage account. Under Regulation T, only securities listed on a registered stock exchange, the NASDAQ system, or certain approved over-the-counter stocks may be used in a margin account.

A physician investor who transacts in a margin account will be responsible for maintaining the equity in the account at the legal limit, i.e., the 50% level against a stock portfolio.

For example, if a physician investor has a margin loan of $500,000 against a $1 million stock account, and the value of the stock portfolio decreases to $500,000, the doctor-client will need to immediately repay $250,000 of the loan value, because the account no longer can support a $500,000 margin loan.

If the doctor-client is holding bonds in a margin account, the client may borrow under Regulation T up to 80% of the current market value of the securities. U.S. government and municipal bonds have even higher borrowing power.

Example:

Jim Hojo MD, owns a private healthcare equipment company that his father built into a $10 million business, would like to sell some of the equity of the company to long-time employees.

Jim is advised to sell 30% of his privately held company to an Employee Stock Ownership Plan. Jim was told that under Internal Revenue Code §1042, he will be afforded a tax deferral opportunity on the sale of a portion of the stock of the company to the employees. The delay in the recognition of the capital gains on the sale of a portion of the company to the employees is contingent upon compliance with certain criteria outlined in Code §1042.

Jim takes advantage of this transaction and, as advised, purchases domestic-issue floating rate bonds. He then borrows against the floating rate bonds in a margin account.

Because the bonds have a higher Reg T lending capacity, Jim is allowed to borrow 80% of the market value of the bonds. He takes his loan proceeds and invests in a diversified portfolio of equities.

If he had invested initially in stocks, his borrowing capacity against the stock position would have been limited to 50% of the market value of the account.

Failure to Maintain Regulation T Equity

If a doctor-client fails to maintain the Regulation T-required equity in an account, the client will get a “Reg T call” or a “margin call” from the brokerage firm. The Reg T call will require the doctor to meet the margin requirement through a deposit of cash or securities.

However, if the amount of the margin call is immaterial ($500 or less), the brokerage firm is not required to collect the additional margin requirement. Each brokerage firm will have house rules that further restrict the use and/or the availability of margin accounts.

Since securities in a margin account are held in a street name, a brokerage firm has the right to sell the securities if a Reg T or margin call is not met. Securities held in a street name are simply held for a customer’s account in the name of the brokerage house. If a margin call is not met, a customer will lose the securities in the account that are on margin.

Brokerage Credit Agreements

When opening a margin account, the physician investor must sign a credit agreement, which is not very different from any loan documentation, and a hypothecation agreement, giving the stock-broker the right to pledge the securities to a bank in order to provide for lending capacity. The loan consent agreement allows a brokerage firm to lend securities in a stock loan transaction.

Borrowing Capacity

To determine how much a physician-client can borrow, a series of complicated calculations must be made, and a number of key terms must be identified.

First, the doctor client’s equity in the account must be determined. The equity in the account will be the market value of the account less the debit balance (any outstanding debt). The long market value is the current market price of the securities in the account. The amount available for borrow will be limited by the Reg T restrictions, for example, 50% for securities. Whenever the market value of the securities in a margin account increases, the client will have increased borrowing capacity.

Next and conversely, whenever the value of the securities in a margin account decreases, the client will have a margin call. Excess cash in an account (cash from dividends, interest, or proceeds of sale of securities) will be included in the calculation of the margin call. An account holding cash will have increased buying power that cannot be reduced because of decreases in the market value of the account.

Finally, accounts that fall below the Federal Reserve Board requirements will be restricted in the execution of transactions. Stock exchanges also promulgate rules and regulations that must be complied with. The New York Stock Exchange and the National Association of Securities Dealers require an initial minimum equity of $2,000, or 100% of long market value, and a minimum maintenance requirement of 25% of the long market value [minimums may change without notice].

Assessment

The rules outlined above are for a long [owned securities] margin account. The rules for a short account [borrowed securities] are similar in that an uncovered (or naked) short margin requirement is still 50%, but a covered short sale has a Regulation T limit of 95%.

Conclusion

Have you, or a physician-client, ever been caught in one of these regulatory traps or “margin-calls”, and what was the outcome?

***

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Richard D. Helppie; CEO

Posted on March 10, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

FORWORD

Financial Planning for Physicians and Advisors

Medical management is already one of the most complex businesses, with advances in science, technology, and consumer awareness often eclipsed by regulation, rights, and financial restrictions.

Navigating a course where sound practice management is intertwined with personal financial security requires a blue print designed by subject matter experts. Financial Planning for Physicians and Healthcare Executives [third edition] provides that blueprint.

The timeliness of this book is underscored by the current state of the health care industry in the United States. Healthcare in the United States is, by design, a system of independent and interrelated organizations. Demand for health care services is escalating due to the demographics of an aging population, advances in medical technology and new courses of treatment. Concurrently, financial resources allocated to health care services are not rising as rapidly as the demand for services.

As a consequence of the unusual economics of today’s health care industry, physicians and health care professionals must plan financially successful professional practices and construct financial security in a manner that is markedly different from that of other businesspersons and professionals.

Financial planning for physicians and health care professionals is not intuitive, nor is it a logical extension of professional pursuits. Physicians are usually motivated by a need to serve humankind and by scientific and intellectual curiosity. Economics and finance are secondary to the pursuits of clinical excellence, service and scientific expansion.

Consider some of the financial aspects unique to health care providers: unlike most other businesses or professions, doing more does not necessarily translate into earning more; providing superior quality service does not necessarily translate into better prices for those services; and abandoning service lines or “markets” with inferior financial yield is anathema to the health care professional’s commitment to patients.

Peak earning years may also be shorter for health care providers than other professionals. Consider that physicians typically enter careers at later ages, often with larger debts from training. Some specialties may not lead a case until 10 years of practice, and many specialties have limited longevity. Financial survival skills are paramount for converting the limited earnings time period to personal financial security.

Financial Planning for Physicians and Healthcare Executives confronts the reality that business management in health care is decidedly more complex than most other businesses or professions. To illustrate, in what other industry can participants debate the simple question, “who is the customer?”

The same business management intricacy gives rise to an information model that is exclusive in its complexity. The fragmented-by-design health care delivery system, rising consumer expectations, and rampaging information technology advances all serve to compound the degree of difficulty in effective use of information technology.

The industry’s track record regarding information systems in terms of increased efficiency, ease-of-use and improved margins has been short of expectations. Information systems aimed at improving workflows, connecting to trading partners and taking advantage of new technologies are still in development. The opportunity remains attractive to information technology providers, as evidenced by a near-continual flow of business venture announcements from technology companies and various industry participants. While the information systems puzzle remains unsolved, the need for skillful management of information systems is an immediate imperative.

This book provides a description of communication systems, data storage and retrieval systems, and health care-specific data sets. Chapters declare that patient safety and quality of care depend on accurate, complete information. Moreover, information systems must reflect that the real-world events that are digitally stored are longitudinal in nature and that privacy and security requirements are paramount.

Government and payer-led initiatives to control health care costs and manage care have resulted in a multifarious regulatory environment. New legislation under consideration covering such areas as patient rights could create new liabilities for physicians and other health care providers. This book describes a medical office compliance program to help avoid the perils of non-compliance.

Of particular note is the new section on HIPAA. When fully implemented, HIPAA will require standard transaction sets, as well as privacy and security mandates. HIPAA legislation is rife with penalties for non-compliance. This book enlightens and instructs by providing a framework for operating in the expected HIPAA world.

Selecting a personal financial strategy requires contracting with other professionals. Just as patients are becoming more informed about a growing range of diagnosis and treatment options, physician providers are learning of a growing range of financial vehicles available to them.

In medicine, the “right” course of diagnosis and treatment is one that balances the risk, cost, time horizon, outcome and personal preferences of the patient. In the world of personal finance, the physician plays the role of patient to the professional advisor who may be from one of many sub-disciplines in the financial world – advisor, broker, insurance agent, attorney or accountant.

The physician must be more informed about the growing range of analysis and investment options in order to choose the “right” course that balances risk, cost, time horizon, outcome and his or her own personal style.

Richard D. Helppie
Former: CEO and Founder
Superior Consultant Company, Inc.
[SUPC-NASD]

Speaker: If you need a moderator or a speaker for an upcoming event, Dr. David Edward Marcinko; MBA – Editor and Publisher-in-Chief – is available for speaking engagements. Contact him at: MarcinkoAdvisors@msn.com

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Financial Planning & Plan Construction for Physicians

Posted on February 6, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

On Crafting a Personal Financial Plan [A Fundamental Overview]

By Dr. David Edward Marcinko; MBA CMP™

Editor-in-Chief [Executive-Post]

For a review of financial planning and financial plan construction for physicians, and all medical professionals, please read this important white-paper:

Fundamentals of Financial Planning and Plan Construction for Physicians

http://209.85.165.104/search?q=cache:ci42C7BBGiIJ:www.medicalbusinessadvisors.com/financial%2520planning1.doc+david+marcinko+mba&hl=en&ct=clnk&cd=77&gl=us

Conclusion

And so, after review, is this a DIY project or is it time to call in a professional? Of course, execution and continuous monitoring is the next step.

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Advisor Selection for Emerging or Suddenly Wealthy MDs

Posted on January 22, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Monitoring the “Professional” Advisors

[By Dr. David Edward Marcinko; MBA, CMP™]

An emerging or non-previously wealthy doctor may never have had a reason to develop a team of “professionals” to help manage his or her personal finances and/or affiliated medical practice businesss entity.Many areas of expertise such as tax planning and medical compliance, risk and investment management, or HR, practice succession planning and medical practice valuations may not be within the background, training, and health economic experience of the emerging or newly wealthy individual physician.

