“I have a huge cash flow… but atthe end of the day it’s what youhave after expenses in yourhand… and what you do with it”

John, urologist.

DIAGNOSIS FOR FINANCIAL SUCCESS Creating Financial Independencefor Medical Specialists

Level 2, 52 Davenport Street

Southport, Queensland 4215

Level 10, 60 Carrington Street

Sydney, New South Wales 2000

T: 07 5591 7900

W: www.pertassoc.com.au

TABLE OF CONTENTS

1. EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

2. THE ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

3. THE SOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

4. CASE STUDY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

5. YOUR PERSONAL CFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2

6. CHOOSING YOUR PERSONAL CFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2

7. ABOUT THE AUTHOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3

8. ABOUT PERT & ASSOCIATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3

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1 EXECUTIVE SUMMARY

Pert & Associates performed extensive research into the

financial well-being of medical specialists in public and private

practice. Their findings revealed a number of common themes

and challenges. Notably, many specialists find themselves

totally reliant on ongoing cash flow for their wealth and

financial independence. That means their biggest asset is the

money they will make in the future – an amount that

diminishes over time.

A key challenge for medical specialists – both public and private –

is to transform their cash flow into productive wealth.

PRODUCTIVE WEALTH – assets that generate income to fund retirement or

other needs. These are different to lifestyle assets such as a fine home, beach

house, jewellery or art.

Most practices are purely cash flow businesses – their value relies solely on the

skill and expertise of the medical specialist. That means the value of their

business cannot grow independent of their labour.

“The problem is we are sole traders. I guess that is a big challenge. We cannot build businesses.” Stephen, Oncologist.

With a typical medical specialist working in excess of 70 hours per week, they

are extremely time-poor. That makes tackling the important issues of cash flow,

investing and lifestyle protection difficult. Furthermore, specialists pride

themselves on being medical experts but may not have the time or inclination

to become financial markets experts as well.

“It’s not something you would want to worry about. You wouldrather go to the beach and spend time with your kids than sit down and read some financial papers.” Simon, Anaesthetist.

To overcome these problems, some medical specialists have found a way

to manage lifestyle expenses and transform cash flow into productive wealth.

In the following paper we outline how a dedicated professional can use a holistic

approach to help you manage your superannuation, debt, business structure,

taxation, risk, estate planning and lifestyle goals. In essence, become your

personal Chief Financial Officer (CFO).

“I want one phone number, one person that does everything forme…tax, insurance, super and investments… I don’t want fourpeople. It’s a headache.” Michael, Orthopaedic Surgeon.

Your personal CFO can establish an integrated, tailored approach and project

manage a team of experts in each field (tax, law, investments etc) to transform

your high income stream into independent wealth. The use of a fee for service

model (rather than commission) means you pay professional fees only for the

service you require.

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2. THE ISSUES

In 2007 Pert & Associates interviewed a wide range of medical specialists both

public and private to uncover the financial DNA of medical specialists. Detailed

below are some of the most common themes and financial challenges.

2.1 CASH IS K ING

For medical specialists, public or private, managing cash flow wisely is vital. It’s

a matter of simple arithmetic. While other businesses can generate goodwill and

grow their value independent of the owner’s participation, medical practices may

produce high cash flow yet build little or no equity over time.

“I have a huge cash flow…but at the end of the day it’s what youhave after expenses in your hand…and what you do with it” John, urologist.

2.2 TIME POOR

Daily work demands coupled with family life leaves most medical specialists

little time to focus on their finances.

“I work at least 60 to 70 hours a week, twelve hour days, Monday to Friday and on call in the public sector alternate weekends…the last thing I want to do when I am free is study financial markets.” Paul, Surgeon.

“Time pressure is a big thing with doctors, and I don’t think everyonewants to use their time to consider their financial future.” Ross, Vascular Surgeon.

By neglecting financial matters medical specialists may not be adequately or

appropriately addressing many wealth management issues. This can compromise

their long-term financial wellbeing. It may mean that it takes more years of hard

work to achieve financial independence than it should. Sometimes financial

independence is not achieved at all.

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2. 3 COMPARATIVE ADVANTAGE

Most medical specialists are passionate about their specialty and do not seek –

or have the time – to become financial markets experts. Despite high and

growing cash flows, it is not uncommon for medical specialists to lack the

financial skills they need to make the most of that financial wealth over time.

