Risk Management
Thomas E. Nolan, MD, MBA
Abe Mickal Professor and Chair
of Obstetrics and Gynecology
Director, Women’s and
Newborn Services
LSU-Health Science Center
New Orleans
Objectives
• The following should be covered by
at the end of these lectures:
– Professional relationships: who you are
and who you need and when
– The budgeting process and tools used
by financial planners
– Business entities and how to chose
– Understanding risk management and
appropriate use of insurances
Stereotypical Behavior
• Most financial planners will have a preset
idea of where people are from a financial
and emotional basis
– Important to understand where you as a
physician stand and what the planner expects
from you
– Self realization of how you were raised, what is
of value to you needs to be formulated and
articulated, including your financial fears
Characteristics of Physicians
(as seen by themselves)
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Intelligent
Compassionate
Sophisticated
“Captain of their own ship”
Overworked, under appreciated
Under compensated
Characteristics of Physicians
(as seen by most financial advisors
and sales personal)
• “You can sell a doctor anything”
• The more you pay, the better it is
• Because we make more, we should
buy better things and pay more
• Rely on “feelings” about financial
planning situations
• “Deserve” better treatment
Characteristics of Physicians
(as seen by most financial advisors)
• Don’t understand short and long term
strategies of financial planning
• Tax avoidance schemes (every doctor
pays too much in taxes, just ask!)
• Tendency to rely on one advisor for
financial advice (CPA, stockbroker,
insurance agent)
• “Just too busy”
Our Goal is to Teach you:
• Fundamental understanding of
financial services available and how
to use those services
• How to reach YOUR GOALS
• Goals and guidelines for evaluation
of your progress at different stages
of your biological and financial life
Steps used by Financial
Planners
• Define goals in terms of dollar
amounts and time frames
• Determine existing resources
• Determine if additional resources are
needed
• Consider potential strategies/
products for achieving goals
Before you see: CPA, Planner
Attorney
• What do you want to accomplish
• Call in advance: find out what they
want or need prior to appointment
• The billing clock is usually ticking
• The more you bring in, the better the
visit, the less costly
• Letter of intention (will, estate, etc.)
Before you see: CPA, Planner
Attorney
• Worksheets are helpful (Excel,
Quicken, etc.)
• Vanguard has financial planner
worksheets (17 pages)
• Requires probably 8-10 hours of
work and worth every minute
Creating Time Lines
• Next series of slides is meant to
stimulate thought and are less than
perfect, but are tend to be major
worries to most professionals
• The time lines may be off by a
decade, but are only meant to
illustrative
Financial Age: Young
• 25 – 29
– Education
– Creating education
debt
– Marriage,
relationships
– Children
• 30 - 34
– Finishing residency
– Beginning to
manage education
debt
– Establish, join
practice
– First cars, houses
– Insurances
Financial Age: Young
• 35 - 39
– Liquidating
education debt,
consolidation of
debt
– Infertility
treatments or
adoption expense
– Children's
education needs
– Insurance needs
• 35 - 39
– Home, furnishing
upgrades
– Retirement
planning
– College planning
– Tax problems
Financial Age: Enter Early
Middle Age
• 40 – 44
– Practice growing,
expanding
– Children’s
secondary
education
– Retirement
planning focus
– College saving
• 40 – 44
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–
–
–
Divorce
Asset accumulation
Estate planning
Income taxes
Financial Age: Middle Age
• 45 – 49
– Practice leveling off
– Leveraging practice
– Retirement
planning
– College !!
– Debt decreasing
(home, boat, etc.)
• 45 – 49
– Buying out senior
partner or adding
partners
– Insurance needs
lower
– Estate planning
Financial Age: Later Middle
Age
• 50 – 54
– Retirement
planning
– Asset accumulation
– College
– Divorce
– Other business
opportunities
• 50 – 54
– Buying out senior
partner or adding
partners
– Second home,
bigger boat
– Estate planning
Financial Age: Later Middle
Age (Getting Close!)
