We all know the threat of civil monetary penalties, audits, and the ever-increasing expense and headache of regulatory compliance has led many physicians to pack up and head for the security and predictability offered by larger group employment or hospital employment. Perhaps the most important consideration is income, and the ability to save for retirement.
I recently spoke with someone who deals with this every day, physician wealth management expert, Scott Wisniewski, founder and CEO of Dallas-based Arianna Capital Management.
Martin Merritt: What are some of the considerations in selling a practice?
Scott Wisniewski: Aside from the deeply personal choice, the biggest concern for anyone in business is how they’re compensated. An equal concern is how best to accumulate the assets that will support them in retirement. The sale of a private medical practice carries the potential of a large cash infusion that could be used to jumpstart the growth of retirement assets. Particularly in the early stages of a physician’s career, the ability to save may be impacted by a variety of factors: lack of time to address planning, paying off or down loan debt, or just simply not paying attention. Gaining access to a pool of cash can address these concerns early on. In a more mature practice, equity proceeds can ensure a comfortable retirement.
Compensation concerns range from the uncertainty of private practice revenue streams balanced against the ability to deduct ongoing expenses and if available, the potential to contribute large sums to tax-deferred retirement accounts such as SEP-IRAs, cash balance plans or a solo 401(k). As an employee of a corporation, you’ll be able to expect a stable, predictable income but your retirement account contribution options are significantly different. Contributions are limited by law at lower levels than for self-employed individuals, which if free cash flow was available previously, may become a constraint on effective savings.
MM: Do you feel that associating with a larger business or hospital will positively impact physicians’ abilities to prepare for retirement?
SW: Most physicians will see an improved ability to save due to the predictable nature of their compensation. Much will hinge on the state of the practice and the amount of disposable income, but given the vehicles available to the self-employed, the potential for significant wealth accumulation is far greater than for an employee of a corporation. While private net income may be inherently volatile, it is likely that the long term average will exceed the compensation from a corporation.
MM: So there is a trade off: “volatility” and “risk” for lower, but stable income?
SW: That is generally true for any investment. Depending on the particular specialty of the physician, generally speaking, income from an employer (W-2 income) can be expected to be lower than that of a self-employed individual or practice (1099 income). The inherently higher tax burden associated with 1099 income is offset to a degree by the ability to deduct certain business expenses. These are not options a physician should consider without a trusted financial advisor. Based on our conversations with physicians, when prudent financial advice is considered, the trade-off of stability for lower income doesn’t make sense in a significant number of cases.
MM: Are there exceptions?
SW: The one exception is for those who can move from front-line practice with a larger group or corporation into a managerial position. In this situation, a reduced work load coupled with stability of income can be more attractive than long hours and volatile income. A hybrid solution we’ve also encountered is choosing to work occasionally (i.e. weekends or a few shifts per month) with a large group or corporation. This supplements income without incurring the negative aspects of moving completely out of private practice. It also may provide an exit ramp in the event a sale is eventually contemplated.
For most however, the positive perks from a corporate setting don’t fully compensate for the loss of a greater variety of opportunity that can result from obtaining excellent financial advice.
Here’s a real world example: Access to a 401(k) with a match provides an instant positive return, in some cases up to 6 percent but typically more in the 3 percent to – 4 percent range. The drawback to this is that the available mutual fund investment options most likely will be relatively expensive and can be expected to provide a limited range of market exposures. By contrast, an independent financial advisor with access to low cost, well-diversified mutual fund investment options can position the self-employed physician to receive a significantly greater return on the larger pool of assets they can contribute to the wider variety of vehicles available to them. Free matching is great but not if it comes at the expense of longer term returns and certainly wouldn’t be a great reason to accept lower overall compensation.