Paradoxically, their high cash flow gives them access to a wide range of

investments. These investments may be sophisticated and attractive but if

deployed without some kind of coherent investment strategy can achieve

disappointing, even counter-productive results.

“We need to invest our monies in real estate or stocks etc…and I think the majority of us have no idea how best to do this.” David, Dermatologist.

2.4 DEBT

This lack of financial skills is compounded by the way in which debt quickly

becomes a part of a medical specialist’s financial profile. It costs a lot of money

to become a medical specialist. Many specialists find themselves burdened by

the debt they incur through long years of study. Compared to many other

professions, their peak earning years occur later in life.

“By the end of training, most people I know are usually about$40,000 behind. If you go to somewhere like Bond University, you’re probably more than $100,000 behind.”Roger, Surgeon.

“Most people I know, when we finished we all have had five figure debts.” Denis, Ophthalmologist.

Debt quickly becomes a habit. In the early years of practice it is a hangover

from a long and expensive medical education. In later years, with a steady stream

of cash coming in and credit readily available, a habitually heavy debt load can

delay investment and have a corrosive effect on savings throughout a career.

“We always seem to be buying stuff we don’t necessarily need andalways have around $10,000 on the credit card.” Brent, Surgeon.

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“I feel like I am always behind the eight ball. I’ve always got $5,000on the credit card, until I get that paid off and then there is anotherbill and another bill…” Tim, Registrar.

“In the first ten years of practice, you’ve just been poor for so long – you justlive it up…” Gordon, A&E Specialist.

2.5 GOING PRIVATE

Pert & Associates interviewed a number of medical specialists in the public

system that are thinking about going into private practice. There are a number of

benefits to both public and private practice, and the biggest challenge in moving

from public to private surrounds cash flow.

“If I go private and I don’t earn an income in the first threemonths…the first 12 months are leaner, then I earn lots of money.” Ian, Paediatrician.

For medical specialists contemplating the move, careful consideration and

planning is needed to manage this cash flow situation wisely.

2.6 A CENTRAL POINT OF CALL

Our research showed that medical specialists spread their financial affairs across

a number of different and often uncoordinated providers, such as accountants,

lawyers, investment advisers, stock brokers and insurance agents.

“The trouble with using different experts for different issues, such astax, legal, investments etc, is that they aren’t working together to get youthe best overall outcome.” Robert, Dermatologist.

Many medical specialists commented that it would be far easier (and more effective)

to have one central point of contact to handle all financial management issues.

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2.7 BEHAVIOURAL BIASES

There is a whole branch of science known as behavioural finance which has

evolved to study interaction between human behaviour and economics1.

According to this theory, many human behaviours are hardwired and we often

act in ways which are not in our best financial interest. Often, motivated by fear

and greed, we respond erratically and irrationally, reducing our investment returns.

Some of the most common investor behavioural biases include:

2.7A OVERCONFIDENCE

Many professionals think that because they are good at what they do,

they will also excel in managing their investments. Medical specialists

have a tendency to overspend to fund an affluent lifestyle, assuming the

cash flow will last forever.

“Because we have access to high cash flow, it sometimes createsa lifestyle that’s beyond what’s reasonable for us.” Julie, Cardiologist.

2.7B RISK AVERSION

Academic research has shown that investors are more troubled by a loss

than pleased by an equivalent gain. However, by being so afraid of losing

money, investors can often reduce their opportunity for gain. In other

words, sometimes not taking risk can be risky itself.

2.7C REGRET

We tend to judge ourselves quickly if our actions do not immediately

generate a positive response. Fear of regret can lead investors to hold on

to losing investments for too long in the hope they will ‘come good’.

Alternatively, if you have invested for sound reasons, as part of a long-

term asset allocation strategy for example, it pays to stick to your

investment objectives rather than engage in costly, knee-jerk trading.

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2.8 MONEY PERSONALITY

According to the financial services research firm, CEG Worldwide LLC, investors

can be divided into a number of different money personalities. Family Stewards

for example, invest to provide for their family but are not deeply interested in

how investments work2. Many doctors have what is known as an Innovator

Money Personality. CEG research suggests Innovators are always looking for the

latest, leading edge investment products. Given the many years doctors spend

looking at the latest research and seeking better medical solutions, this tendency

is understandable. However, when it comes to investing, many doctors are prone

to chase the latest investment product rather than build and stick to a

disciplined, long-term investment strategy.

