Oops!
Doctors' worst financial blunders

These doctors' mistakes prove that exam room smarts don't guarantee financial savvy. To avoid similar pitfalls, consider what others have learned the hard way.

By Susan Harrington Preston
Senior Editor

In 1998, two wine-loving doctors joined other investors in stockpiling top-quality champagne, confident that toasts to the new millennium would push demand, and prices, sky-high.

When prices fizzled instead, at least most of the investors had champagne to show for it. But not the doctors, who told their tales to Andrew Hudick, a financial planner in Roanoke, VA. The physicians had invested in champagne futures. The deal: $50,000 up front for certificates entitling them to buy 2,400 cases of champagne at the then-market price, and $50,000 more when the champagne was delivered. Meanwhile, the salesmen would purportedly trade the certificates as if they were futures on a commodity exchange.

"These sales guys were very convincing," Hudick says. "They kept calling one doctor and saying the prices were going up and that they were trading his futures, telling him to send more money. So he did. "I finally persuaded him to ask them to send a check back—to tell them he needed the money," says Hudick. "He never heard from them again."

One doctor lost $50,000; the other, $100,000. "They never got the champagne or their money back," says Hudick.

When it comes to making big financial blunders, these doctors are far from alone. "In the last three years, we've seen doctor clients invest in a motorcycle dealership, a cattle ranch, and a couple of real estate limited partnerships," says Denver financial adviser Larry Howes. In each case, the doctor lost the entire investment—half a million dollars for the motorcycle dealership alone.

"Most of these investments were based on very general advice," Howes adds. "Doctors read that boomers are going to go in big for Harley-Davidsons, or their tax adviser told them, 'Sure, an office building would work as a writeoff.' Or they believed what the developer told them."

Notes adviser Randy Thurman of Oklahoma City: "We financial planners talk about boring things like diversification, asset allocation, market rates of return, and so forth. When somebody says 'Hey, I'm going to double your money this year!' who do doctors want to believe?"

Knowing they're smarter-than-average people, doctors often think they're too bright to get conned. But exam room smarts aren't market smarts, and even smart people can do dumb deals. In this article, we'll tell you about some of them. Perhaps you can avoid paying the same high prices your colleagues paid for their mistakes.

Safe can be sorry, too

Too little confidence can be just as dangerous as overconfidence, leading you to choose investments with the lowest possible risk over better investments with only modest risk.

"One of my doctor clients had a substantial sum in money-market accounts," says financial planner Ron Carson of Omaha. "After a lot of handholding, I finally persuaded him to switch to a portfolio that was diversified and invested for growth and income. It took about six months to get the program in place. A few months later, the doctor called me and said, 'I've made 15 percent in three months, and that's more than I made in the last three years. That's good enough for me.' Then he put it all back into money-market accounts. That was a major mistake."

To another doctor, security meant gold. "He was so convinced that the new millennium would bring disaster that he cashed out all his investments and took physical delivery of gold bullion," says Carson. "He did it early in 1999, and he paid tax on everything he sold. So the maneuver cost him about a third of his assets in taxes, plus a 2 or 3 percent fee for buying the gold. If he'd kept his money in the markets, it would have doubled."

Timidity isn't all that leads doctors to lob their cash into the nearest bank. "One physician inherited something like $8 million in 1997, and he kept all of it in a money-market fund," says Marvin Burt, whose financial management firm is in Rockville, MD.

Why? "He's just been too busy to deal with it," says Burt. Not only did the doctor miss the previous run-up in stocks, but he stands to miss any future ones, too; the inheritance is still in the money fund.

Dave Diesslin, a Fort Worth financial planner, chalks up such inaction to apathy. "They don't care enough to read the details of documentation, and they don't sit down with their spouses and say, 'What happens if I'm disabled? What happens if we have an accident?' Apathy's a common problem, and the outcome can be very costly to the entire family."

Running too hard and losing ground

"Bulls make money and bears make money, but pigs get slaughtered," goes a Wall Street saying. Some physicians ought to pay close attention to that line.

"One doctor left me in 1985 because my investment approach was too slow for him," says Bart Boyer, a financial planner in Asheville, NC. "He wanted more than the 12 percent average annual return we expected him to get. He left for a full-service brokerage, with $100,000 in his pension and profit-sharing plans.

"Ten years later, he came back, and he still had $100,000. He'd been saving $30,000 per year, and because of the subsequent run-up in stocks, if he'd stayed with me he probably would have made an average of 15 percent per year, compounded, during that period," Boyer continues. "So instead of $100,000, he could have had over $1 million. And if he'd kept that entire amount compounding at 12 percent until he retired, he'd have wound up with more than $13 million.