• 55 – 59
– Retirement planning
– Estate Planning
– Asset accumulation
– Consider selling
practice, ? Relocation ?
– Taxes
Early Elderly
• 60 – 65
– Retirement planning, assessing income
needs, medical needs, children’s needs
– Selling practice
– Reevaluate estate planning
– Life insurance, medical insurance
– Tax planning
You Made it!!!
• 65 and beyond
– Keeping busy!!!
– Retirement planning, cash flows,
vehicles to reach needs
– Social Security, Medicare, Long term
care
– Estate planning, with a close eye on
taxes!
How do I get there???
• Need to establish a team of
professionals or a “quarterback” to
assist you
• Most financial individuals come
with strengths, weakness and bias
• Major areas of concern need to be
addressed in interviews and
articulated
Common Problems or
L.I.V.E.S
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L – Lack of liquidity
I – Inadequate resources
I – Inflation
I – Improper disposition of assets
V – Value or proper financial security
E – Excessive taxes (poor investment
choices)
• S – Special situations
Your Team
• Accountant: CPA and look for area of
expertise. Personal, business and
estate are your primary focus
• Forget H & R Block—you taxation
needs as you acquire assets and
increase income will outstrip most
the training and knowledge of
standard preparers
Your Team
• Lawyer. Knowledgeable in areas
such as:
– Contracts
– Shielding assets
– Estate planning, trusts
– Impact of divorce
• Comfort level should be the same as
your pastor, rabbi or priest!
Your Team
• Broker or mutual fund company
– More individuals are working with
online mutual fund companies
– Banks, brokers and mutual fund
companies are becoming more of a one
stop shopping
• Banker
– Trust officer, lending officer, etc.
Your Team
• Insurances:
– Life and health agent
– Disability
– Casualty agent
– Car
– Umbrella
– Assessment of needs
Your Team
• Financial Planner (fee only)
– Assess your needs
– Coordinates other team members
to focus on your needs
– Assess where you are, where you
should be, where you want to go
• Avoid the one for all (typically
insurance sales people)
Steps used by Financial
Planners
• Consider client constraints affecting
selection of vehicles and strategies
• Select appropriate vehicles and
strategies
• Implement plan
• Monitor and adherence to plan
• Revise plan as client situation
changes
Data Needed
• Family and dependant data
– Date of birth, Social Security number,
health problems, extended family
members as appropriate
– Desires of family and how that may
affect planning
• Parents
• Children and education (public, private
graduate school, etc.)
Financial Work Sheets
• Family Balance Sheet (“Net worth”)
• Income statement: What comes in
and how it is spent on a personal
level (think monthly budget)
• Statement of Cash Flows (Where it
comes from and where it goes from a
more global level)
Financial Work Sheets
• Family Balance Sheet
– “Snap shot” of where you are on a
particular day
– Commonly called “net worth statement”
– Static: reflects one point in time, but
gives an overall quick assessment of
where your assets are located
How to Construct a
Balance Sheet
• List all assets first starting with most
solvent and working to fixed (house)
– Cash, Money Markets, Annuities and
fixed income securities (bonds)
– Stocks, mutual funds, cash value
insurance policies
– Collectables, art, jewelry, guns, etc.
– Real estate, home, vacation home,
boats, autos, furniture
How to Construct a
Balance Sheet
• Then construct a sheet of liabilities
– Mortgage, second mortgage
– Business debt
– Auto loans
– Consumer debt (credit cards)
– Loans or ongoing payments (alimony)
• Subtract liabilities from assets = net
worth on that date
Balance Sheet
• Assets
– Cash
– Short term and liquid
investments
– Long term, deferred
retirement plans
– Jewelry, coin, art
– House, cars, boats
• Use FMV
• Liabilities
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Credit card debt
Unsecured debt
Car loan
Mortgage
• Subtract liabilities
from assets = Net
worth (positive I hope)
Family Income Statement
• Usually on a monthly basis:
– Put all revenue sources at beginning of month
– Subtract recurring debts (mortgage, car and
education loans, insurance payments, tuition
– Subtract utilities, cable, telephone, estimated
usual food, entertainment
– Net at bottom is discretionary income (or
possible investment moneys)
Family Income Statement
• Helpful to monitor sources of
spending and will allow for
more accurate budgeting
• In many cases, will uncover
expenses that can be modified
or changed to better invest for
wealth creation
Family Cash Flow
• Best use of many financial tools (Quicken,
Microsoft Money) that you put payments
and transactions into program
• Gives perspective of sources of income,
expenditures, savings, investments
• Also very useful to better understand
where monies are moving and role of
taxation, retirement, etc.
