Three Fundamental Criteria All Physicians Should Consider before Investing

Posted on October 5, 2022 by Dr. David Edward Marcinko MBA MEd CMP™

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Re-Appreciating the Basic Three Rs …

By Guy P. Jones CFP® www.guypjones.com

Guy P. Jones

Physician-investors are often confronted with a myriad of decisions concerning any potential investment not the least of which is:

“When or how should I change my investment strategy?”

Given the choice of investment options, there are three criteria by which any investment you make should be evaluated: Risk, Reward and Liquidity.

  • Risk, in a financial context, is defined as: The probability that the actual return on an investment will be lower than the expected return.  For our purposes and for most people, it equates to whether there is the potential to lose money on an investment and how much of a risk you are willing to take in order to achieve an acceptable return.

One measurement of the risk or volatility of market-based investments can be quantified by the beta of an investment.  Beta is a measurement of volatility of an investment and is measured against how volatile an investment is relative to the market.  The beta of the market is always 1.00, so any investment that has a beta of less than 1.00 is less volatile and conversely, one with a beta greater than 1.00 is more volatile.   The desired result is low beta (low volatility) investments that have higher returns vs. the market.  Each of our institutional-class money managers utilize investments that collectively have a beta that is lower than the market while generating results that avoided the steep losses of the stock market in 2000-02 and 2008.*

  • Reward, in a financial context, is the positive return on your investment.  The rule of thumb is that the reward – or return on investment – is directly proportional to the amount of risk that one is willing to assume- i.e. – the higher the risk, the higherreturn on investment.

In addition, traditional thinking says in order to reap stock market-like returns, you have to invest in the stock market.  In our managed portfolios, that is not necessarily the case.  Two of our investment managers, who do not invest in the stock market, have generated average returns over the past 7 and 10 years that are equal to or better than returns of the stock market over similar timeframes with 76-84% less risk as measured by the beta of each manager*

  • Liquidity, in a financial context, means how quickly you can get your hands on your cash or is the ability to get your money whenever you need it.  One of the first things I advise anyone to have is a liquid emergency fund of readily available cash.  By having available cash, you don’t have to convert another asset to cash and create a transaction that could result in potentially adverse tax consequences or worse, trigger losses.  I often see clients sacrifice higher returns that they could be earning on idle cash because of their perceived need for absolute liquidity of their money.  But what if there was a way to have both?  Wouldn’t you want higher returns in low risk, low-volatility assets as well as the ability to get at those assets quickly?

With our multi-manager investment platform, investors have the ability to have a portion of their assets held in a safe, liquid money market account while also having their remaining assets diversified in a variety of low risk, low-volatility investments.

financial risk

More:

Assessment

*Past performance is not a guarantee or indicator of future performance

Conclusion

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Are you Over Paying for Your 401(k) Plan – Doctor?

Posted on June 11, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

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Checking it Twice

By Guy P. Jones CFP® http://www.guypjones.com

Guy P. Jones CFPMany of the doctor and medical professionals I meet are surprised to find that their 401(k) plan has hidden fees. They often don’t have or take the time to learn all the aspects of setting up a new plan.

As a consequence, they often times buy what I call “The 401(k) in a Box” from the first provider that comes along or from a current vendor that is providing ancillary services for them.  Many plans have significant hidden fees and this is especially true of 401(k) plans offered to small businesses like a medical practice or clinic.

According to a recent study, the average 401(k) plan has hidden fees of 0.72% per year. That may not seem like much but it costs the average participant about $11,000 over the lifetime of their participation. That’s $350 per year – and the fees are extracted directly from the 401(k) your account!

But, what about doctors and small business owners whose 401(k) plans have fewer than 20 employees and less than $1 million in total assets?

Well, their situation is much worse. For these small 401(k) plans, hidden fees can jump from 0.79% to 1.89%, or up to $920 per plan participant per year. This can mean paying an estimated $28,000 in hidden fees over the lifetime of their participation. If you selected one of these 401(k) for your employees, you could be unknowingly costing them $350 – $920 per year in hidden fees.