Required Protean Subject-Matter Mix

The first step in developing a single or cadre of advisors is identifying which specific services are needed. For the practicing physician today, this often includes a protean mix of expertise in:

· Banking and credit relationships

· Budgeting and debt reduction

· Employee benefits negotiations

· Practice business planning and practice organizational start-up

· Practice funding and cash flow

· Financial accounting and tax planning

· Managerial accounting and practice cost accounting

· Insurance planning

· Risk Management implementation

· Continuous practice management

· Practice compliance

· Human resource management

· Investment advice and implementation

· Medical practice equity building

· Mature practice health law and policy issues

· Medical practice valuation and appraisal

· Practice sale and succession planning

· Retirement plan administration

· Professional trustee appointments

· Estate planning and documentation; etc.

Advisor Characteristics

Next, the individual physician should write down the criteria that will be used for selecting these advisors. These criteria could include:

· Fiduciary capacity

·Medical specificity and expertise

· Educational degrees

· “Professional” credentials [many require just a HS diploma or GED]; age and experience

· Size of firm providing the services [agent, representative or owner].

·Compensation arrangements

·Location; increasingly less important; etc.

A written document should also specify the services to be provided by the advisors that outline not only the specific responsibilities of all parties, but also the amount and source of compensation. (Some advisors receive compensation only from their clients; others are paid only when they sell certain products – try to avoid the latter).

Avoiding the Hype

Additional factors for the emerging or newly wealthy doctor to consider are reviewed below. Finding the right match in advisors can be a difficult but not impossible task.

While many advisors may fulfill the doctor’s initial criteria, it also is important to secure the services of those with whom the physician can have a relationship based on (documented-legal) trust and professional interaction.

Because the emerging or newly wealthy doctor may have little experience in dealing with financial advisors, the doctor needs to be wary of the flashy, aggressive marketing hype that can accompany different types of advisors.

Physicians should look for fiduciary integrity, personality, extreme physician focused subject matter specificity and professionalism when selecting advisors.

Compensation Schemes

From the beginning of a relationship, it is important to establish a clear understanding of how an advisor is to be compensated.

Advisors who are paid a fee directly by their clients, based on time worked or the complexity of their services, are more likely to provide objective advice than are agents or representatives – who are paid to sell certain products.

Services delivered should be reviewed on a systematic, regular basis as outlined in the engagement agreement. The time period for review will vary, depending on the services being provided.

For example, in working with a money manager, it may be appropriate to schedule quarterly review sessions to check investment performance, expected changes in asset allocations, the types of investments made, and so on. Many however, feel this may be too often and merely serves as a pretense to conscientious-industry on the part of the advisor.

With an insurance agent, a bi-annual review may be sufficient for checking on policy coverage and premium costs.

Evaluating the Advisors

Ask advisor level of experience in dealing with other physicians in similar settings. And, consider employment setting.

For example, a large firm provides continuity and depth, while a small firm often results in more personalized, individual attention. Most broker-dealers [BDs-wire-houses] use non-fiduciary stock-brokers [aka vice presidents, wealth managers, investment advisors, etc]; while most Registered Investment Advisor (RIA) firms are true fiduciaries.

Ask about confidentiality as well as transparency.
Do not sign arbitration agreements; if possible. You do not want to give-up your right to sue as the deck is stacked against the plaintiff by most arbitration panels.
Check references that are not offered by the advisor. Make sure they are long-term clients.
What are the advisor’s professional affiliations? For instance, what professional organizations or societies does he or she belong to and what do their codes of ethics require? Nevertheless, remember ethics is not fiduciary capacity which entails a much high legal duty (i.e., to the doctor-not the representing firm); etc.

Conclusion

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Bequest Management

Posted on January 21, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Doctors Dealing with Financial Favor Requests

Staff Writers

Physicians who have earned wealth – or recently acquired new wealth – often receive numerous requests from family, friends, acquaintances and others for financial assistance.

These requests may take the form of requests for loans, gifts, contributions and/or “investments.” They often come at a time when the doctor is most vulnerable to requests for assistance, especially when resources are new or far in excess of his or her previous experience.

Just Say “No” – Initially

It is often advantageous to make no transfers [whether as outright gifts or investments and loans from which there is the expectation of an ultimate return of the funds] until after both short-term and long-term cash flow models have been constructed.

Within the framework of existing or the newly wealthy doctor’s short-term and long-term needs, transfers can then be considered and/or incorporated. With a cash flow model, total annual transfers can be forecasted and planned for, much the same as with any other anticipated disbursement.

Example:

To illustrate within the context of the short-term and long-term projections of the newly wealthy, the doctor may want to incorporate -say- $50,000 per year of intra-family assistance. Both the timing and amount of this type of disbursement can be planned for, in much the same way as the purchase of replacement automobiles can be planned.

Construct an Action Plan

Having a definitive, written action plan [or charitable foundation] can reduce the emotional demands placed upon a newly wealthy individual.

A written plan provides the framework for making informed, timely, disciplined transfers, rather than mere reactions to emotional pleas for assistance.

For example, the affluent doctors may find it advantageous to adopt a policy that no transfers will be made until at least six months after the first request. This waiting period can provide the doctor time to consider whether or not the transfer meshes with his or her long-term desires and investment policy.

Retain a “Third-Person” Intermediary

It also is common to use a trusted financial advisor – or personal health economist – as an initial screening mechanism for requests, as a sounding board to discuss merit, and as a potential “bad guy” onto whom the ramifications of denying a request can be shifted.

Just as this advisor or third-person intermediary can play an important role in being the deal breaker when appropriate in the corporate setting, he or she can be equally effective in taking the blame for the doctor, who then can maintain personal interaction with the party requesting a transfer.

Depending on the personality of the wealthy physician, the intermediary can also serve an important role in preventing the individual from sharing too much.

Adhering to established formal written guidelines [IPS = Investment Policy Statement] that outline the parameters of an individual’s long-term financial plan can be an effective backstop to the untimely depletion of an asset base.

Transferring the Right Way

When financial or other asset transfers are made they may take the form of outright gifts, investments, or loans. And, always be sure to do it correctly, formally and thru your intermediary. For example:

Gifts must be examined in the context of associated gift tax liabilities.
Investments should be accomplished within the framework of the individual’s written investment objectives document.
Personal loans should be implemented as legally enforceable transactions.
Don’t forget charitable intent and philanthropic giving.

Conclusion

Feel free to comment and discuss your experiences with the above?

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Celebrating a Physician’s Financial Windfall

Posted on January 20, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Controlling the Euphoria of Newly Acquired Wealth

Staff Writers

A physician’s spending patterns can be drastically altered with the receipt of a financial windfall. Caught up in the euphoria of sudden riches, newly wealthy doctors, as with most people, often purchase new homes and buy flashy sport cars, boats, airplanes and jewelry, etc.

Some may even be driven to fulfill the message of a common bumper sticker: “He who dies with the most toys wins.”

Cash Flow Management is Key

For these medical professionals, current cash flow management takes on a new importance. Adequate resources must be set aside to fund future needs, or else fewer resources will be available in the future to fund an affluent lifestyle. If resources are depleted, the doctor may be forced to reduce spending to the pre-wealth level.

The lucky physician and his/her health economist – or physician focused financial advisor – should construct projections of expected net worth accumulations to contrast the long-term impact of current consumption with saving and reinvestment at various levels. These models can be used to educate the newly rich about the implications of drastically changing their lifestyles.

Consider a “Spending-Hiatus”

The physician should also consider a “spending-hiatus” on major expenditures or changes in lifestyle. It is a good suggestion that the newly wealthy make no changes in employment – medical practice – housing, or make major acquisitions for twelve months.

Such a “cooling off” period allows the physician to make long-term plans before consuming a large portion of the wealth.

Example:

Dr. Mary Jones recently won the lottery and hired a health economist for advice. As a jackpot winner, she will receive $150,000 each year for the next 20 years.

The economist suggested that in the first year she use not more than $35,000 to purchase new “things” and that she should not change her employment until after twelve months. She should not purchase a new home until she receives the lottery proceeds for the second year. Loans and gifts to family members should be kept within the $35,000 “things” budget until the proceeds for the third year are received.

Assessment

By keeping a deliberate and controlled attitude toward spending, Mary has time to develop a new attitude toward money. This includes developing a long-term plan for dealing with the wealth, while avoiding immediate decisions that cannot be easily reversed.

Don’t Forget Tax Planning

The newly wealthy doctor also must plan for a potentially large income tax obligation in the first year. Depending on the source of the wealth, the new wealth can create the first significant tax liabilities that the physician has ever incurred. The newly wealthy often overlook the tax burden that comes with their new assets.

For example, when a medical practice owner – or physician executive – sells a closely held clinic valued at $5 million, the true resource available to the owner is only half that after taking into account the related federal and state tax burden. A stock portfolio with a trading value of $1 million is actually worth less when the related taxes are subtracted on liquidation.

Developing a short-term budget for disbursements can also help the newly wealthy maintain control over his/her personal, real and financial assets?

Although it may no longer be necessary to strictly watch each dollar that is spent, it is important to implement total preset levels of spending within specific categories.

Practice Employment

For a newly wealthy doctor, continuing to work after receiving a windfall is more than just a financial decision; it may be a life-goal. After developing a long-term net worth and cash disbursement model, he or she can make an informed financial decision regarding continuing to practice. A purely financial decision, however, does not take into account the emotional and psychological ramifications of significantly altering one’s professional standing and social lifestyle by quitting the profession.

The advantages of continuing to practice include the social support of involvement with one’s professional or vocational peers, self-fulfillment and the full utilization of available time, experience and prior education. Medicine after all, is still a noble professional that is highly regarded.

The advantages of not practicing include having time available to pursue non-income-producing activities, such as spending time with family members, traveling, volunteering for nonprofit healthcare organizations, practicing pro-bono and teaching; etc.