Other Data
• Investment data
– Accounts, rate of return, ease of use
– How safe you feel
– Risk tolerance
– Why you have chosen the vehicles
currently using
– Do you want to change?
Other Data
• Insurance policies should be
reviewed on an annual basis
• Wills and power of attorney
• Estate planning
– Child or parent care
– Immediate liquidity?
– Where is the necessary information?
– What do you plan to do?
Other Data
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Age of retirement
Goals in retirement (travel, hobbies)
Income sources
How much do you think you will need
Where are you going to live
Health and long term insurance
Budgeting
• Not only to “save money”, but to
better see how money is used
• Must be flexible
• Many financial software programs
are available today (Quicken,
Microsoft Money and others)
• Serves as a monitor of fund usage
Budgeting
• Goals of budgeting
– Controlling expenses
– Accomplish desired level of wealth
• Retirement
• Children’s education
• Vacation or second homes
– Monitor performance of investments
Risk Management
• Wills and Power of Attorney
– Single most important document in the
fate of your estate (you lose control of
how your assets will be distributed)
– Power of attorney—especially important
if you become incapacitated physically
or mentally. Should be drafted with will
and is minimal cost
Wills need to be reviewed:
• Birth of a child or grandchild
• Death of spouse, another beneficiary,
your executor, your children’s
guardian
• Marriage or divorce in nuclear family
• Move to a different state
• New practice
Wills need to be reviewed:
• Substantial increase or decrease in
your estate
• Real estate acquired in another state
• Retirement
• Change in tax law (currently major
changes in unified credit laws, e.g.
how much can be transferred to heirs
tax free)
Estate Planning
• Adequate insurance early in career to
provide for spouse and children
• Insurance on spouse if primary
household provider or income
• Later in career, marshalling your
assets for retirement, and disposition
of estate after death (tax strategies)
Risk Management
Unexpected Event
Attendant Risk
Liquidity crisis (debt
Forced sale of
crisis, tax assessment assets, bankruptcy
Death
Disability
Loss of earnings,
tax liability, liquidity
crisis
Loss of earnings,
tax liability, liquidity
crisis
Risk Management
Unexpected Event
Sickness
Attendant Risk
Medical expenses,
family earnings
Property loss
Loss of assets and
asset value
Personal liability
claim
Legal cost, judgment
or settlement
Principals of Risk
Management
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Risk Reduction
Risk Avoidance
Risk Retention (self-insurance)
Risk Transfer
Risk Sharing
Risk Management
• Risk avoidance — least practical, but
certain behaviors can be modified.