What are 401(k) Plan Fees and Who Pays for Them?

401(k) plan fees and expenses generally fall into three categories:

  • Plan Administration Fees – The day-to-day operation of a 401(k) plan involves expenses for basic administrative services – plan recordkeeping, accounting, legal and trustee services – that are necessary for administering the plan as a whole. Generally the more services provided, the higher the fees.
  • Investment Fees – the largest component of 401(k) plan fees and expenses is associated with managing plan investments. Your net total return is your return after these fees have been deducted.
  • Individual Service Fees – Individual service fees are charged separately to the accounts of participants who choose to take advantage of a particular plan feature. For example, individual service fees may be charged to a participant for taking a loan from the plan or for executing participant investment directions.We all evaluate our vendors occasionally. I find most doctors and small business owners do not evaluate their retirement plans because they do not know what questions to ask:

Questions

  • When was the last time you reviewed your retirement plan for cost savings or plan improvements?
  • Is it time to find out how to get a plan started?

Retirement

Assessment

Getting education from a physician focused fiduciary financial advisor is an important step in the process to either grow the profitability of your current plan or realize the benefits of a 401(k) Plan.

Conclusion

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Retirement Savings Opportunities for Self-Employed and Small Practice Physicians

Posted on May 8, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

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Funding your own Retirement

Guy P. Jones

  • By Guy P. Jones CFP®
  • 21 Stone Creek Place
  • The Woodlands, TX  77382
  • 832-677-1692 www.guypjones.com

As a self-employed physician or small practice physician, it’s up to you to fund your own retirement. You don’t have your employer furnishing you a retirement program with matching dollars and various investment options in which to invest.

On your Own

Basically, you’re on your own to figure out the best plans, the best investments, and the appropriate fees to pay for these services. Oftentimes, without the help of a retirement plan specialist, self-employed physicians and small practice physicians choose the simplest plan, which may not be the best plan for their particular situation.

The Choices

Given the myriad of choices available, let’s take a look at the various plan options and what savings opportunities exist.

Retirement Plan 2014 Savings Limits for an  MD age 52 earning $300-k*

Plan type SIMPLE IRA SEP/PROFIT SHARING 401(k) Single DB Single DB + 401(k)
Maximum contribution $22,300 $52,000 $57,500 $183,000 $221,600

*Defined Benefit plan maximum contribution limits for a 52 year old, including “catch-up” contributions of $2500 for SIMPLE IRA, $5500 for 401(K)

Due to the simplicity of setting up and administering the plan, most self-employed physicians and small practice physicians choose either a SIMPLE IRA or a SEP/Profit Sharing plan. While simple and easy to administer, these plans don’t offer the maximum opportunity to set aside large annual tax-deductible contributions which can accumulate as much as $1-2 million in just 5-10 years. This higher level of contributions can potentially reduce income tax liability by $40,000 or more annually for individuals in higher income tax brackets.

While these higher limit plans may not be right for everyone, they are best suited for physicians who have self-employment income or small practice physicians who are older and want to increase their retirement savings while reducing their tax liability.

Ideal candidates are:

  • 40+ year of age
  • Interested in contributing more than $50,000 per year or a higher percentage of compensation that is allowed in a 401(k)
  • Able to make contributions for at least 3-5 years
  • Earning at least $100,000 per year in one of these ways:
  1. Owns a practice with 5 or fewer FT employees including the physician
  2. Is self-employed as the primary way of earning a living
  3. Has a second source of income whereby he/she is earning self-employment income
  4. Is an independent contractor vs. an employee
  5. Receives payments or royalties from patents, books, consulting, Board of Directors fees, or speaking engagements, etc.

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leadership1

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These plans can work for physicians and practices that are sole proprietors, partnerships, corporations, LLCs, LLPs, or PA’s. High income sole proprietors and couples who are in business together can potentially maximize contributions by doing a combination of a 401(k) and Defined Benefit plan.Recent legislation has increased the flexibility of Defined Benefit plans so that the physician can better manage their contributions from year to year.