Conclusion

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Investment Policy Statement Construction

Posted on January 4, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Developing a Sample IPS Document Template

[By Clifton McIntire; CIMA, CFP®]

[By Lisa McIntire; CIMA, CFP®]

Here is an abbreviated sample Investment Policy Statement [IPS] template for a healthcare entity, clinic, private physician or hospital endowment account; posted by “Ask-a-Consultant” subscriber request.

Introduction

An IPS typically contains the following sections, at a minimum. It may be a 5-15 page document for a single physician investor, or a 50-100 page tome for a hospital endowment fund.

Statement of Purpose

The purpose of this section is to guide and direct physician managers in the investment of hospital endowment funds. You want details about goals and objectives, as well as the performance measurement techniques that will be employed in evaluating the service rendered by the physician managers.

Realizing that your overall objective is best accomplished by employing a variety of management styles, you will adjust your asset tolerances and permissible volatility to incorporate specific doctor-manager styles.

Statement of Responsibilities

To achieve overall goals and objectives, you want to identify the parties associated with your accounts and the functions, responsibilities, and activities of each with respect to the management of fund assets.

Physician managers or financial consultants [FC] are responsible for the daily investment management of Plan assets, including specific security selection and timing of purchases and sales.

The custodian is responsible for safekeeping the securities, collections and disbursements and periodic accounting statements. The prompt credit of all dividends and interest to our accounts on payment date is required. The custodian shall provide monthly account statements and reconcile account statements with manager summary account statements.

The physician executive or financial consultant [FC] is also responsible for assisting us in developing the investment policy statement and for monitoring the overall performance of the Plan.

Investment Goals and Objectives

The asset value of the funds, exclusive of contributions or withdrawals, should grow in the long-run and earn through a combination of investment income and capital appreciation a rate-of-return in excess of a specified market index for each investment style, while occurring less risk than such index.

It is recognized that short-term fluctuations in the capital markets may result in a loss of capital on occasion, commonly expressed as negative rates of return. The amount of volatility and specific frequency of negative returns shall be detailed for each investment style. We will provide specific numeric targets by which we will measure whether or not objectives have been met.

The investment policy of the Plan is based on the assumption that the volatility of the portfolio will be similar to that of the market. A specific index or combination of indexes will be assigned to each manager based on the class of securities and style of selection to be employed. The physician consultant or FC will determine an overall index for volatility and asset allocation within the Plan as a whole.

It will be the duty of the physician or FC to monitor this section closely and advise us of necessary changes to comply with our overall policy. We expect that the accounts in total will meet or exceed the rate of return of a balanced market index comprised of the S&P 500 stock index, Lehman Brothers Government/Corporate Bond Index and U.S. treasury bills in similar proportion to our asset allocation policy.

Recognizing that short-term market fluctuations may cause variations in the account performance, we expect the combined accounts to achieve the following objectives over a three-year moving time frame:

The account’s total expected return will exceed the increase in the Consumer Price Index by 7.0 percentage points annually. Actual returns should exceed the expected returns about half the time. Expected returns should exceed actual returns about half the time (i.e. if the CPI increases from 5.0 percent to 7.0 percent, then expected return should exceed 9 percent).
The total annual return of the account is expected to exceed the average CPI for the year by an absolute of 3.0 percentage points (i.e. if the average CPI is 5.0 percent, then the expected annual return should exceed 8.0 percent).
The average total expected return will exceed 10 percent annually.

Suggested Performance Comparison Indexes

Style	Index
Small Cap Growth	Russell 2000 Growth
Medium Cap Value	Russell Medium Cap Value
Small Cap Value	Russell 2000 Value
Growth	Russell 1000 Growth
Value	Russell 1000 Value
Tax-Free Bonds	Lehman Brothers Municipal
Taxable Bonds	Lehman Brother Govt/Corp
Blended Account	S&P 500/ Lehman Brothers Govt/Corp

Proxy Voting Policy

The physician manager or FC shall have the sole and exclusive right to vote any and all policies solicited in connection with securities held by us.

Trading and Execution Guidelines

Trading shall be done through a brokerage firm. However, this request should in no way at any time affect the performance of accounts.

Instruction to execute transactions through a brokerage firm assumes that their service is equal to, and the rates are competitive with, other nationally recognized investment firms.

Additionally, it is understood that block transactions or participation in certain initial public offerings might not be available through a primary broker. In this case the manager should execute those trades through the broker offering the product and service necessary to best serve our account.

Social Responsibility

No assets shall be invested in securities of any organization that does not meet the standard for socially and morally responsible investments we establish and communicated separately in writing to our physician investment manager.

It is the responsibility of the physician or FC to maintain a list of such prohibited investments with us and to inform the respective managers of this list.

Asset Mix Guidelines

It shall be the policy of the foundation to have the assets invested in accordance with the maximum and minimum range for each asset category stated below.

This section applies to our overall account as monitored by the physician consultant. Separate asset category guidelines will be provided for multiple physician managers, according to specified style and standard deviation tolerances.

ASSET	MINIMUM	TARGET	MAXIMUM	REP
CLASS	WEIGHT	WEIGHT	WEIGHT	INDEX

Equities	50	60	70	S&P 500/FRC 2000 Index
Fixed Income	25	40	55	LB Muni/LBGC Inter
Cash & Equiv	0	0	30	90 Day Treasury

Portfolio Limitations

The following are general requirements of the account as a whole. These specific limitations would be adjusted for a different medical manager or FC whose performance expectation would make it necessary for us to expand on our definitions.

Equities:

Equity securities shall mean common stock or equivalents (American Depository Receipts plus issues convertible into common stocks).

Preferred stocks with the exception of convertible preferred share are considered part of the fixed income section.

The equity portfolio shall be well diversified to avoid undo exposure to any single economic sector, industry group, or individual security. No more than 5 percent of the equity portfolio based on the market value shall be invested in securities of any one issue or corporation at the time of purchase. No more than 10 percent of the equity portfolio based on the market value shall be invested in any one industry at the time of purchase.

Capitalization/stocks must be of those corporations with a market capitalization exceeding $250,000,000. Common and convertible preferred stocks should be of good quality and listed on either the New York Stock Exchange [NYSE], American Stock Exchange [AMX] or in the NASDAQ System with requirements that such stocks have adequate market liquidity relative to the size of the investment.

Fixed Income Investments:

Types of securities of funds not invested in cash equivalents (securities maturing in one year or less) shall be invested entirely in marketable debt securities issued either by the United States Government or agency of the United States Government, domestic corporations, including industrial and utilities and domestic bank and other United States financial institutions.

Quality: only fixed income securities that are rated BBB or better by Standard and Poor’s or Baa by Moody’s shall be purchased.

Maturity: the maturity of individual fixed income securities purchased in the portfolio shall not exceed thirty years.

No more than 30 percent of the fixed income portion of the portfolio may be placed in these lower rated issues. The average quality rating of the fixed income section shall be grade A; or better.

Restricted Investments:

Categories of securities that are not eligible without prior specific written approval of the physician investor, healthcare entity, clinic or hospital foundation include:

Short Sales
Margin purchases or other use of lending or borrowed money
Private placements
Commodities
Foreign Securities
Unregistered or Restricted Stock
Options
Futures

Administration

The custodian will be responsible for settling trades executed by the physician manager in our accounts. From time to time, we will request disbursements from the accounts. Checks covering these requests must be mailed to us on the date of the request providing telephone notification is received before 2:00 pm; EST.

Performance Review and Evaluation

Performance results for the physician manager or FC will be measured on a quarterly basis. Total fund performance will be measured against a balanced index posed of commonly accepted benchmarks weighted to match the long-term asset allocation policy of the Plan.

Additionally the investment performances specific for individual portfolios will be measured against commonly accepted benchmarks applicable to that particular investment style and strategy.

The physician investor or FC will be responsible for complying with this section of our policy statement. The managers or FCs shall report performance results in compliance with the standards established by AIMR (Association for Investment Management and Research); now the CFA Institute. Reports shall be generated on a quarterly basis and delivered to us with a copy to us within four weeks of the end of the quarter.

Communications

Copies of all transactions will be maintained on a daily basis and will conform to our Investment Policy Statement. Monthly statements for each of the accounts will detail each transaction and summarize the account identifying unrealized and realized gains and losses.

A formal meeting will be prepared quarterly by the consultant and delivered to us within six weeks from the end of the quarter. The report will review past performance and evaluate the current investment outlook and discuss investment strategy of the physician manager. These reports will compare the performance of the manager with the respective market benchmarks measuring return and volatility and compare the managers with their respective peer groups.

Conclusion

Of course, an IPS can include or exclude almost whatever you – or your institution’s governing board – may wish.

Finally, any professional financial manager or FC will be required to forward to you the SEC Form ADV Parts 1 and 2 annually, or at any interim point the ADV is substantially revised.

Remember to use a fiduciary financial consultant and/or physician-focused and/or appropriately degreed and/or licensed CPA, CFA, RIA or CMP™. Investment results should never be guaranteed!

QUESTION: Does your hospital institution, medical practice, clinic or healthcare business entity have an ISP; more importantly – do you? Please comment.

Conclusion

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Front Matter with Foreword by Jason Dyken MD MBA

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Children with Special Needs

Posted on December 14, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

Types of Related Trusts

Staff Writers

A trust can be established to insure that funds are available for a disabled child’s lifestyle. If funds are left directly to a physician’s child at the age of majority, Medicaid is lost until their funds are spent down. The type of trust chosen is therefore critical.

Medicaid, Payback or OBRA 93 Trust:

First authorized by the Omnibus Budget Resolution Act of 1993, allows the trust for pay for non-essentials. The specific language must be written in to the exact letter. Upon the death of the child the Medicaid bill is repaid from the funds remaining in the trust, and thus the Medicaid and SSI benefits continue to be available to the child during her lifetime. The payback trust is more advantageous when established at an early age. The funds in the trust can then be stretched out to last over an extended period, hopefully the child’s lifetime. Here are two examples where such a trust is an effective vehicle.