1Two of its pioneers, Daniel Kahneman and Vernon Smith received the 2002 Nobel Prize in Economics for their work.

2“High Net Worth Psychology” Russ Alan Price and Karen Maru File, 1999, USA 0-9658391-3-3

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3. THE SOLUTION

Unlike other businesses, ‘selling out’ is not a viable retirement solution for

medical specialists. So instead of banking on selling your private practice at the

end of your career, a wiser strategy is to manage the substantial amounts of cash

you are generating now to build income producing capital outside your practice.

Without this type of structure you are effectively “spending down” your wealth

in lifestyle expenses over time – and as you get older, you have fewer years to

make these earnings. As the chart below illustrates, while the present value of

your future earnings is your biggest asset, your lifestyle is your largest liability.

You also need to carefully manage your lifestyle expenses. In that way you can generate

productive wealth that offsets the tendency to ‘spend down’ your wealth over time.

The economic principle of comparative advantage suggests it is perfectly rational

for medical specialists to focus their time on what they are good at – that is

where their time is most valuable. The link that many medical specialists miss

is the need to outsource financial issues to an expert in that field – just as they

would with an IT specialist or an architect.

Essentially, medical specialists need help to make smarter decisions with their

money. They need a dedicated professional who can manage their finances and

allow them to stay focussed on their career.

They need a personal Chief Financial Officer (CFO).

A personal CFO is first and foremost oriented towards their clients. Working

for professional fees rather than product-related commission their interest is

in building long, mutually-rewarding relationships with clients whose wealth

expands over time. The following case study illustrates how a CFO can help you.

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CURRENT VALUE OF FUTURE EARNINGS OVER TIME FOR A MEDICAL SPECIALIST

TIME

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LIFESTYLE ‘SPENDS DOWN’ EARNINGS

CLIENT PERSONALCFO

Banker – Debt Management

Super, DIY, Admin, Actuarial

Cash Flow

Solicitor, Estate Planning

Accountant, Tax Adviser

Investments

Broker

Risk Adviser

4. CASE STUDY (based on a real life example)

Simon is a recently qualified anaesthetist. He is employed as a VMO at a

hospital on the Gold Coast and does some private work with a local group.

He is married to Jennifer, a qualified physiotherapist, who is not currently

working as she is raising their two young children.

Last financial year Simon earned over $350,000 as a VMO. With the additional

private work he is now doing, his annual income is predicted to rise to around

$500,000.

In the past, Simon and Jennifer found it hard to do much long-term planning –

partly due to the financial demands of Simon’s study and raising two young

children. The recent strong cash flow has given them enough capital to look at

buying their first home, it has also raised some questions about their financial

wellbeing.

“Will we have enough money by the time we are 50 to make work optional?”

“What is the best structure for our investments?”

“Should we be putting money into Super?”

“What happens if one of us dies”?

“What happens if Simon is injured and cannot work for a period of time?”

“What is asset protection?”

Taking a friend’s advice, Simon and Jennifer set up a meeting with a personal

CFO to find answers and solutions to their questions.

To help them, the personal CFO:

1. Undertook a discovery process to find out their attitudes to money. This

process revealed that Simon would like to take a year out within the next

ten years to use his medical skills working for a charity overseas.

2. Identified their financial goals – which included buying the family home,

becoming financially independent by age 50 and having an income outside

of work which can fund their lifestyle choices.

3. Acknowledged that a number of financial ‘projects’ needed to be completed

to lay the foundation to reach their goals and objectives. This would require

a variety of outside experts (lawyers, taxation experts etc) – but that these

experts would be project managed by the personal CFO.

4. Coordinate their new home loan, taking into account their situation –

ensuring the property was purchased in the right entity in order to protect

their equity due to Simon’s profession.

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5. Engaged a risk specialist to put the appropriate level of insurance cover in

place. Since their greatest asset is the cash flow generated by Simon’s skills,

the right level of insurance was vital to protect Simon and Jennifer’s wealth in

the event of his death, disability or temporary ill health.

