Over the past several years, a recurring complaint
among orthodontists and other health-care
providers has been that they have been mislead by
their "investment adviser." Specifically, the complaints
fall into two categories: being placed into
inappropriate investment vehicles and incurring
principal losses instead of gains.
In the past, it was important to distinguish
between retirement accounts and personal accounts
since the former is tax deferred while the latter is
taxable. However, the distinction might be of little
significance over the last three to five years (or for
some, even 10 years) since there have been relatively small gains to tax in the majority of investment portfolios.
Furthermore, with a high turnover ratio, 100 percent annual
turnover is not uncommon for mutual funds; the problems are
further compounded since much of the buying has occurred at
levels higher than the subsequent selling.
In any event, many professionals are unhappy about the lack of
positive direction, infrequent communication and, most significantly,
the haphazard approach that has been
taken with regard to their investments. One
orthodontist queried, "What kind of treatment
would I be providing my patients if I
proceeded the way my adviser has without
the proper diagnosis and treatment plan."
It is clear that orthodontic treatment
outcomes would be haphazard at best without
a proper plan based on a careful evaluation of a history and
interview, clinical examination, diagnostic records and a
thoughtful diagnosis and consultation, along with regular and
timely progress evaluations. Such an approach would be unprofessional
and unacceptable and might be the basis of a malpractice
action when the outcome was substandard.
It is suggested that your investments be given the same
degree of attention that your patients are given. Anything less
should be unacceptable to you. As such, both your participation
and that of your investment counselor should be focused on
developing the proper strategic plan as well as a regular and frequent
protocol for review so as to be able to quickly modify the
allocations as tactically necessary.
It is important to not lose sight of the goal of the investing
endeavor. Whether it is the retirement fund for you and your
staff or your personal portfolio, your single-minded focus is
financial security. Even though the individual aspects and specific
timing might be completely different from anyone else, the
overall outcome is the same. Your time horizon might be short,
or it might be five, 10, 15, 20 or more or years. This is especially
true for younger practitioners because with a long time horizon,
the most critical investment time period is the first five years.
Thus, young practitioners need this structure even more than
older practitioners. Unfortunately, the discipline and process is
likely not being followed.
The reasons the structure is missing are simple. Either the
doctor is too busy to take the time, or believes that it will be adequately
taken care of or the adviser/broker is too busy with too
many clients. Even though you might have one, two or even five
million dollars of retirement or personal investments, this is not
a large account for most highly skilled and professional financial
advisers and gets you no special attention.
It is rare you will even receive a telephone call once per year
from your adviser/broker. If you do, it could be to taut some
"dot-com opportunity or firm proprietary offering" or it is a brief
reaquiantence call to try to maintain your account for another
year to capture the fees paid on your assets under management
(AUM), which by the way, are significant since even at 0.5 percent,
if your account is advancing five percent per year, equal 10
percent of the profits. This doubles as with most adviser/brokerages
that receive one percent on AUM, which at the same return
would equal 20 percent. And, as with most returns being zero
over the past 10 years, the fees are incalculable.
Many practitioners ask: "How much worse could I have done
managing my own portfolio?" As it turns
out, much worse for some, especially if they
are inexperienced and professionally busy to
the extent that they don't have the time or
inclination to devote the resources needed
for self-study and review. It is very similar
to the development of the practitioner's
professional skills. It would be difficult to
imagine excellent orthodontic results provided by someone
untrained or without meaningful education and inexperience.
With the above in mind, the suggestion for my colleagues in
health care is to "heal thyself." By that I mean take a look at the
process and reformat your approach. Stop trying to "beat the
market" yourself or even to hire someone else to do so. The statistics
are clear. Over the last 20 years, according to public
sources, almost 90 percent of the active investment advisors have
fallen behind the market averages. Over the last 10 years, almost
75 percent have fallen short. It is not a pretty picture when your
goal is to outperform the market on a consistent basis. It is very,
very rare for an active manager to do so, and it is even rarer for
you to be able to select those managers in advance. In practice,
what frequently happens is that the adviser/broker buys fund A
at X, after one or two years of mediocre to poor performance,
switches you out of fund A at .85X and into fund B at Y, only
to repeat the scenario in a year or two at .80Y and so on.
It is important to properly identify your mission and that of
your investment counselor. It is suggested that it isn't merely to
beat the market. In fact, active management isn't likely to be the
answer. It might be a small part of it, but only after a carefully
crafted strategic investment plan has been implemented, which
can only be prepared after all the necessary data, including risk
tolerance, time horizon(s), tax issues, goals, etc. has been collected
and thoroughly analyzed by a highly sophisticated and
knowledgeable counselor, who has "no horse in the race," (i.e.
who is not incented to take inappropriate risks to achieve a possible
but unlikely high return to gather more AUM).
Regular and meaningful progress discussions are a critical
aspect of investment success. These should be preferably in person,
but only after a thorough review of your specific current and
future needs, short- and long-term goals, liabilities and unique
objectives have been reviewed. Only then will the counselor have
enough information to make an intelligent and unbiased decision
in a matter of utmost importance to you and your family.
Investment advisers/brokers and fund managers continue to be
very well compensated. They are among the highest earners. The Wall Street Journal has reported over and again the multi-millions
of dollars these individuals receive as compensation and bonuses.
In fact, their compensation has remained exceptionally high even
when the economy and your assets have either diminished or
remained the same. Each month new funds flow into brokerages
and/or funds of all sorts. The compensation increases as a result of
the percentage received for "management" of the assets, previously
referred to as AUM. Their fees and bonuses are not because your
portfolio has performed well, even with hedge funds, some of
which still charge a "2 and 20," (i.e. two percent of AUM and 20
percent of all gains or in some instances, 20 percent of gains over
a certain amount, the base fees are merely based on AUM).
For the above reasons, it is important to reorganize your
investment approach and develop a regularly reviewed, longterm
strategic plan and service relationship based on an agreed
upon working document developed in conjunction with a
trusted counselor. You need to avoid merely being a customer in
a "retail shop mentality" brokerage where you are sold products
and hope for the best but often don't receive it.
The stock market has been referred to as "the loser's game."
For many, this is the case. It does not need to be. However, as
with anything of value, it does take extra time and effort. It is a
risk that you can manage and it is one of the biggest risks to your
Donald E. Machen, DMD, MSD, MD, JD, MBA, CFA, is
the recognized authority on risk management in orthodontic
practice having initiated the discipline in the
mid-1980s. He developed, moderated and presented at the AAO's
first national risk management telecast to more than 2,600 orthodontists.
He has represented orthodontists, dental specialists,
general dentists and physicians in malpractice lawsuits and other
legal matters as a trial lawyer and currently is a trial court judge
in Pennsylvania, having served for more than 14 years. He is a
board certified orthodontist maintaining a part-time practice and
is on the orthodontic faculty of Case Western University Dental
School and The University of Pittsburgh School of Dental
Medicine. He is also an adjunct professor of Law at Duquesne
University School of Law where he teaches malpractice litigation.
Dr. Machen was the editor of the Legal Aspects of Orthodontic
Practice column in the AJO, writing a monthly column and has
authored columns in JCO and Ortho Tribune. He lectures extensively
to orthodontic groups, both large and small, focusing on
developing highly effective systems for eliminating lawsuits, optimizing
patient care and increasing practice referrals. Dr. Machen
is the author of Managing Risk in Orthodontic Practice and is
managing director of Risk Management Consultants, LLC. He can
be contacted at: email@example.com.