Doctors’ Advice

Publication: The Times Of India Mumbai; Date: Jul 29, 2008; Section: Your Money; Page: 23
A couple of surgeons learns that even if you can’t cure financial risk, you can certainly control it
Swati and Jayant Pradhan, both successful surgeons in their early forties, have no shortage of money, but never enough time. They have relied on investment advice from their banks, insurance advice from their insurance agents, and tax advice from their chartered accountant. Many ad hoc decisions later, they ended up with a lot of products. So although things looked fine on the surface, their finances were exposed to several risks. 

The Pradhans believed their approach constituted financial planning, because their bank, which gave them preferred-customer treatment, said so. They had no time to take stock of their investments, nor even where they had kept the documents. They were clueless about the insurance cover they had, the kinds of investments they had made, and whether these were short-, mid- or long-term. Products were not chosen based on a holistic view of their portfolio and goals; decisions were based only on each product’s features.

When we reviewed and discussed the Pradhans’ overall financial situation with them, they saw the risks they were exposed to. We shared the following observations with them. First, they had no proof of some investments. Second, some bank accounts were dormant, and they were paying monthly penalties. Third, they had no critical illness or disability insurance—a crucial oversight, considering their family histories of cancer. Fourth, they had negligible professional liability cover.
Fifth—a common mistake—the Pradhans had several policies in their children’s names. There was no need these, as the kids had no dependents. Jayant and Swati were paying Rs 20 lakh in premiums, for a cover of just Rs 75 lakh per person.
Sixth, the couple had equipment loans at high rates, around 15%, while maintaining tidy balances in savings accounts and fixed deposits. Their savings accounts earned 3.5%, and FDs, 8% (both pre-tax). Seventh, almost 90% of their wealth was in real estate. And lastly, the couple had made no will; indeed, some investments didn’t even have a nominee.
They now realised they needed to focus on not only wealth accumulation but also management. They were concerned about the choices they had made. I assured them that acknowledging the risk was the vital first step.
A problem most surgeons face is that any risk to their professional skills has a direct impact on income. They have no social security. They constantly face the risk of professional liability.
The Pradhans had no retirement benefits, and needed to create a pension plan.
As for goals, Swati and Jayant wanted to build a corpus of Rs 50 lakh over the next 10 years, for their sons’ education. They wanted to provide Rs 50 lakh for each son’s marriage. They wanted to build a chain of hospitals with initial funding of Rs 10 crore. They wanted to diversify their portfolio, and to ensure a retirement income of Rs 3 lakh a month. An assessment of the Pradhans’ goals, cash flow and net worth statements, insurance policies, investments and tax returns revealed several things. The first was the preponderance of real estate in their portfolio. Some inherited properties, under litigation, brought in no income, but entailed maintenance expenses. Most holdings were illiquid, and not much help in a rough patch. Two, most of the Pradhans’ savings had gone into buying their house in Juhu. They had a big liability on this property, but limited savings. Three, the Pradhans were paying unnecessarily high insurance premiums. The same cover—just enough for their liabilities—could have been bought for a fraction of the amount. And four, the Pradhans’ debt exposure was mainly through insurance policies that yielded low returns. There was a negligible contribution to the Public Provident Fund. Their equity portfolio had several unitlinked insurance plans (ULIPs), 20 mutual funds, and five stocks.

We drew up a comprehensive financial strategy, whose highlights are below. First things first: we first surrendered most of the life insurance policies, and paid up others, bringing premiums down to Rs 4 lakh while raising the cover to Rs 4 crore. This was done by buying a term plan (pure risk cover) of Rs 3.5 crore, for which the premium was Rs 1.3 lakh a year. This improved cash flow dramatically.
Secondly, the Pradhans bought a cancer insurance policy from the Cancer Patients’ Aid Association. Third, they added critical illness riders to their life insurance policies, as well as disability and accident protection.
Fourth, we made a business plan and clarified the funding requirement for the next several years. They took a loan of Rs 85 lakh, something they could now service comfortably.
Fifth, they teamed up with doctor friends to form an association, and approached angel investors with a proposal to raise Rs 10 crore. Sixth, we raised the Pradhans’ professional liability considerably. Seventh, we drew up a will and ensured that all accounts and investments named Jayant and Swati as joint holders. Lastly, we decided to review the plan every six months, so that changes in the external and internal environment could be taken care of.
All doctors advise and operate on patients only after thorough examination and diagnosis. Yet, when it comes to their own finances, few apply the same rigour. It’s understandable that their work leaves little time for financial decisions. But a sound strategy must addresses all aspects of personal finance: cash flow, debt management, loans, risks, business plans, investment, retirement, and estate planning.
Swati and Jayant Pradhan, both in their 40s, are successful surgeons. They live in a posh Mumbai neighbourhood with their two sons, Harsh and Rahul. Although they earn well, they are too busy to manage their finances. But it’s time for the Pradhans to start planning for their sons’ futures, their own professional ambitions, and retirement
Amar Pandit is a Certified Financial Planner and Director, My Financial Advisor

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