"I asked him what happened," Boyer says, "and he told me, 'We kept swinging for home runs, and we always hit air.' "

Ending up where you started is bad enough, but you can do worse, as a tale from adviser Tom Grzymala of Alexandria, VA, illustrates.

"One of my clients had won $3 million in a lawsuit, and when he came to us, he had just under $1 million left," says Grzymala. "He'd get tips at cocktail parties, and then he'd tell me, 'I want to buy Time Warner,' or whatever. I'd say, 'You don't have any money.' He'd say, 'Well, buy it on margin! There'll be money coming in.' Or he'd say, 'My aunt's broker is hot on XYZ. I want 1,000 shares at 2 1/4.' I'd advise against it, but he'd do it anyway.

"He also had a broker in New York," Grzymala continues. "The doctor would frequently call me and say, 'Sell whatever you have to sell to make my margin call in New York.' Meanwhile, he was paying big bucks for the trades.

"We found out later that the doctor was trying to impress his aunt with his stock-picking ability so she'd leave money to him in her will," Grzymala says. "She'd call him and ask, 'How much do you have now?'

"When we severed the relationship, he was down to $250,000."

Day trading, too, captures doctors' fancy, and sometimes their fortunes. "One of my clients took a large position in Wal-Mart after it had run up about 70 percent during the year," says Mark Balasa, a financial adviser in Schaumburg, IL. "He was trading it as often as six or seven times a day, trying to make gains on little movements in the price.

"He even started selling options on it, and also bought on margin. When the stock went down, he started getting margin calls, and he had to sell at a loss."

When dreams don't fit the budget

Doctors are particularly prone to overspending on homes. "They'll have a dream, and they won't count the cost," says John Henry McDonald, a financial planner in Austin.

"One client of mine moved out of state and bought himself a castle right on the water. His dream was to spend time relaxing on the porch or floating around in an inner tube, but because the house cost so much, he wound up working 70 hours a week," says McDonald. "He's never home."

If you don't want your budget to bust your dreams, you need to shape your dreams to fit your budget. Adviser Richard Bellmer of Indianapolis has seen doctors who ignored that advice dig some deep holes. "One was making half a million a year, but he had 42 credit cards, and every one of them was maxed out," Bellmer says. "He had every toy known to man: two motorboats, a sailboat, Jet Skis, a Porsche, two motorcycles. He had a negative net worth.

"The doctor couldn't grasp that he was spending more than he made. He wound up consolidating his debts and borrowing to pay them off."

More than once, Howes has seen the consequences of overspending go even further. "A doctor will have five cars and three houses, and he'll never eat at home," he says. "He'll borrow against the equity on the properties, and transfer large balances from one credit card to another. Then it will all start coming apart. He'll miss a house payment, say, and get a notch in his credit report. The offers for low-interest credit cards stop coming, so the balance-transfer ploy comes to a halt. Then he'll fall behind on payments, get hit with late-payment penalties, and have to sell one of the houses to free up cash.

"Once that process begins, it's tough to stop it. I've seen doctors go into bankruptcy in as little as four months."

And then? "Their dignity won't allow them to hang around with their old colleagues," Howes says. "They move. They get a job in another town."

Taking the hit for bum advice

Consider the hardheaded, Ivy-league-educated internist who spent 12 years following bad advice from a bumbling money manager.

"My practice accountant recommended him, and several doctors I knew had pension plans with him," the physician says. "So I turned over the retirement plan for my medical office to him."

Bad move. "For the first seven years, he advised me to keep the entire retirement portfolio in a money-market account. He said the stock market was overvalued and was going to crash.

"Then he talked me and other doctors in our community into using our personal funds to invest in one small-cap stock," he continues. "He said it was very safe, and that it would have great returns even in the short run. A lot of doctors lost tens of thousands of dollars."

The doctor finally took a cue from his common sense when, after the market took a steep dip, the adviser told him to put his money back into fixed accounts. "My financially savvy friends said I should hold tight, and I followed their advice," he says.

The internist now invests with Bob Hanlon, a Morristown, NJ, money manager whom he'd seen recommended in this magazine, in 1998's "The 120 best financial advisers for doctors." (See our updated list of the best financial advisers.)