However, defined benefit plan contributions are required to keep the plan on track each year to deliver the promised retirement benefit. If the physician wants to terminate the plan, the assets can be rolled over into an IRA where they will continue to grow tax-deferred until withdrawn.

Assessment

If you want to find out if one of these higher limit plans would be appropriate for your situation, don’t wait until the last minute for 2014. Plans such as this have to be opened by the end of the fiscal year or by December 31st if the practice is on a calendar year basis.

Conclusion

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Is a Captive Insurance Company (CIC) Right for Your Medical Practice?

Posted on September 19, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

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A Medical Practice Risk Management Strategy

By Guy P. Jones CFP®

Successful practices face multiple risks in their daily operations including loss of a medical license or professional certification, legal defense reimbursement, medical/Medicare collections risk, HIPAA violations, and reputational risk. Small- to medium-sized practices can benefit from risk-management tools that can help them handle such risks more effectively and reduce their overall insurance costs. To that end, the practice may want to consider the establishment of a Captive Insurance Company (CIC) to protect themselves from risks not typically covered by traditional insurance companies.

Captive Insurance Planning

Captive insurance planning is a strategy for physicians to manage risk through the purchase of a property-casualty insurance policy. Premiums paid by the practice to a properly structured CIC should be tax-deductible to the practice under section 162(a) of the IRS code just like their workers’ compensation or malpractice coverage.

When the practice forms a CIC, it receives premium income tax-free up to $1,200,000 per year, per captive. Profits that come out of the CIC come out as a distribution from a C-corp. as qualifying dividends or long-term capital gains, which are currently 15%. Furthermore, the CIC may retain surplus from underwriting profits within reserve accounts, free from income tax. Profits that accumulate within the CIC can be used as a tax-deductible sinking fund in order to save money on malpractice premiums by shifting to a high deductible policy and/or insuring that deductible through the CIC.

No Rules – Just Right

There are no hard-and-fast rules regarding the minimum amount of gross revenue from a practice or the minimum amount of insurance premiums paid by a practice before considering the establishment of a CIC.

Planning Opportunities

The establishment of a CIC creates immense planning opportunities for physicians because of the flexible ownership of the CIC. The CIC is set up as a C-Corp and someone or some entity owns the shares of the C-Corp While it’s important to keep in mind the primary business purpose of the CIC is for risk management, some potential planning opportunities include the following:

  • Wealth Accumulation/Surplus Retirement Income: Physicians own the CIC outside the practice for surplus dollars in retirement.
  • Asset Protection Planning: Most physicians have the CIC owned inside an asset protection trust to potentially shield pre-tax dollars and assets from judgment creditors or litigation.
  • Estate Planning/Wealth Transfer: Physicians who don’t need access to this money may be interested in having the CIC owned outside of their estate to also bypass gift and estate taxes with each premium payment.
  • Practice-Owner Benefits: By the CIC not being an employee benefit plan, it is not subject to the non-discrimination rules of ERISA, and therefore only benefits the owners of the practice.
  • Non-Mandatory Participation for Practice Doctors: Doctors at smaller levels can join together to create a CIC for economies of scale.

Enter the Experts

Physicians would be encouraged to discuss the various CIC planning strategies with their tax, estate planning, and other legal professionals to ensure that the most appropriate structure is utilized to fit their unique planning objectives. As part of our services to the practice, we would be happy to meet with the practice management and advisors to answer any questions and start the process of the feasibility of a CIC for the practice. As reassurance, this is already IRS-tested, and we strictly adhere to each IRS Safe Harbor Revenue Ruling for a conservative model offering very predictable risk management and tax planning results.

Assessment

While this is not intended to be a thorough discussion of CICs, it is meant to initiate a conversation with practices or conduct due diligence with their key advisors as to the many potential benefits of establishing a Captive Insurance Company.

About the Author

Mr. Guy P. Jones is a Certified Financial Planner in Houston, TX who has specialized in serving the financial planning needs of medical professionals and their families since 1990.  He can be reached at 832.677.1692, email: guypjones@guypjones.com, or by visiting his website: www.guypjones.com

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

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

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