In the first case, a payback trust is set up for a 21-year-old with $100,000. During his lifetime the Trust spends $92,000. The Medicaid bill is $75,000. Medicaid receives the remaining $8,000 and the bill is considered paid in full.

In the second case, a payback trust of $350,000 is set up for a 35-year-old. Upon the child’s death, the trust has assets of $225,000 and the Medicaid costs due are $75,000. The trust then meets its Medicaid obligation and the remaining $150,000 is available for other beneficiaries.

Other effective trust vehicles include a community trust, master trust and special needs trust, each with its own set of rules.

Community Trust:

This trust is managed by a community foundation of volunteer trustees so the issue of dealing with trustee death is erased. This trust vehicle greatly expands the window of opportunity to those who may not have the time, expertise or funds to establish a private trust, to receive the benefits of a trust.

Master Trust:

May be established by a community or by an organization and is administered along the lines of a Community trust.

Special Needs Trust:

This trust may maintain Medicaid and Social Security benefits, without having the payback clause. Unfortunately, this trust is sometimes challenged as it entails more risk than a payback trust and must be considered carefully before selection.

For example, a situation where this may be put in place is when gifting by family members is used to support the specialized schooling of a disabled child.

The Crummey Trust:

Trust named after the D. Clifford Crummey family who first set it up to deny the annual gift tax exclusion. A Crummey Trust does not give the child any right to income but does give the right to withdraw the amount of each gift up to 30 days after it is made. Since the withdrawal right begins immediately after the gift is made, it is considered a present interest. If the child does not withdraw the gift within the 30 days, the withdrawal right lapses and the money remains in the trust until the child attains a designated distribution age.

Of course, parents must still convince the child not to withdraw. However, if the child decides to withdraw, s/he can only access the amount of the most recent gift; not the entire trust. Thereafter, parents can eliminate all future withdrawal opportunities by not making any more gifts. The property in the trust remains intact and grows until distributed. This private trust option and its language must be specific to avoid disqualification.

The Charitable Remainder Trust:

This is an irrevocable trust with the beneficiary enjoying the trust funds and the charity receiving the remainder upon death. The tax exempt status of a CRT may make the funds in the trust last longer. If the charity is a nonprofit organization involved in the caring of special needs children, the physician’s family can show gratitude with a CRT.

The Irrevocable Life Insurance Trust:

An ILIT may be used in tandem with the various trust vehicles to assure continued funding for the child after one or both parents have died.

Which of the above trust types have you used and what were the results?

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Funeral Expenses

Posted on December 14, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

The Perilous Last Economic Journey

By Staff Writers

As a physician or other medical professional, perhaps you have not considered the immediate cost of death related activities; in other words – your funeral and its follow-up last expenses.

When one considers the cost of a funeral, with casket, embalming, burial and other itemized costs and service related expenses, the average price tag is about $8,500 and of course, purchasing the burial plot is extra. The cost of the average cremation is about $850.

Further information relating to burial finances, can be obtained from Consumer Caskets USA at 800-611-8778, the Choice in Dying at 88-989-9455, and the Funeral and Memorial Society of America at 802-482-3437. All have internet web sites.

Remember, life is a perilous journey.

Assessment

Have you planned for funeral follow-up and/or last living expenses?

Channel Surfing the ME-P

Have you visited our other topic channels? Established to facilitate idea exchange and link our community together, the value of these topics is dependent upon your input. Please take a minute to visit. And, to prevent that annoying spam, we ask that you register. It is fast, free and secure.

Conclusion

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ADVISORS: www.CertifiedMedicalPlanner.org
FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
Dictionary of Health Economics and Finance
Dictionary of Health Information Technology and Security
Dictionary of Health Insurance and Managed Care

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Terminal Illness and Anatomic Gifts

Posted on December 14, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

Placing your Affairs in Order

By Dr. David E. Marcinko MBA

As a doctor, you face the realities of death on a daily basis.

And so, if you are yourself diagnosed with a terminal illness the following may not be helpful to you, but might be of help your survivors:

· Increase liquidity to cover the costs of pre- and post- death expenses.

· Contract your local social security office to determine eligibility for disability and death benefits.

· Determine the contents, and those you wish to have access to your safety deposit box(es).

· Since some states do not have death taxes, consider changing your domicile.

· Preserve your testimony to any outstanding claims or litigation regarding personal or professional affairs, through a formal legal deposition or other means.

Also, as a lay or medical professional, consider organ donation since the supply of donated organs is dwarfed by the demand for them. The Coalition on Donation is on a campaign to raise awareness of this need. The decision to be an organ donation is personal and some healthcare professionals have philosophical or religious beliefs that prohibit this option.

However, if you decide to be an organ donor, documentation and communication are the critical steps to insuring your wishes are carried out.

First, contact your local motor vehicle department and inform your family and loved ones. Then, inform your own personal physician in writing, and wear a donor identification bracelet – or something similar – that fits in your wallet or purse, so your wishes are known.

Assessment: Has the above information helped you turn a potential financial disaster into a manageable pitfall?

***

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Financial Windfalls

Posted on December 14, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

Successfully Handling the Brass Ring

[By Staff Writers]

If you are a physician or healthcare executive who is fortunate enough to win the lottery, or receive a large inheritance, the following simple rules will help maintain your emotional stability, as well as financial health.

###

· Deposit cash into a money market account in your name or into a joint account with your spouse, and limit access. If a doctor is the executor of an estate, be aware that significant tax benefits may result by freezing the estate for six months and using the alternate valuation method of size determination. Similarly, if a windfall is in the form of securities, make sure they are titled correctly. Limit those to whom you tell about your luck.

· Hire a Registered Investment Advisor (RIA), Certified Medical Planner™, CPA or other financial fiduciary to lead your team of lawyers and insurance agents. Get tax advice immediately.

· Do not quit your job, sell your practice, or initially disrupt your life materially.

· Maintain your normal routine.

· Limit your new expenditures and consider your lifestyle options.

· Redefine your financial plans, and continue to save and invest.

· Pay down your debt and recall that non-deductible debt costs the stated APR, while deductible debt costs less if you itemize.

· Review your insurance policies, will, estate plan or trusts.

· Avoid friends or relatives who petition you for money.

· Consider charitable interests and gifting strategies carefully.

· Exercise, stay healthy and enjoy your windfall.

Assessment

Now, if you won the lottery; your experiences – no matter how major or minor – are appreciated.

Conclusion

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Alternative Financial Clout

Posted on December 14, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

On the Gay Financial Network [GFN]

[By Staff Writers]

A useful resource to supplement the financial knowledge of gay medical or lay professionals is the Gay Financial Network www.gfn.com

Gays and lesbians control more than $800 billion, according to the network, and the nations’ most gay friendly companies include IBM, AT&T, Bank of America Corp., Google, Yahoo, Mobil Corp., and Hewlett-Packard Co., according to the network.

By its own estimates, there are more than 25 million homosexuals in the USA, and more than 10 million are on-line. About 75 percent of the network’s members are men, 25 percent women, and the majority aged 30-50. Sixty percent visit the site daily, and about 15 percent earn more than $100,000.

Assessment

And, the fact that this information is geared toward alternative lifestyles should not let it be an impediment toward using the information.

For example, did you know that the same penalties associated with pension plans and estate tax laws, also impact unmarried straight couples in the same manner as a gay couple?

***

Conclusion

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FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors

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Alternative Lifestyles

Posted on December 14, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

Understanding Exactly What’s at Risk

Staff Writers

A function of Social Security is to be an old age pension plan supplement. It also offers survivor benefits for a physician’s spouse and children. The benefit is not paid to a live-in companion, however.

Social Security also offers a disability payment for those unable to work. This benefit will be available to those who qualify, but calculated at a single individual’s rate for those unmarried.

One area where a bonus may be earned is the old age pension program. This will be paid to every qualifying individual.

In other words, if both you and your significant other qualify for maximum benefits, these will be received for your lifetime. You will not be subject to a reduced survivor benefit.

Medicare pays health insurance benefits based upon the individual. These benefits will be affected by a non-traditional relationship. Yet, the family pieces of this puzzle are missing under current Medicaid guidelines.

Marriage Benefits

The federal and state governments, as well as corporate America, confer many benefits, protections and obligations to married couples, among them:

Assumption of spouse pension
Automatic housing lease transfer
Automatic inheritance
Bereavement leave
Burial determination
Child custody
Confidentiality of conversations
Crime victim’s recovery benefits
Divorce and domestic violence protection
Exemption on property tax upon partner’s death
Family leave to care for sick partner
Immunity from testimony against spouse
Insurance benefits and breaks
Joint adoption, foster care and custody
Joint bankruptcy
Joint parenting to care for partner
Medical decisions on behalf of partner
Property rights
Reduced rate membership
Social security benefits
Tax advantages
Visitation of partner’s children
Visitation of partner in hospital or prison
Wrongful death benefits

The Estate Tax Penalty

Estate law is unforgiving and its penalties are truly gender and relationship blind.

As an example, the powerful first tool in a well-written estate plan, the unlimited marital deduction, is not possible. This is a fact which must be recognized and dealt with in a proactive manner.

Do not be misled by your local or state law that may recognize a relationship involving a significant other. The federal estate tax code simply does not exist for such a relationship.

Have you been affected by any of the above?

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Non-Traditional Relationships

Posted on December 13, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

Minimizing the Impact

Staff Writers

Social Security regulations are set in stone. To combat reduced disability payments it is advised that both partners in a non-traditional relationship purchase additional disability insurance, above and beyond what may be offered from your medical office or hospital group plan.

And, to combat the lack of death benefit from Social Security and some restrictive hospital or medical employer plans, it is recommended that sufficient life insurance be purchased on both parties.