6. Establish an estate plan – the risk discussion led towards the important issue

of protecting their two young children. The personal CFO discussed issues

such as guardianship, asset protection measures, testamentary trusts and

enduring power of attorney. The personal CFO then contracted an estate

planning lawyer to create all required documentation.

It doesn’t end there. Projects planned for year two include the following topics:

7. Superannuation – this may involve establishing a DIY Super Fund.

8. Investing outside of superannuation and the family home, this could involve

establishing trusts for asset protection.

9. Strategies for funding private education for the children.

10. Regular review of cash flow to ensure productive wealth is being built to

achieve their goals.

11. Advice on trusts should Simon decide to move into private practice.

12. Securing the services of a book keeper should Jennifer decide to return to the

workforce.

Simon and Jennifer have laid the foundation for a successful financial future.

They have answers to their questions, but more importantly, they have a personal

CFO they can turn to who will work with them through whatever financial issues

life throws up.

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5. YOUR PERSONAL CFO

Your personal CFO will offer you a variety of benefits, including:

1. Project management – managing a team of experts while remaining focussed

on what is in your best long term interest.

2. Discipline – helping you avoid wealth-damaging biases and behavioural traits.

3. Longevity – they will be there for the long haul. The relationship between

you and your personal CFO is ongoing and built on trust.

4. A deep understanding of your core values, goals and objectives.

6. CHOOSING YOUR PERSONAL CFO

Your choice of personal CFO is critical. You need to be comfortable delegating

to them wealth management issues that directly affect your financial security and

that of your family.

You need to consider the following criteria when choosing such a professional.

1. Strong relationships with other professionals such as accountants, insurance

experts, estate planning lawyers and business consultants.

2. Comprehensive understanding of the specific needs of medical specialists.

3. Limited client numbers, to allow them the time necessary to build a sound

relationship with you and to understand what is important to you.

4. Fee for service rather than commission based. This allows the CFO to align

their interests with yours.

5. Client focus.

This last point is difficult to quantify, but not difficult to understand. You should

go with your gut feeling. In your initial meeting you might consider raising a list

of issues which you feel are important such as the points listed below:

1. Frequency of contact – how often does the personal CFO meet their

clients, speak with them on the phone and communicate via email?

2. Personal rapport – do you feel that you can have a good working

relationship with this person?

3. Time and patience – is he or she spending enough time with you

explaining issues and fully understanding questions?

4. Attention – does he or she listen to your concerns and take the time to

understand you and your goals?

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TIME

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LIFESTYLE ‘SPENDS DOWN’ EARNINGS

CLIENT PERSONALCFO

Banker – Debt Management

Super, DIY, Admin, Actuarial

Cash Flow

Solicitor, Estate Planning

Accountant, Tax Adviser

Investments

Broker

Risk Adviser

7. ABOUT THE AUTHOR

Brian Pert is a director and adviser of Pert & Associates. His mission is to help

clients use their wealth to achieve their most important life goals, such as establishing

legacies for their families, contributing to their communities and pursuing their

passions. He specialises in helping medical specialists and Qantas pilots.

Brian is a certified Financial Planner, a status that requires comprehensive

knowledge and continuing education. He has a Degree in Economics and has

been advising clients on financial independence for more than 15 years.

8. ABOUT PERT & ASSOCIATES

Pert & Associates is a boutique firm with offices on the Gold Coast and in

Sydney. The number of clients is limited in order to ensure a high level of

personalised attention and direct access to the partners’ expertise.

Clients include medical specialists, Qantas pilots, professionals and high net

worth individuals.

Pert & Associates

Level 2, 52 Davenport Street

Southport, Queensland 4215

Level 10, 60 Carrington Street

Sydney, New South Wales 2000

T: 1300 730 381

E: enquiries@pertassoc.com.au

W: www.pertassoc.com.au

Do you want to know more about the unique issues facing medical specialists, or

about how to achieve long-term financial success?

Pert & Associates would be happy to discuss your specific situation with you and

help you work towards true financial independence.

IMPORTANT INFORMATION: This document has been prepared to provide you with generalinformation only. It is not intended to take the place of professional advice and you should not take actionon specific issues in reliance of this information. In preparing this information, we did not take into accountthe investment objectives, financial situation or particular needs of any particular person. Before making aninvestment decision, you need to consider (with or without assistance of an adviser) whether this informationis appropriate to your needs, objectives and circumstances.

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