Hobbies that place hands in danger
• Risk reduction – anticipating
problems, office procedure and back
ups for important documents,
notification of abnormal results
Risk Management
• Risk transfer – Insurances and
indemnification obligations
• Risk sharing – Combination of
retention and risk transfer
Risk Management
• Risk retention: deductibles—in most
cases take the highest. Disability
insurance consider 60-90 days (sick
days and vacation days should be
considered in calculation)
• Chance of becoming disabled much
greater than death
Morbidity (Disability) versus
Mortality (Death) per 1000 lives
Age
32
37
42
47
52
57
Disabled at Dying at Disability:
90 days
given age Death
7.78
2.25
3.45:1
9.81
2.8
3.50:1
12.57
4.17
3.01:1
16.76
6.36
2.63:1
22.72
9.96
2.28:1
32.28
15.34
2.08:1
Disability Insurance
• Greater use by physicians over the
past decade because of decreased
satisfaction with practice of medicine
• Benefits vary between policies
– Maximum is usually 60-80% of
income
– Benefits may decrease with time or
age
Disability Insurance
• Definitions (and in disability insurance it
is all in the definitions!!):
– Occupation specific (difficult to obtain
in past 5 years, but best if found/
afford)
– May change after 2-5 years to any
occupation (PCP provider)
– Residual or partial disability coverage
may be important considerations
Disability Insurance
• Key Issues:
– How is the disability defined, i.e., is it
own occupation, modified occupation
(defined as any reasonable occupation
based upon education, experience or
training) or any medical occupation
– Elimination period: how long do you
have to wait to collect usually 30, 60
and 90 intervals
Disability Insurance
• How much will it pay?
• How long will it pay
– Many policies are until age 65
• Will it pay for additional training
in another specialty?
• How often are physical
reassessments?
Disability Insurance
• Company history and rating
– Recent article in NY Times, February 13, 2005
on difficulties with UnumProvident with
200,000 disputed claims
– Women are more likely to be disability than
men because of OB/GYN related issues
• Once you begin to collect the company
will be vigilant that you remain disabled,
i.e., hire private investigators, etc.
Life Insurance
• Major Variations (regardless of how
the insurance community presents it)
– Term insurance (“pure risk”) is for
death. Cheap and provides what
you and your family really need
– Whole life, variable life, universal
life, etc. Death benefit with a
savings vehicle
Life Insurance
• Term insurance can be bought in
varying increments: until age 65-70,
or in varying lengths 5-30 years
• May require a physical. At the end of
a term, another physical may be
needed and may change risk status
• Premiums vary by age and type
• Consider policy to age 65
Life Insurance
• Whole life: level premium until age 95—
then face amount returned
• Expensive. May borrow against cash
value of policy but decreases death
premium by the borrowed amount (why
borrow your money and assume the risk?)
• Agents love whole life—they get 40-150%
of first 1-2 years of premium
Life Insurance
• Major difference in whole life versus
variable
– Whole life is “owned” by the company
and invests in very conservative
vehicles such as real estate and bonds
– Variable has 2 accounts: term on one
side and the variable is linked to the
vehicle you choose
Life Insurance
• Variable life (or any product with
variable in the name). Term life with
another separate account—may be
money market, equity or bonds
• Universal life: decreasing term with
increasing cash value—some
policies allow contribution changes
Life Insurance
• What it is good for:
– Protecting against catastrophic events
– May be used in estates planning (trusts,
pay estate taxes)
• What it is not good for:
– Saving vehicle (poor return, inflation
risk)
– Borrowing—make banks assume risk,
not you.
Life Insurance
• Later in practice, consider key
person insurance
– 2 or 3 partners own a building—key
person insurance would buy out the
dead partner’s interest and allow the
remaining partners to keep the building
– Also can be used for liquidity during
shifting practice patterns
Insurance Needs
• Insurance is a wedge: you need a
lot in the beginning when assets are
low and decreasing amount with
increasing assets
• “Usual” ratio of insurance to income
is 5-6 times pre-tax income
Insurance versus Net Worth
5,500,000
4,500,000
Dollars
3,500,000
Net Worth
Insurance Needs
Estate at Death
2,500,000
1,500,000
500,000
30
35
40
45
-500,000
Age
50
55
60
Other Considerations
• Replace care given by spouse
• Replace income generated by
spouse
• Transition cost if spouse dies (time
off, reconsiderations of work
commitments, etc.)
• Children's education costs, etc
Insurance Trusts
• If you are the owner of a life insurance
policy, unless a trust is established,
the death benefit may be included in
you estate (for tax purposes)
• Become more important as estate size
increases (consider if > 1 million)