View this as a business buy-sell arrangement, so that one either partner will be left with sufficient financial means if an untimely death should take place.

A charitable remainder trust, for estate planning, may be an appropriate document that allows a medical professional with an alternative lifestyle to insure an income stream for the rest of both partner’s lives. It may result in reduced estate taxes, relief from capital gains, and the opportunity to diversify your investments. In this way, the legacy that is left to a significant other comes without familial meddling.

In early 2000, the Vermont Supreme Court recognized that committed gay couples deserve the same rights and benefits, in the eyes of the law, as heterosexual couples.

So, going forward from 2008, some experts hope the above machinations may not be required much longer. Nevertheless, on the positive side, there are a few financial benefits to being unmarried.

For example, although they can’t file joint income tax returns, or use each other’s deductions to shelter income, unmarrieds do avoid the so-called but eviscerated marriage penalty that occured when both parties had high paying jobs, such as medical professionals.

Assessment

Moreover, if one partner is wealthy, unmarried couples can take advantage of estate freeze techniques, unavailable to married couples since 1990, to reduce gift and estate taxes.

And so, have you been affected by any of the above?

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UGMAs and UTMAs

Posted on December 13, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

Titling Assets Correctly

Staff Writers

Generally, medical professionals should not save in a child’s name. Yes, there is a small tax break, but all the assets in their name diminish the amount of financial aid available to them.

Also, your child can take control of the assets at age 18 or 21, depending on your state’s law.

Other drawbacks to be aware of include:

· The custodian has the power to invest and draw funds for the benefit of the child; but who defines – what is a benefit?

· Earned income will be taxed at the child’s rate.

· The gift is irrevocable, and may be included in your estate for federal tax purposes, if you die prior to the age of majority.

The Uniform Gift to Minors Act (UGMA) and the slightly different Uniform Transfers to Minors Act (UTMA) are therefore usually not helpful when it comes to financial aid, and not using them will ensure that you will decide how to spend the funds.

What is your experience in this area relative to college savings?

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A Different Breed of Healthcare Advisor

Posted on December 12, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

The New Financial Planners and Investment Advisors

Staff Writers

The healthcare industrial complex represents a large and diverse industry, and the livelihood of other synergistic financial professionals and consultants who advise doctors depend on it. These include financial planners and investment advisors who themselves wish to avoid the collateral damage and negative ripple effects of healthcare reform.

Introduction

As a financial planner, investment advisor or general securities registered representative, you understand that the financial service sector is going to become the next great growth opportunity of the 21st Century. Even H & R Block and the Charles Schwab Corporation are trying to build medical professional interest in their respective firms and compete with your independent practice. They are fervently wooing away one group or another to interface with their embryonic management, accounting or advisory programs. As are the banks; like SunTrust.

The Pondering

Meanwhile, more than 260,000 of the nation’s brokers are moving into the investment advisory and financial planning business because securities sales and transactions are being commoditized by the internet’s World Wide Web.

A survey conducted a few years back clearly demonstrated the dominance of fiduciary consultants and registered investment advisors (RIAs) over stockbrokers, among clients 35-49 years old. With the average Merrill Lynch private client well over 60, it’s easy to ponder the future vulnerability of this business model. When asked to determine the added value of key industry players, baby boomers in a recent Dalbar study ranked fiduciaries first, followed by financial planners, stockbrokers, CPAs, mutual fund companies, insurance agents, and commercial bankers, respectively.

Even however, if you are a financial planner or CFP® – and despite the proliferation of investment advisors – evidence suggests that your individual impact is still narrow within the healthcare industrial complex and with individual physicians.

The Realization

Among the challenges you face to broaden your influence is to offer your physician clients new value-added services, perhaps by establishing your expertise in the medical niche and capitalize on being different. You must not be just another of the more than 250,000 or so individuals who claim to be financial planners, with a collective universe of an additional 700,000 or so who purport to be financial advisors, in some fashion or another.

The Niche

You must begin to develop the strategic competitive advantage of medical niche practice management knowledge to synergize with your existing financial service and product line. Integrated practice management and true physician-focused financial planning will also become much more competitive among physicians because of the above fusion.

Now, no one is suggesting therefore that you abandon your core financial advisory business for medical management. It is merely a fact that healthcare has drastically changed during the past decade, and the knowledge that you used yesterday is no longer enough for the future.

And, medical practice management is the natural outgrowth of traditional financial planning for doctors which is synergistically central to the implementation of a contemporary medical office business plan.

Finally, you realize that the most successful physician focused financial planners therefore, will be those who incorporate practice management services into their truly informed niche practices.

The Epiphany

A light then goes off in your head, epiphany!

Enter the Certified Medical Planner™ professional designation program.

For more information: www.CertifiedMedicalPlanner.com

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Rent versus Buy

Posted on December 5, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

When is Renting a Home Less Expensive than Buying?

[By Staff Writers]

It usually makes sense to rent a home – rather than purchase one – when the period of time you will stay in the home is short or undetermined.

Why? The reason for this is the high cost of purchasing and selling a home.

When a physician purchases a home, he or she must pay an amount varying from the total price in cash to at least 0-3% down; and hopefully up to the traditional 20% or beyond to remove PMI – especially after the recent mortgage industry meltdown with today’s tight credit markets because of the sub-prime mortgage fiasco.

Recall, that about 13% of first mortgages that originated in 2005 and 2006 had down payments of less than 10%, according to the Mortgage Bankers Association. An additional 1% of the mortgages surpassed the value of the property.

And, if the home is purchased for cash, a majority of the expense of purchasing and selling comes in the selling via commissions and excise taxes.

Sound too much like a Pollyanna? Well, one must understand that mortgage securities are now so complex that it’s often hard to know who actually owns the underling property. If the doctor finances a home, he or she has to pay closing costs on the mortgage as well as the back-end commissions and excise taxes.

So, it’s obvious that owning a home for a short period of time can be very costly unless the home experiences a dramatic rise in appraised value during the (short) ownership period. And, it surely did in some areas, in the past. But, because each situation will vary, it is important to build a spreadsheet model that encompasses all of the important information when analyzing the situation.

The Contemporary Scene for Homes

Currently, more doctors should probably concentrate on debt reduction and establishing their careers – and rent their homes. Of course, this strategy does drive up rental fees in the short term. But, home “flipping” did the same thing to prices and resulted in our current mortgage mess.

Current Theme for Apartments

Apartment asking rents posted their biggest increase of 2007 in the third quarter, jumping 4.2% from a year ago, to an average of $1,015 per unit, according to industry sources. And vacancy, which had edged up slightly earlier in the year because of apartment construction, tightened up in the last quarter to an average of 5.6% from 5.7% the same time a year ago. Thus, the outlook is rosy for landlords in 2008, but murky for homeowners.

Assessment

Hopefully in the future, home prices may shrink – and physician economic stability increase – to the point that home ownership becomes the delight it should be; rather than the burden it has become for many doctors.

Do you rent or own? How has your strategy worked for you? Do you view your home as a place to live – or an investment? Why, or why not?

Conclusion

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The Arbitrage Pricing Theory [APT]

Posted on December 5, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

A Multi-Faceted Representation of Systematic Risk

By Jeffrey S. Coons; PhD, CFA
By Christopher J. Cummings; CFA, CFP™

Introduction

Did you know that the economist Stephen Ross PhD developed a more generalized Modern Portfolio Theory [MPT] model called Arbitrage Pricing Theory (APT)?

Definition

APT is based upon somewhat less restrictive assumptions than the Capital Asset Pricing Model [CAP-M] and results in the conclusion that there are multiple factors representing systematic risk. The APT incorporates the fact that different securities react in varying degrees to unexpected changes in systematic factors other than just beta to the market portfolio.

The risk-free return plus the expected return for exposure to each source of systematic risk times the beta coefficient to that risk is what determines the expected rate of return for a given security.

Physician-Investors

An important point for physicians to keep in mind is that the APT focuses on unexpected changes for its systematic risk factors. The financial markets are viewed as a discounting mechanism, with prices established for various securities reflecting investors’ expectations about the future, so any excess return for an expected change will be arbitraged away (i.e., the price of that risk will be bid down to zero).

For example, market prices already reflect physician and other investors’ expectations about GNP growth, so prices of assets should only react to the extent that GNP growth either exceeds or falls short of expectations (i.e., an unexpected change in GNP growth).

A Rhetorical Interrogative?

And so – we can ask – why do lay investors, medical professionals and their advisors go wrong in making passive asset allocation decisions using MPT? The problem has less to do with the limitations of CAPM or APT as theories and more to do with how these theories are applied in the real world.

The basic premise behind the various MPT models is that both return and risk measures are the expectations assessed by the investor. Too often, however, decisions are made based on what investors see in their rear view mirror rather than what lies on the road ahead of them.

Theoretical?

In other words, while modern portfolio theory is geared towards assessing expected future returns and risk, investors and financial professionals all too often simply rely on historical data rather than develop a forecast of expected future returns and risks.

While it is clearly difficult for physicians and all investors to accurately forecast future returns or betas, whether they are for the market as a whole or an individual security, there is no reason to believe that simply using historical data will be any more accurate.

MPT Shortcomings

One major shortcoming of modern portfolio theory as it is commonly applied today is the fact that historical relationships between different securities are unstable. And, it would seem that a physician or other healthcare provider should not rely on historical averages to establish a passive asset allocation.

Of course, the use of unstable historical returns in modern portfolio theories clearly violates the rule-of-thumb related to the dangers of projecting forward historical averages; MPT is nonetheless an important concept for medical professionals to understand as a result of its frequent use by investment professionals.

Critical Elements of Investing

Furthermore, MPT has helped focus investors on two extremely critical elements of investing that are central to successful investment strategies:

First, MPT offers the first framework for investors to build a diversified portfolio.
Second, the important conclusion that can be drawn from MPT is that diversification does in fact help reduce portfolio risk.

