Some personal thoughts on financial planning...

WARNING: This is a long article. It is a conversation I am having with my keyboard to share a free flow of thoughts with those who like to follow me. Save it for when you are less busy - if interested in reading it.

While I have been called to the Bar for more than two decades, I've never completed any of the usual financial designations such as the CFP or CFA that experts in financial planning have. My observations in this article are just that, what I seem to have gleaned from thousands of interactions with financial planners, financial advisors, tax advisors and actuaries. As such, they are my own and are not designed to be legal advice.

I was watching a short clip on LinkedIn by Saad Nadeem, CFP, CLU, RRC on why physicians become physicians and what motivates them to join this noble profession. He also speaks about the importance of having a retirement plan because as independent business owners, physicians don't get offered a true pension plan from the provincial Ministries of Health nor from hospitals that might retain their services (except, I am told pathologists).

That got me thinking of how overwhelming and challenging it must be to be a physician interested in doing some retirement planning. What I've noticed is that while there is no shortage of help out there, from the perspective of a doctor who hasn't trained to be a financial expert, the industry "writ large" must seem like a chaotic sea filled with all kinds of stakeholders. Let's look at what these industry players say and why.

The Senior Doctor

Junior physicians might look to their peers for advice, since after all, many experienced doctors either appear, or are, very successful financially. The easiest way to do some 'due diligence' on what to do is to get some mentorship from someone who has already been down this path. With the advent of social media, there are even MD-only discussion groups that provide financial tips on what to do. I am not a physician but my MD friends tell me that these large public discussion forums are often dominated by "crusaders" who have developed mantras such as:

• Only do ETFs (exchange traded funds) because that way you can cut out the 'middleman' that is adding an extra 1% fee to your cost of investing, and since 80% of mutual funds underperform the index, why pay for fees when you are not getting returns....
• Buy Term Insurance, invest the rest....
• Simply set up an "insured retirement plan" using permanent life insurance from your Medical Professional Corporation and you'll have tax free income in retirement...
• Only buy real estate and shy away from the stock market...

Obviously, while it may be appealing to boil down retirement planning into a few quick and easy action items, if a financial plan is reduced to a few taglines and products, the physician risks making monumental mistakes as their life changes and circumstances evolve (especially if it can be demonstrated that this "advice" is not appropriate or simply patently wrong.)

The Accountant

Eventually, the physician figures out that when OHIP pays the doctor for services rendered, especially when the payments are below $500,000, it is nicer to pay 12.2% tax via a Medical Professional Corporation, than 50% as a sole proprietor/unincorporated individual, and they get a Medical Professional Corporation registered with the College of Physicians and Surgeons. To keep up with tax filings for this new entity, the MD turns to their Accountant.

Again, many physicians have discovered that there are "go to CPAs" out there who have developed an expertise in providing tax services to incorporated physicians and via word of mouth in the staff lounge at the hospital many end up with these subject-matter specialists.

The Accountant is paid for doing tax filings (T2 for example) on transactions that have already occurred in the past and are often asked to provide financial planning advice.

For example, many CPAs get asked:

• Should I take the compensation I need to pay my bills via dividends, or salary or some mix of the two ?
• If I do decide on some level of salary, should i also contribute to a TFSA or to an RRSP or to both ?
• If I shun Salaries, and go 100% dividends, should I keep the retained earnings in the Medical Professional Corporation or should I invest it in some other structure ?

Some accountants simply do tax filings and tax compliance and are not equipped or not interested in also providing "forward looking" financial planning advice. As they are not compensated for these extra services their lack of enthusiasm for certain "lesser known" solutions such as Personal Pension Plans is totally understandable. Why recommend a product or solution that isn't fully understood, and where there is no financial compensation ?

Those CPAs that do provide financial and tax planning already have a long list of strategies in place to help physicians save for retirement. Some of these include:

• Establish a Holdco (where permitted) or a Investco, and strip retained earnings from the Medical Professional Corporation ("MPC") for creditor protection purposes (and other reasons) and have a corporate non-registered investment account opened up.
• Buy private real estate with the retained earnings that were not needed for immediate compensation purposes.
• Set up a family trust to multiply the lifetime capital gains exemption with other fellow family members
• Do some surplus stripping.
• Do an estate freeze.
• Etc etc.

