Risk Management

1. 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

2. 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

3. 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

4. Characteristics of Physicians (as seen by themselves) • Intelligent • Compassionate • Sophisticated • “Captain of their own ship” • Overworked, under appreciated • Under compensated

5. 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

6. 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”

7. 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

8. 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

9. 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.)

10. 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

11. 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

12. 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

13. 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: Young

14. 40 – 44 Practice growing, expanding Children’s secondary education Retirement planning focus College saving 40 – 44 Divorce Asset accumulation Estate planning Income taxes Financial Age: Enter Early Middle Age

15. 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: Middle Age

16. 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

17. Financial Age: Later Middle Age (Getting Close!) • 55 – 59 • Retirement planning • Estate Planning • Asset accumulation • Consider selling practice, ? Relocation ? • Taxes

18. 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

19. 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!

20. 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

21. Common Problems orL.I.V.E.S • 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

22. 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

23. 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!

24. 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.

25. Your Team • Insurances: • Life and health agent • Disability • Casualty agent • Car • Umbrella • Assessment of needs

26. 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)

27. 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

28. 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.)

29. 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)

30. 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

31. 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

32. 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

33. Assets Cash Short term and liquid investments Long term, deferred retirement plans Jewelry, coin, art House, cars, boats Use FMV Liabilities Credit card debt Unsecured debt Car loan Mortgage Subtract liabilities from assets = Net worth (positive I hope) Balance Sheet

34. 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)

35. 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

36. 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.

37. 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?

38. 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?

39. Other Data • 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

40. 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

41. Budgeting • Goals of budgeting • Controlling expenses • Accomplish desired level of wealth • Retirement • Children’s education • Vacation or second homes • Monitor performance of investments

42. 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

43. 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

44. 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)

45. 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)

46. Risk Management

47. Risk Management

48. Principals of Risk Management • Risk Reduction • Risk Avoidance • Risk Retention (self-insurance) • Risk Transfer • Risk Sharing

49. 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

50. Risk Management • Risk transfer – Insurances and indemnification obligations • Risk sharing – Combination of retention and risk transfer