Assessment

MPT approaches are generally consistent with the first investment rule of thumb, “understand and diversify risk to the extent possible.”

Additionally, the risk/return tradeoff (i.e., higher returns are generally consistent with higher risk) central to MPT based strategies has helped investors recognize that if it looks too good to be true, it probably is.

Conclusion

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

PRACTICES: www.BusinessofMedicalPractice.com
HOSPITALS: http://www.crcpress.com/product/isbn/9781466558731
CLINICS: http://www.crcpress.com/product/isbn/9781439879900
ADVISORS: www.CertifiedMedicalPlanner.org
FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
Dictionary of Health Economics and Finance
Dictionary of Health Information Technology and Security
Dictionary of Health Insurance and Managed Care

***

Filed under: Financial Planning, Portfolio Management | Tagged: Investing Basics | 3 Comments »

Auto Ownership Costs for Docs

Posted on December 3, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

What are the Costs of Physician Automobile Ownership?

[By Staff Writers]

Automobiles are generally the fourth largest expense of a physician’s household; right behind student loans and/or practice start up costs; and home ownership loans.

The largest automobile-related expense is purchase of the car, either in the form of a monthly payment or cash.

Other expenses include gas [especially when over $3/gal], maintenance, repairs, taxes, and insurance. Insurance is generally the next largest expenses in the automobile category unless a large repair is necessary, a factor mostly dependent on the age and type of the car.

For some cars, repairs may be the second largest expense. Maintenance costs vary depending on such factors as the age and mechanical complexity of a vehicle. Generally, money spent on regular maintenance will reduce future repair costs.

Like the cars themselves, auto leases are generally poor deals and are not investments; merely interest payments on a depreciating consumer asset.

Assessment

What do you think about the fascination of doctor’s with “luxury” automobiles?

Channel Surfing the ME-P

Conclusion

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

PRACTICES: www.BusinessofMedicalPractice.com
HOSPITALS: http://www.crcpress.com/product/isbn/9781466558731
CLINICS: http://www.crcpress.com/product/isbn/9781439879900
ADVISORS: www.CertifiedMedicalPlanner.org
FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
Dictionary of Health Economics and Finance
Dictionary of Health Information Technology and Security
Dictionary of Health Insurance and Managed Care

Filed under: Financial Planning | Tagged: Financial Planning | 7 Comments »

Physician Homestead Affordability

Posted on December 3, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

What are the Costs of Physician Home Ownership?

[By Staff Writers]

Home ownership for the physician or other medical professional can be a very rewarding experience that gives the owner a real sense of security, especially when the home is free and clear of a mortgage. Home ownership can also be very expensive, and is generally the largest expense of a household; sans the physician’s medical practice itself. And, there are many costs to home ownership.

First, to acquire a home, the physician home owner must make a down payment and pay closing costs on the mortgage. The down payment is usually a minimum of 5% of the purchase price, although some mortgage programs allow as little as 3% down or even nothing with interest-only deals available. The closing costs can run as high as 3% with no buy-down on the interest rate.

Second, the physician home owner must service the mortgage with the usual monthly payments of principal and interest. This is usually the largest expense associated with home ownership.

Third, the physician home owner must pay all of the utilities associated with the property. The mandatory utilities are water/sewer/garbage, electricity and/or gas, and local telephone. These expenses can be substantial. Water/sewer/garbage services can total over $150 per month. Electricity and gas bills usually total a minimum of $250 per month for an average-sized four-bedroom, three-bath home.

Fourth, the physician home owner must pay property taxes, a substantial expense. As an example, property taxes average approximately 1-2% of fair market value computed on appraised value rather than the fair market value. This translates into thousands of dollars per year.

Fifth, the physician home owner must maintain the home. These expenses include small and large home repairs and maintenance, landscaping, gardening, and remodeling. Large home repairs can include replacing a roof, painting the interior and exterior, replacing carpeting, and repairing water damage. Small home repairs and maintenance often include repairing leaky faucets, damaged flooring, broken windows, and walls that children thought would make a great coloring board.

Sixth, the physician home owner must insure the home for property damage and liability damage related to the home. This expense varies widely but will be a minimum of several hundred dollars per year.

The following is an example of the monthly costs of home ownership for a new doctor who owns a house worth $200,000 and has a $160,000 mortgage with an 8% rate and a 30-year term. So, a lower rate today looks even better, right?

Mortgage payment: $1,174
Property taxes: $166
Utilities: $450
Insurance: $30
Maintenance: $300

Total $2,120

These numbers do not include large repair and maintenance expenses. When these expenses occur, they are usually paid for in a lump sum, rather than being amortized over the years of their useful life. The lump-sum cost does not include the amount of earnings lost on the money used for the expenditure.

In order to amortize these items, the physician home owner would have to borrow the money to pay for them, but this would result in additional interest expense.

There are also exit costs to home ownership. When a doctor wants to sell a home, he or she must pay a sales commission of approximately 6% and an excise tax that varies state to state. Of course, FSBO is also a sales option.

Q: What is the biggest impediment to a home loan down payment?

A: A student loan and/or an existing automobile loan.

Q: What is the biggest impediment to a practice start-up loan; office down payment, or medical group buy-in situation?

A: A home loan; school loan and/or automobile loan.

Note, the vicious consumer debt-cycle which differentiates wants from needs!

Rents on the Upswing for 2008

On the other hand, apartment asking-rents posted their biggest increase of 2007 in the third quarter, jumping 4.2% from a year ago, to an average of $1,015 per unit, according to industry sources. And vacancy, which had edged up slightly earlier in the year because of apartment construction, tightened up in the last quarter to an average of 5.6% from 5.7% the same time a year ago. Thus, the outlook is rosy for landlords in 2008, but not necessarily the same for homeowners.

Conclusion

Now, how does the above traditional philosophy seem in light of the recent mortgage debt debacle?

Filed under: Financial Planning | Tagged: Financial Planning | 3 Comments »

Your Biggest – Dual Asset

Posted on November 30, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

Why a Medical Practice is Both a Financial and Non-Financial Asset

By Dr. Gary L. Bode; MSA, CPA

A medical practice is a valuable asset in two respects. First, it provides the work environment that generates your personal income. It is a current financial asset.

Second, it has inherent sales value that can be part of an exit (retirement) or transfer strategy. It is a potential future financial asset. Some of this inherent value lies in the current market value of medical equipment, minus any money owed.

The other aspect of inherent value is goodwill, or the worth of the practice as on going concern that allows you to sell it to another practitioner. But, there are other non-financial rewards, as well.

Non-Economic Rewards of an Efficient Medical Practice

Some of the rewards of a well-run practice that transcend purely financial considerations include:

1) A better, more consistent clinical result

2) Improved patient perception which increases referrals and decreases liability

3) Less employee turnover

4) Less stress

5) More free time for the practitioner.

Now, can you think of any other non-financial rewards? But, in the era of healthcare reform, are they increasing or decreasing?

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com or Bio: www.stpub.com/pubs/authors/MARCINKO.htm

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Healthcare Organizations: www.HealthcareFinancials.com

Health Administration Terms: www.HealthDictionarySeries.com

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MD Salary versus Net-Worth Conundrum [.ppt slide-show presentation]

Posted on November 30, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

“The Tale of Two High School Graduates”

[By Private Banker Jorge Russe; MBA CMP candidate]

“Of the 125 medical schools in the USA, only one of them to my knowledge offers a class related to saving or investing money.”

– William C. Roberts, MD

For more insight into the physician salary and wealth accumulation disparity [inverse relationship], feel free to review this .ppt presentation by Jorge Russe MBA who is a private banker for physicians in Chicago.

Rich Doctor’s?- Maybe Not!

It’s not strictly-speaking P4P, but it does demonstrate that the need for doctor focused financial planning is more acute than ever. So, what is your own tale?

Ann Miller; RN

Conclusion

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Filed under: Financial Planning | Tagged: P-4-P | 4 Comments »

The Financial Services Industry Explained

Posted on November 28, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

Financial Services Sales Professionals

By: Dr. David E. Marcinko; MBA, CMP™

[Publisher-in-Chief]

It has been said that there are more than 95 financial services designations in the business; and most are suspect credentials. A college degree may not even be required for most of them.

And, the quest to find true guidance is clothed in mystery and subterfuge in the business.

Why? It’s because the industry promotes a low standard of care, known as “suitability”; when a much higher fiduciary standard – to work on behalf of the client like a physician – should be required.

If you don’t believe me, just look in the classified ad section of your local newspaper under “sales positions”, for job listings for these folks.

So, when you select any type adviser, get this fiduciary standard-of-care statement in writing. Just think of the “golden rule”, as you ponder these traditional credentials.

What is an Insurance Agent?

No one, especially doctors, likes to pay life and disability insurance premiums. Inadequate coverage, however, can completely devastate your family or medical practice, by quickly wiping out a lifetime of asset accumulation and business equity.

Buying and maintaining the right amount and type of coverage from solid insurance companies at a reasonable price eliminates these risks in a very efficient manner. Unfortunately, an essential and relatively simple concept like risk transfer has evolved into an area that makes many doctors downright queasy.

The easiest way to handle this issue is to get consensus agreement from a core team of financial advisors as to the amount and types of coverage.

Once that is accomplished, appropriate insurance agents can be contacted. The agents should be captive agents with insurance companies with policies known to be good for the coverage in question. Otherwise, independent agents with access to a large number of companies and products can be contacted.

Regardless, in addition to the usual questioning regarding competence and a background check, the agent should be aware that the core team will review all proposals. Proposals should include what is known as a ledger statement.

A Chartered Life Underwriter (CLU) as granted by the American College, or Chartered Financial Consultant (ChFC), are two valid insurance designations demonstrating a focused expertise in the insurance business. But, these still are typically commission sales agents who work for their respective firms, or themselves, but not necessarily you. The saying goes “insurance is sold not bought.”