In all of these cases, the need for a proper registered pension plan does not even arise because the accounting professionals have already "worked around" the lack of a pension solution to provide a synthetic way of creating cashflows for the physicians in retirement.

The Insurance Advisor

At some point the physician might encounter situations where patients die and the notion of succession planning becomes a live issue. "I've just seen a young patient of mine die, what will become of his young spouse and infant children now that he can no longer provide for them ?" The concept of life insurance then takes on a new dimension and becomes a priority. Life insurance, especially extremely cheap term life insurance (gives you protection for 10 years at a very low annual premium assuming one is in good health and a non smoker) is usually the first purchase made, sometimes before assets are set aside for retirement. After all, if my family is going to receive a few millions of dollars tax free from a life insurance company upon my death, I've put a first wall of protection around my loved ones and can take my time to map out a more fulsome retirement plan at my leisure.

Eventually, the Insurance Advisor will bring up the topic of Permanent Life insurance, and the concept of the Insured Retirement Plan ("IRP") or some variant thereof. The idea is that while Term Insurance is very cheap when young and healthy, at every 10 year renewal term, as life expectancy shrinks and mortality risk looms, the premiums to maintain that coverage start to jump up quite dramatically and what might have been cheap becomes dear. When permanent life insurance is combined with a Medical Professional Corporation, you end up with paying for the insurance with "lightly taxed" income since the MPC only paid (in Ontario in 2023) 12.2% tax on the first $500,000 of taxable corporate income earned. Permanent life also levels the premiums and keeps them more affordable in future years.

The only observation is that many Insurance Advisors believe that there is a 'zero sum game' at play when a doctor is contemplating an IRP. The belief held by many is that either the extra 1$ of disposable income will end up as a premium for a permanent life insurance policy (and thus compensation), or that 1$ will instead go into another retirement solution such as an RRSP or PPP and thus, the premium available for the policy will be lower. Some other advisor will get the compensation instead...

This is, of course, a totally false dichotomy for a number of reasons, such as:

• Pension contributions made by the MPC are done with pre-tax corporation income (before the 12.2% or 26.5% is taken off the top).
• Pension plans can purchase permanent life insurance policies as an asset of the pension plan, so that a doctor could have both an IRP and a pension plan.
• If an MPC has been pre-paying its corporate taxes along the way, but a decision is made to contribute to a Pension Plan, the offsetting tax deduction resulting from this contribution could entitle the MPC to get a tax refund from CRA on these prepaid taxes. This tax refund could be used as a premium to purchase the insurance policy.
• With the enhanced Smith Maneouvre, one can have both an IRP and a pension plan etc..

Thus, for some, the fear of losing out on a commission for placing a larger policy will lead the Insurance Advisor to dismiss or not even propose a pension solution to complement the IRP. We have witnessed this countless times in the last decade.

The Financial Planner

Given that retirement planning is much broader than tax planning and should in most cases incorporate succession planning (in case of death or disability) and longer-term planning with children and beneficiaries in mind, some portion of physicians will turn to a Financial Planner to take a much more holistic view of all of the moving parts that constitutes their assets.

This is usually a very good idea, especially when the Financial Planner is truly independent and does not get compensated from financial companies for implementing the solutions stemming from the financial plan generated. This does not mean that there is anything intrinsically wrong in having a financial plan generated and implemented by the same advisor, but one must be aware that such conflicts are technically possible if the planner selected does not have a stellar reputation in the industry.

My point about Financial Planners is that they usually rely on commercially-available financial planning software companies to generate their financial plan in the first place. And upon discussing with the owners of such financial planning software companies, it was discovered that none of them model using a Personal Pension Plan as a substitute to using an RRSP. The inexorable conclusion is that if the software itself completely ignores the possibility for the MPC to set up a Pension Plan, the recommendations generated after tax optimization takes place will totally ignore the use of a pension plan as a viable alternative to an RRSP and/or TFSA!!! The financial planners cannot be expected to manually calculate the additional tax deductions granted to the MPC by the pension plan if the financial planning software couldn't be bothered in anticipating the existence of a pension solution.