Financial adviser Kenneth Schapiro of Martinsville, NJ, also picked up a ball that another planner dropped. "The doctor had a bond account that his broker was churning," Schapiro recalls. "Over three years, the broker had made $10 million in transactions on the account, which was worth only $1 million. At a time when interest rates were falling, the doctor should have gotten double-digit returns, but he made only 3 percent a year." Eventually, the doctor received a settlement through an arbitration proceeding.

"Once doctors trust someone, they take a very hands-off attitude," notes Schapiro. "Sometimes it's an accountant. Sometimes it's a good salesman. Most times it's somebody a fellow doctor recommends. Many times it's the wrong person."

Dime-wise is dollar-foolish

Then there's the do-it-yourselfer. "When I was divorced, I took my lawyer's advice and settled out of court," says one poorer but wiser doctor who is now a client of financial planner Guy Acerra of San Antonio. "I got advice on what to do, but not how to do it."

To get cash, the doctor simply sold shares from his retirement account. Since he was earning a hefty income and wasn't yet 59 1/2, he not only paid income tax at the highest possible rate, but also the 10 percent penalty the IRS levies for early withdrawal from a tax-deferred account.

"I paid 50 percent in taxes!" the doctor says. If he'd gotten financial advice, he'd have learned about the retirement plan withdrawal hitch and made less-costly arrangements to get the cash for his ex-wife.

In Nebraska, another doctor took pride in doing his own taxes. Over 15 years, he saved himself about $500 a year in accountant's fees. On the other hand, he paid an extra $10,000 a year in taxes.

"The doctor was updating his will, and his lawyer had referred him to me so I could check the financial arrangements," says J.A. Abels, an estate planner in Papillion, NE. "While reviewing his records, I noticed that he hadn't taken the affordable housing tax credits he was entitled to. I had to tell him he'd paid $150,000 more in taxes over the years than he had to."

Abels periodically has to give penny-saving doctors such bad news. Not surprisingly, "they look kind of stunned," he says.

Co-sign a loan, and you might inherit it

"Give a pledge for a stranger, and you will suffer," says a Biblical proverb. "Refuse to stand surety and stay safe." It's fair to say, then, that one FP made a mistake of Biblical proportions.

"He co-signed a note so his brother-in-law could buy a gas station," says Malcolm Makin, a Westerly, RI, financial adviser. "The gas station turned out to be a toxic waste site."

Having divorced the doctor's sister for unrelated reasons, the ex-brother-in-law took off for Mexico. "He just ran," says Makin. "But even if the doctor could have reached him, it wouldn't have helped; the guy didn't have any money.

"The doctor wound up selling the gas station at a loss," says Makin. "It cost him thousands of dollars a month for 10 years to pay off the debt. It worked out to about $1 million."

Hobbies that should have stayed hobbies

"One physician I work with had an interest in fine wines," says Michael Arnow, a financial adviser in Glendale, WI. "He got involved in a wine and cigar shop and wound up losing a ton of money. For one thing, when alcohol is involved, you have what we call 'inventory shrinkage,' where the bottles walk out. You really need two people there at all times, so one watches the other. But that's just the tip of the iceberg."

Indeed. Says the doctor: "I did it with a partner, who is also a doctor. We were located in a mall, which redecorated after we opened, and boarded up our storefront. Also, we were a small shop, and what we had to pay the wholesaler for the wine was more than the high-volume discounters were charging retail.

"Then our store manager quit, started a competing shop, and sued us because he thought we'd unfairly denied him the right to buy into our wine shop. I've never been sued for malpractice, and here I'm being sued over a wine shop," he says with a laugh. "Well, he won the lawsuit, and that cost money, too.

"We think the manager was also the one who suggested to government authorities that we weren't paying all our taxes," he says. "So some officials came in one day and demanded records." Eventually, he and his partner let the venture go bankrupt, losing a total of about $130,000.

"Now I have some of the most expensive wines in the world in my basement," the doctor remarks.

Says Arnow, "People think they're going to be able to play with the things they like to play with when they turn a hobby into a business. The reality is very different."

In fact, $130,000 is a relatively modest loss for such an investment. Richard Bellmer tells of a doctor who was making a million and a half a year, but threw away more than half of it on investment schemes. Among them was a plan for a restaurant chain that he and his wife concocted after she became an expert in Italian gourmet cuisine.

"They put a lot of money into capital investment, but they'd never tested a business plan for the restaurant," Bellmer says. "They bought a computer system that could handle 16 sites, but they had only two. The whole thing went bankrupt and cost them about $700,000."

 

Sue Preston. Oops! Doctors' worst financial blunders. Medical Economics 2000;15:50.