As a reformed insurance agent myself, I sold all sorts of personal and other business insurance, too.

Some years ago, the American Society of CLU and ChFC, in Bryn Mawr, Pa., reconsidered its own strategy of insurance as the organization changed its name to the Society of Financial Services Professionals to appeal to a broader base of financial practitioners beyond the insurance products it traditionally provided.

What is a Stock Broker [Registered Representative]?

A full service retail or discount stock broker, regardless of compensation schedule, is also known as a registered representative. Other names include financial advisor, financial consultant, financial planner, Vice President, etc. Nevertheless, they are still stock-brokers and not fiduciaries.

Typically, the national test known as a Series #7 (General Securities License) examination and state specific Series #63 license is needed, along with Securities Exchange Commission (SEC) registration through the National Association of Securities Dealers (NASD) to become a stockbroker. The industry touts them as rigorous; they are not as I passed mine after studying for a weekend. Since a commission may be involved – and performance based incentives are allowed – always be aware of costs.

Again, regardless, of nomenclature derivative, the goal of these folks is to sell financial products; and earn a commission or fee. You also typically sign away your right to litigate when you enter into a brokerage contract.

What is a Registered Investment Advisor?

This securities license, obtained after passing the easy Series # 65 examination, allows the designee to charge for giving unbiased securities advice on retirement plans and portfolio management, although not necessarily sell securities or insurance products.

An RIA, or RIA representative, is usually a fiduciary, and should work for the interest of the client. A registered-representative, financial consultant, Certified Financial Planner™, or stockbroker does not necessarily have to be.

What is a Certified Financial Planner™?

Some believe that the premier personal financial planning designation of choice for the Financial Planning Association (FPA) – originally located in Atlanta, then Denver and now Washington, DC and founded in 1969 – is board Certification in Financial Planning. This independent, designation represents a person who has completed a 24 month course of study at an accredited institution and passed the two day, comprehensive Certified Financial Planner Board of Standards Examination. This test encompasses all aspects of the financial planning process, including insurance, economic principles, taxation, investments and retirement benefits planning.

An ethics, continuing education and confidentiality requirement is also mandated for this designation [www.FPANet.org]. But, be warned however, a CFP is not necessarily a fiduciary and does not have to act on your behalf, or with your best interests in mind.

And, conflicts of interest do not necessarily have to be disclosed. There is much dissention in the industry regarding this situation, as I remain a former-reformed Certified Financial Planner™.

Still, the association’s marketing clout is powerful.

What is a Chartered Financial Analyst™?

A Chartered Financial Analysis™ will usually work for a brokerage house and follow one or a few publicly traded companies. CFA analysts may manage institutional money or run a mutual fund and have ethics requirements. This is a tough standard. I experienced it first-hand in business school.

Unfortunately, the previously unbiased nature of some Wall Street experts has been questioned lately with the collapse of such stocks as HealthSouth and others. Some authorities now feel that analysts have become merely promoters of the followed company, since sell recommendations are rarely made and CFAs or non-CFAs may cozy up to insiders and corporate executives as they curry their favor.

Contact the Association for Investment Management and Research (www.AIMR.org); now [www.CFAInstitute.org].

Q: Why is knowledge of the above important to physician-investors?

A: To avoid being ripped off!

Don’t believe me? Recall the tale of Dr. Debasis Kanjilal, a pediatrician from New York who put more than $500,000 into the dot.com company, InfoSpace, a few years ago, upon the advice of Merrill Lynch’s star analyst Henry Bloget. Is it any wonder that when the company crashed, the analyst was sued, and Merrill settled out of court? Other analysts, such as Mary Meeker of Morgan Stanley, Dean Witter and Jack Grubman from Salomon Smith Barney, are involved in similar fiascos. Remember; forewarned is forearmed.

8 Things your Financial Planner Won’t Tell You: http://articles.moneycentral.msn.com/RetirementandWills/CreateaPlan/8ThingsYourFinancialPlannerWontTellYou

Conclusion

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

PHYSICIANS: www.MedicalBusinessAdvisors.com
PRACTICES: www.BusinessofMedicalPractice.com
HOSPITALS: http://www.crcpress.com/product/isbn/9781466558731
CLINICS: http://www.crcpress.com/product/isbn/9781439879900
ADVISORS: www.CertifiedMedicalPlanner.org
BLOG: www.MedicalExecutivePost.com
FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors

Filed under: Financial Planning, Investing, Op-Editorials, Portfolio Management | Tagged: Financial Planning | 5 Comments »

Annuity Insurance Products

Posted on November 26, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

A Brief Overview of Annuities for Physicians

[By Gary A. Cook, MSFS, CFP®, CLU, ChFC, RHU, LUTCF, CMP™ (Hon)]

[By Kathy D. Belteau, CFP®, CLU, ChFC, FLMI]

[By Philip E. Taylor, CLU, ChFC, FLMI]

Introduction

Annuities were reportedly first used by Babylonian landowners to set aside income from a specific piece of farmland to reward soldiers or loyal assistants for the rest of their lives.

Today’s annuities substitute cash for farmland; however the concept is the same. In 1770, the first annuities were sold in the United States and were issued by church corporations for the benefit of ministers and their families. Annuities have grown on a tax-deferred basis since enactment of the Federal Income Tax Code in 1913. They began to gain widespread acceptance in the early 1980s when interest rates credited exceeded 10%. During the last two decades, annuities have been the fastest growing sector of premiums for life insurance companies.

Nevertheless, are they actually “needed” by contemporary physicians – – or merely “sold” to them?

An annuity is a legal contract between an insurance company and the owner of the contract. The insurance company makes specific guarantees in consideration of money being deposited with the company.

Annuities are generally classified as fixed or variable – deferred or immediate. As their names indicate, deferred annuities are designed as saving funds to accumulate for future use.They are growth-oriented products where the tax on the interest earned is deferred until the money is withdrawn. An immediate annuity is used for systematically withdrawing money without concern for the money lasting until the end. The insurance company assumes this risk.

Deferred Annuities

The deferred annuity contract, like a permanent life insurance policy, has been found by some to be a convenient method of accumulating wealth. Funds can be placed in deferred annuities in a lump sum, called Single Premium Deferred Annuities, or periodically over time, called Flexible Premium Deferred Annuities. Either way, the funds placed in a deferred annuity grow without current taxation (tax-deferred). .

Fixed Deferred Annuity

Fixed deferred annuities provide a guaranteed minimum return of return (usually around 3 percent per year) and typically credit a higher, competitive rate based on the current economic conditions.

Fixed annuities are usually considered conservative investments as the principal (premium) is guaranteed not to vary in value. Insurance companies are required by state insurance laws to maintain a reserve fund equal to the total value of fixed annuities. Fixed annuities are also protected by State Guaranty Fund Laws.

Example:

Dr. Park, a retired physician, desires a safe financial vehicle for $100,000 of her excess savings. She doesn’t need the earnings of this investment for current income and also wants to reduce her income tax liability. She decides to purchase a fixed deferred annuity with her $100,000. The annuity guarantees a 3 percent annual return and the current rate is 6 percent.

After the first year, $6,000 of interest is credited to the annuity and Dr. Park has no current income taxes as a result. If the 6 percent interest rate does not change, after 3 years, the annuity will have $119,102 of value.

Variable Deferred Annuity

Recently, variable deferred annuities have become very popular. Like fixed annuities, variable deferred annuities offer tax-deferred growth, but this is where the similarities end. Variable annuities are not guaranteed. The appreciation or depreciation in value is totally dependent on market conditions.

Variable deferred annuities assets are maintained in separate accounts (similar to mutual funds) that provide different investment opportunities. Most of the separate accounts have stock market exposure, and therefore, variable annuities do not offer a guaranteed rate of return.

But, the upside potential is typically much greater than that of a fixed annuity. The value of a variable deferred annuity will fluctuate with the values of the investments within the chosen separate accounts. Although similar to mutual funds, there are some key differences. These include:

· A variable annuity provides tax deferral whereas a regular mutual fund does not

· If a variable annuity loses money because of poor separate account performance, and the owner dies, most annuities guarantee at least a return of principal to the heirs. This guarantee of principal only applies if the annuity owner dies. If the annuity value decreases below the amount paid in, and the annuity is surrendered while the owner is alive, the actual cash value is all that is available.

· When money is eventually withdrawn from a deferred annuity, it is taxable at ordinary income tax rates. With taxable mutual funds, they can be liquidated and taxed at lower, capital gains rates.

· There is also a 10 percent penalty if the annuity owner is under 59½ when money is withdrawn. There is no such charge for withdrawals from a mutual fund.

· The fees charged inside of a variable annuity (called mortality and expense charges) are typically more than the fees charged by a regular mutual fund.

Assessment

Variable deferred annuities are sensible for physicians who want stock market exposure while minimizing taxes. Most financial advisors and Certified Medical Planners™ [CMP™] recommend regular mutual funds when the investment time horizon is under 10 years. But if the time horizon is more than 10 years, variable annuities may occasionally become more attractive because of the additional earnings from tax-deferral.

Both types of deferred annuities are subject to surrender charges. Surrender charges are applied if the annuity owner surrenders the policy during the surrender period, which typically run for 5 to 10 years from the purchase date. The charge usually decreases each year until it reaches zero. The purpose of the charge is to discourage early surrender of the annuity.

Equity Index Annuity

The equity index annuity combines the basic elements of both the variable and the fixed annuity. The credited interest earnings are generally linked to a percent of increase in an index, such as the Standard & Poor’s 500 Composite Stock Price Index (S&P 500). This percentage is called the Participation Rate and may be guaranteed for a specified period of up to 10 years or adjusted annually. Thus, the physician annuity owner is able to participate in a portion of market gains while limiting the risk of loss.

