As everyone from tax attorneys to gamblers can attest, it’s not what you make, it’s what you keep. Still, the more you make, the more it’s easier to keep; at least in theory. You probably don’t have to look hard to find someone you know who works an unremarkable job, yet somehow owns multiple houses and a thriving stock portfolio. Conversely, the high-salaried professional who carries overwhelming debt is almost a cliché.
Revelation: If you’re smart enough to complete med school, pass the bar exam, earn an engineering degree, or start and run a successful business that doesn’t preclude making the same financial errors that the less educated often do. That’s why such professionals should (and often do) hire a financial advisor to help manage their planning, finances, investments and tax planning.
Financial ignorance among six-figure professionals and entrepreneurs isn’t necessarily conscious, nor does it indicate some sort of intellectual limitation. Quite the opposite, in fact. Devoting oneself to one’s profession often leaves precious little mental room for anything else, including financial competence. Accordingly, here is an overview of what kinds of professions are most likely to enlist the services of a financial advisor or a certified financial planner.
But even your average sociology undergraduate should know that revenues need to exceed expenditures, right? In theory, yes. In practice, financial knowledge really does have a psychological component that can overpower common sense. A rookie doctor is going to be a confident overachiever who gets things done, almost by definition; and is going to enter the workforce with a potentially lethal pair of financial disadvantages.
The average physician graduates a couple of hundred thousand dollars in debt. Regardless of potential future earnings, $200,000 is a veritable crater of negative net worth to dig out of. Especially when that figure is more than the average annual salary for a seasoned physician. The thinking among doctors who court financial disaster seems to be that since the future fat paychecks are inevitable, servicing the debt isn’t all that important. Why accelerate loan payments when you can begin stocking up on the trappings that come with being a universally respected member of society? Those BMWs and shares of private jets aren’t going to buy themselves.
High net income is more likely (the national median salary for generalist is about $185,000), but isn’t guaranteed, either. Operating a private practice means plenty of overhead — employees, insurance, electrocardiography machines, etc. When revenues decline, and patients/clients/customers opt for less or less expensive treatment, margins whittle away. It’s easy to forget that being a private practice physician is pure entrepreneurship. The ability to build a business is a mandatory criterion for a successful private doctor or dentist (national median salary of about $152,000).
A NARROWED VIEW
The same goes for attorneys (national median salary of about $82,000). The study of law famously “sharpens the mind by narrowing it,” and money knowledge is often among the pieces whittled away. The debt load/starting salary ratio for newly minted lawyers is even greater than that for doctors. And with one study showing that the median annual salary for rookie lawyers is now somewhere south of $62,000 — a 13% drop over six years — non-lawyers can only a) rejoice at the cheapening of the legal profession; and b) wonder if we haven’t finally saturated the job market in a nation where one out of every 260 people practices law. The examples of lawyers taking multiple decades to pay off their student loans in the face of disappointing earnings are too numerous to mention.
How does this happen? How do the allegedly brightest of the bright end up eking out hand-to-mouth existences? Again, psychology. Once you attend your first freshman civil procedure class, every subsequent day offers less justification for quitting and more rationalizing for sticking with a bad hand. All the while, the tuition meter continues to run. It might take a bright mind to complete law school, but it takes an uncommonly self-aware one to bail out early in the face of looming financial ruin and switch to a more suitable career. Even managing partners at prestigious firms are starting to drop the hint: find something else to do for a living.
BEATING THE ODDS
Rare is the judicious parent who would publicly encourage a kid to pursue a pro football career, because the odds are so phenomenally long (“Work in the family hardware store? No way. Johnny wants to play for the Seattle Seahawks, and we’ve decided to support him”). The probability of Johnny having a financially successful law career is larger than that of him becoming a starting right guard in the NFL, but is still a lot closer to 0 than it is to 100%. At best, the neophyte lawyer with student loans is in for years of forced frugality. At worst, while bankruptcy won’t get an attorney disbarred, it doesn’t help. Nor will it instill confidence in clients who are being charged by the hour.
Aside from doctors and lawyers, individuals who work in the tech industry, with its high-flying salaries, as well as entrepreneurs and small-business owners are far more likely to enlist the services of a financial advisor. The demand on their time and attention most likely makes doing so a worthwhile pursuit. In addition, new sources of wealth can be very localized. Just ask people in certain spots in North Dakota, for example, where shale oil and gas finds have made their land (and drilling rights on it) exponentially more valuable.
THE BOTTOM LINE
The same rules apply to the radiologist and to the guy who drives a beer truck. First axiom: Income has to outpace outflows. Second, equally important axiom: Financial truth does not discriminate. Not even on the basis of social status. The educated and licensed professional who wants to avoid economic ruin (and perhaps even prosper) needs to learn the same lessons the rest of us do. That, and/or hire a financial advisor who already has.
Originally published by Greg McFarlane/Investopedia