Unfortunately for the physician, if the Pension Plan does not form part of the set of solutions under the Financial Plan, and the doctor is paying for a financial plan that misses out on hundreds of thousands of additional tax deductions (those permitted by pension laws), the MD is suffering from the old "garbage in, garbage out" syndrome. Until such time as pressure is applied on the software developers of financial planning software to integrate the 7 extra tax deductions that Personal Pension Plan provide an MPC over the single deduction of the RRSP, the overall tax-effectiveness of financial plans will continue to be sub-optimal (and leave significant amounts of the doctor's money, "on the table").

The Financial Advisor

After a few years of medical practice and after most if not all of the student loans have been repaid or consolidated into a new debt, the physician who opened up a bank account at a financial institution will receive a call from a financial advisor and an invitation to have lunch to discuss planning for the future. As a Bay Street lawyer earning significantly less than a physician, I tended to get 1 such invitation per week.

The typical encounter is that the financial advisor will ask to get a sense of where the physician is in terms of income, savings, goals and personal situation. From these few data points (usually supplemented by a more robust financial questionnaire) the Financial Advisor will propose a financial plan and will offer to start implementing bits and pieces of that plan for the physician.

For extremely busy professionals such as doctors and lawyers who might not have developed a familiarity with financial concepts and products, having someone from a large, well-respected and well-capitalized financial institution is very comforting. Here is someone who has studied investing willing to take me under their wing, and look after that part of my life that I am not really that good at (or not really that interested in...)

Recall that the financial software used by the Financial Advisor won't make a recommendation to set up a Pension Plan and even it it does, it won't calculate the 7 additional deductions possible nor project out the stream of retirement income produced at different potential retirement dates. So right away, the plan suggested must be taken with a grain of salt, unless the Financial Advisor has been trained on Pension Plans and sought a special quote from a pension specialist and then manually integrated that data with the generic financial plan.

Now, from the point of view of the typical Financial Advisor, whether the client has $1000 invested in an RRSP, a TFSA or a Pension Plan, the fee collected by the Financial Advisor is the same. There is therefore absolutely no financial incentive for this advisor to tell the physician to upgrade from RRSP savings to Pension savings, as a result. If anything, because pension plans are more sophisticated than RRSPs, they are more cumbersome to open up and monitor than an RRSP. Since the advisor doesn't charge more for investing the assets of a pension plan, than the assets of an RRSP (for example), the increased burden on the Financial Advisor of learning about pension rules, is a dis-incentive to even suggest upgrading to a Pension Plan!

Finally, it should be noted that many Financial Advisors are also 'life licensed' and thus may fall into the same trap as the Insurance Advisor and could prefer that disposable income available for retirement planning go to a permanent life insurance policy first, before that same dollar gets allocated to a pension plan. Certainly, the large financial institutions that provide the back office support to these Financial Advisors have very little incentive to advertise pension solutions, for the same economic reasons. That is why Canada has an "RRSP Season" but none of the largest financial institutions even mention that incorporated professionals would be significantly better off with a Personal Pension Plan than under an RRSP.

Conclusions

Our wary physicians that already have a hard enough time navigating our complex health care system now have to also navigate a complex financial system that pulls them in a number of different directions, often based on what the professional they deal with has on offer.

This is not an indictment of individual players in the financial industry. Each one has a compliance department to deal with and head office directives on what they can and cannot sell to the general public. It is the combination of these factors however that prevent physicians from doing what is in their own best financial interest, namely to establish a personal pension plan for themselves.

Much like it is futile to blame a nurse for a patient that dies in the waiting room due to a shortage of attending physicians on that particular shift, one cannot blame the various professionals listed above since each one is operating within their own well-defined framework.

There is a 'systemic risk' for physicians however and lack of familiarity with the financial system and its shortcomings comes at cost, that is borne by the physician and their family.

That said, physicians who truly want to build a world-class retirement plan for themselves do need to learn about registered pension plans, and the Personal Pension Plan ("PPP") in particular. They should consider themselves extremely lucky if their other professionals mention it as an option. For a list of professionals who do have familiarity with PPPs, please consult this directory: https://integris-mgt.com/advisor-directory/

For physicians who wish their own professional association had taken the time to create a true pension solution to protect them in the last 100 years, they should learn about the Canadian Physicians' Pension Plan at https://www.canadianphysicianspensionplan.ca