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The Biggest Risk is One You Can Manage Donald E. Machen, DMD, MSD, MD, JD, MBA, CFA

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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 financial security.
Author’s Bio
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: drmachen@orthormc.com.
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May 2023
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