Typically, the indexed annuity has a fixed principal, with the insurance company and contract owner sharing the investment risk. If the S&P 500 Index goes up, so do interest earnings. If it declines, the insurance company guarantees the principal.

So, the physician contract owner accepts the risk of an unknown interest yield based on the growth or decline of the S&P 500. Medical professionals and healthcare practitioners should pay particular attention to surrender penalties, asset management fees and any monthly caps on appreciation.

Immediate Annuities

Immediate annuities provide a guaranteed income stream. An immediate annuity can be purchased with a single deposit of funds, possibly from savings or a pension distribution, or it can be the end result of the deferred annuity, commonly referred to as annuitization. Just like deferred annuities, immediate annuities can also be fixed or variable.

Immediate annuities can be set up to provide periodic payments to the policy owner annually, semiannually, quarterly or monthly. The annuity payments can be paid over life or for a finite number of years. They can also be paid over the life of a single individual or over two lives.

Immediate Fixed Annuity

Immediate fixed annuities typically pay a specified amount of money for as long as the annuitant lives.They may also be arranged to only pay for a specified period of time, i.e., 20 years. They often contain a guaranteed payout period, such that, if the annuitant lives less than the guaranteed number of years, the heirs will receive the remainder of the guaranteed payments.

A note of caution here, as the selection of an immediate annuity is an irrevocable decision!

Example:

Dr. Jones is 70 years old and retired. He is only of average wealth, but is concerned that if he lives too long, he could deplete his savings. He decides to use $100,000 and purchase a lifetime immediate annuity with 20 years certain. The insurance company promises to pay him $7,000 per year as long as he lives. If Dr. Jones dies four years after purchase, he would only have received $28,000 out of a $100,000 investment. However, his heirs will receive $7,000 for the next 16 years. If Dr. Jones survives to the age of 98, he would have received $196,000 (or 28 years of $7,000).

Immediate Variable Annuity

Immediate variable annuities provide income payments to the annuitant that fluctuates with the returns of the separate accounts chosen. The theory is that since the stock market has historically risen over time, the annuity payments will rise over time and keep pace with inflation. If this is indeed what happens, it is a good purchase, but it cannot be guaranteed.

Some companies will, at a minimum, provide a guarantee of a low minimum monthly payment no matter how poorly the separate accounts perform.

Split annuities

A popular method of adding income and yet still accumulating savings is through the use of two separate annuity policies. Part of the funds is placed in an immediate annuity to provide monthly income. The balance is placed in a deferred annuity grows to the total value of the premium paid for both annuities.

The income that is received from the Immediate Annuity includes a portion of the initial premium, as well as the taxable interest earned. Only the portion of income that is interest is taxable. The ratio between the annuity principal and interest being paid out is called an Exclusion Ratio.

Example:

Dr. Jeanne Jones has put $100,000 into a 5-year non-tax deferred vehicle at 5%. The earnings to supplement Jeanne’s retirement is $25,000. With a combined federal and state tax of 33%, the net after tax income would be $16,750. Jeanne takes the same $100,000 using the split annuity concept she would receive $24,444 over the 5 years. Based on an exclusion ration of 89%, her total taxable amount is $2,797. This would yield $923 in taxes at the same 33% tax rate. Jeanne would have $23,521 of spendable income with the split annuity compared to the $16,750.

Qualified Annuities

The term qualified refers to those annuities which permit tax-deductible contributions under one of the Internal Revenue Code (IRC) sections, i.e., § 408 Individual Retirement Accounts (IRA), § 403(b) Tax Sheltered Annuities, § 401(k) Voluntary Profit Savings Plans. Qualified annuities can also result from a rollover from such a plan.

Assessment

Currently, there is much lively debate in the industry as to whether an annuity, which is tax-deferred by nature, should be used as a funding vehicle within a tax-qualified plan, i.e., a tax-shelter within a tax-shelter. Since the investment options within the annuity are also generally available to the plan participant without the additional management expenses of the annuity policy, it is felt this could be a breach of fiduciary responsibility. And, most insurance agents are not fiduciaries.

Both the National Association of Securities Dealers (NASD) and the Securities and Exchange Commission (SEC) have gone on record as criticizing these sales.

However, there are numerous examples of deferred annuities that have outperformed similar investment-category mutual funds, even after taking the annuity expenses into account.

Conclusion

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FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advis ors

Filed under: CMP Program, Financial Planning, Glossary Terms, Insurance Matters, Investing, Recommended Books, Retirement and Benefits, Risk Management | Tagged: annuities, certified medical planner, CMP, deferred annuity, Financial Planning, FINRA, Flexible Premium Deferred Annuities., Insurance Matters, NASD, SEC, Single Premium Deferred Annuities, SIPC, variable annuity, wualified annuities, www.certifiedmedicalplanner.com | 6 Comments »

What is the Business Cycle?

Posted on November 26, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

The Business [Economic] Cycle Explained

By Staff Writers

The business cycle is also known as the economic cycle and reflects the expansion or contraction in economic activity. Understanding the business cycle and the indicators used to determine its phases may influence investment or economic business decisions and financial or medical planning expectations.

Although often depicted as the regular rising and falling of an episodic curve, the business cycle is very irregular in terms of amplitude and duration. Moreover, many elements move together during the cycle and individual elements seldom carry enough momentum to cause the cycle to move.

However, elements may have a domino effect on one another, and this is ultimately drives the cycle, too. We can also have a large positive cycle, coincident with a smaller but still negative cycle, as may be seen in the current healthcare climate of today.

First Phase: Trough to Recovery (service and production driven)

Scenario: A depressed GNP leads to declining industrial production and capacity utilization. Decreased workloads result in improved labor productivity and reduced labor (unit) costs until actual producer (wholesale) prices decline.

Second Phase: Recovery to Expansion (patient and consumer driven)

Scenario: CPI declines (due to reduced wholesale prices) and consumer real income rises, improving consumer sentiment and actual demand for consumer goods.

Third Phase: Expansion to Peak (service and production driven)

Scenario: GNP raises leading to increased industrial production and capacity utilization. But, labor productivity declines and unit labor costs and producer (wholesale) prices rise.

Fourth Phase: Peak to Contraction (patient and consumer driven)

Scenario: CPI rises making consumer real income and sentiment erode until consumer demand, and ultimately purchases, shrink dramatically. Recessions may occur and economists have an alphabet used to describe them.

For example, with a “V” graph shape, the drop and recovery is quick. For a “U” shaped graph, the economy moves up more sluggishly from the bottom. A “W” is what you would expect: repeated recoveries and declines. An “L” shaper recession describes a prolonged dry economic spell or even depression.

Some pundants believe we may be entering the generalized “U” economic phase, along with the “L” medical economic business cycle.

What do you think?

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Economic Crisis Management

Posted on November 25, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

Personal Financial Stress Management for Physicians

Dr. David E. Marcinko; MBA, CMP™

[Publisher in Chief]

The physician who remains in practice long enough is sure to undergo some adverse situation that may negatively affect his financial life. When it occurs, you must have a crisis management plan in place to deal successfully with the matter. In fact, the following three scenarios typically occur somewhere along life’s journey for the average doctor:

· Office Crisis Management

· Employment Crisis Management

· Financial Windfall Crisis Management.

1. Office Crisis Management

Crisis management is a matter of perception versus reality. For example, a high profile patient may die under your watch inducing a PR fiasco. But, then again, such a celebrity had confidence in you in the first place, so all is not lost. Therefore, honest spin control is needed when tragedy strikes:

· Stay calm and relaxed; but act immediately

· Release detrimental but accurate information and stay neutral

· Educate your staff and local community

· Fix the problem, or minimize recurrence

· Continually release information

· Monitor and report your strategy to all affected parties.

2. Employment Crisis Management

Sooner or later the employed doctor will be terminated or reduced. Or, a partnership will dissolve; a major local employer will relocate or your hospital will close. If you become aware of impending job loss, the following may help:

· Decrease retirement contributions to the minimum company match

· Place retirement contribution differences in an after-tax emergency fund

· Eliminate unnecessary payroll deductions and deposit the difference to cash

· Replace group term life insurance with personal term or universal life

·Take your old group term life insurance policy with you, if possible

· Establish a home equity line of credit to verify employment

· Borrow against your pension plan as a last resort.

After you loose your job, negotiate your departure and execute the following:

· Prioritize fixed monthly bills: rent or mortgage; car payments, utility bills; minimum credit card payments; and restructured long-term debt.

· Consider liquidating assets: emergency fund, checking accounts, investments, or assets held in a child’s name

· Review coverage and increase deductibles on homeowner’s and automobile insurance

· Sell stocks or mutual funds; personal valuables like furnishings, jewelry or real estate; and assets not in pensions or annuities

· Keep or rollover any lump-sum pension or savings plan distribution to your new practice. Pay taxes and penalties as a last resort

· Apply for unemployment insurance and review COBRA coverage

· Consider a high-deductible health plan using tax-deferred dollars.

3. Financial Windfalls

Although ironic, a financial windfall may be more problematic than short-term financial disadvantage. Consider these suggestions:

· Be discrete; don’t quit practice or disrupt your life materially

· Deposit cash into a money market account and limit access

· Title securities correctly

· Redefine your financial plans, and continue to save and invest

· Pay down non-deductible debt

· Review insurance policies, will, estate plan or trusts

· As an executor, be aware of estate tax freeze benefits using the alternate valuation method

· Consider charitable gifting carefully.

Hire an Expert

If any of the above occurs, get tax advice immediately, retain an attorney and hire a financial professional. And, unlike stock-brokers and most financial designees, the Certified Medical Planner© is an emerging new financial-advisor subspecialist and fiduciary with focused medical specificity.

Conclusion

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1. Office Crisis Management

2. Employment Crisis Management

3. Financial Windfalls

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