The Economy And What To Do?

What is your personal plan for your debt and use of cash? With today’s “interesting times” we are once again faced with the proverbial uncertainty of the markets, both in the real estate and stock and bond markets. Why has been addressed in a previous blog (April 07).

What are you thinking?

Are you thinking of reducing your debt load and using cash only for future purchases? Are you thinking a cycle is a cycle is a cycle? Are you experiencing paralysis by analysis? Are you thinking about your kids too?

Have you been maximizing your 401K, profit sharing plan and/or RRSP contributions to reduce your current tax load? You can contribute up to either 25% of your income or $44,000 which ever is less to your 401K. After your tax investments, what are you thinking about for your personal investments? Do you pay yourself first? Do you contribute 10% of your income towards your retirement savings? Do you work closely with a financial planner and accountant? Have you a plan for your retirement? When? Are you concerned if mortgage rates go up?

Is there such a thing as good debt or bad debt? To answer this question I have to say first that there are many different ways to hold one’s perspective about debt and that is what makes us who we are. There is no right or wrong, only how you feel at the end of the day and that your actions are validated by your thinking. Hopefully you are giving as much thought and more to this subject than you would be, for example, for your next vacation.

For example, if you freed up your mortgage, does that make financial sense. Well, that depends on who you are and how you think. For some, I would say that it is better to not pay off your mortgage and invest your money in investments that return a greater return than the cost of borrowed money. That is the logic of investments in the first place. But, with that comes the uncertainty and the risk which is easier to take if you are younger because you have more time to make up any loses and to align yourself with the information that over time, the stock market has out performed the bond market.

So, what to do? Again, it is anybody’s guess, however outside of the logic of financial opportunism is the need, for some, for their gut security of a known tangible investment, your home. Therefore, investing for your home is investing for your peace of mind and is not necessarily the best investment in terms of financial return which leads me to conclude that asset diversification, including your home, is what is really the best thing to do. If your home had an cash flow producing asset, a guest cottage or a rental unit, so much the better. Good luck!

You will need it because this market is also about the real estate market and its effect on credit. To put is simply, the US dollar has lost 30% of its value recently because of its trade deficit, which means the US is buying more than it is selling. Further, because of the US housing bubble has offset the currency loses (psychologically), few are aware of the seriousness of this dilemma. If the US reduces interest rates to further extend the status quo, then this will be at the expense of the value of the dollar and inflation, meaning a big time already unsustainable housing bubble will follow with inflation. If the US increases its prime-lending rate, this will prop up the value of the dollar, but force many over-extended mortgages, millions of Americans, to go bankrupt. This is the squeeze we are in because cash flow is becoming a problem both for individuals with mortgages and highly leveraged institutions holding “high risk mortages” that were packaged and repackaged over and over until they appeared to be a “less risky” basket of assets. Besides individuals, pension plans, insurance companies and even banks have bought into these financially engineered products, many of which have been determined to be worthless. Nobody really knows for certain the full extent of worthless securities and who owns them at this point in time (and the markets don’t like uncertainty). In addition, there still continues to be the possibility of a recession lead by a declining US housing market (more uncertainty).

I should be mentioned not to throw out the baby with the bath water, meaning at this time the liquidity crisis is not considered an economic crisis. There is still plenty of confidence in the US behemoth and although it lacks credit, it still has plenty of assets. However, the impact from the “liquidity crisis” is not over. For instance, the peak of the US sub-prime mortgage rate defaults is expected to occur sometime in April of 2008.

So what do you own?

Why Coaching?

A study of 100 executives receiving executive coaching between 1996 and 2000 found that:
- "Seventy-five percent of the sample (participants and stakeholders) indicated that the value of coaching was 'considerably greater' or 'far greater' than the money and time invested." Page 7.


- "When calculated conservatively, ROI...averaged 5.7 times the initial investment in coaching." Page 7.

- An overwhelming 93% said that they would recommend coaching to others. Page 8

Reference: "Maximizing the Impact of Executive Coaching: Behavioral Change, Organizational Outcomes and Return on Investment." Joy McGovern, et al. The Manchester Review. Volume 6, Number 1, 2001

Developing Emotional Intelligence Produces Dollars & Cents:
- A study of 62 CEO's and their executive teams found that: "the more positive the overall moods of people in the top management team, the more cooperatively they worked together - and the better the company's business results. Put differently, the longer the company was run by a management team that did not get along, the poorer that company's market return." Page 15.

- "For every 1 percent improvement in service climate, there's a 2 percent increase in revenue." Page 15.

- "...interviews with 2 million employees at 700 American companies found that what determines how long employees stay - and how productive they are - is the quality of their relationship with their immediate boss. 'People join companies and leave managers', observes Marcus Buckingham of the Gallup Organization...." Page 83.

- "...consider an analysis of the partners' contributions to the profits of a large accounting firm. If the partner had significant strengths in the self-management competencies, he or she added 78 percent more incremental profit than did partners without those strengths. Likewise, the added profits for partners with strengths in social skills were 110 percent greater, and those with strengths in the self-management competencies added a whopping 390 percent incremental profit - in this case, $1,465,000 more per year. By contrast, significant strengths in analytical reasoning abilities added just 50 percent more profit. Thus, purely cognitive abilities help - but the EI (Emotional Intelligence) competencies help far more." Page 251.

Reference: Daniel Goleman, Primal Leadership: Realizing the Power of Emotional Intelligence (Boston: Harvard Business School Press, 2002).

Going from Good to Great:
- "Yes, leadership is about vision. But leadership is equally about creating a climate where the truth is heard and the brutal facts confronted. There's a huge difference between the opportunity to "have your say" and the opportunity to be heard. The good-to-great leaders understood this distinction, creating a culture wherein people had a tremendous opportunity to be heard and, ultimately, for the truth to be heard." Page 74.

- "Leading from good to great does not mean coming up with the answers and then motivating everyone to follow your messianic vision. It means having the humility to grasp the fact that you do not yet understand enough to have the answers and then to ask the questions that will lead to the best possible insights." Page 75.

Reference: Jim Collins, Good To Great: Why Some Companies Make the Leap and Others Don't. (New York, Harper Collins Publishers, 2001).

The Goal of Coaching:

Put you in control of your own practice by improving your ability to lead an efficient, enthusiastic team who share your vision of providing the highest level of patient care. Coaching provides the structure to help you harness the full potential of your practice to enrich your life - professionally, personally and financially.

Why Coaching:

Because the vast majority of the solutions offered for stress management have not worked well, particularly the most popular one - getting away from it all to the lake, the club or a sun holiday. Have you ever noticed that two or three hours after that well-deserved break, when you are back at it, you feel like you haven't had one? There's a very specific reason for that, unfinished business; this eventually will cause burn out, I guarantee it! Because it is not what you get done, it is what you didn’t get done that it is that you stress over. Coaching will improve any aspect of your practice and make it work for you rather than have you working for it!

If you could identify exactly what you want and what you need to make it happen, why wouldn’t you? How would your life change if you could achieve your dream practice?

OK, it's time to start believing. That's it. Realize right now that this can happen to you. And that’s just the beginning…

Results:

Coaching is a very effective developmental tool for leadership in your practice producing financial and intangible benefits for the practice/business. Decision-making, team performance and the motivation of others will be enhanced. Many of these variables contributed to annualized financial benefits:

• Increased Productivity
• Increased Employee satisfaction and retention
• Increased Patient satisfaction
• Increased Work output
• Increased Work quality
  

Prepare Yourself:

Because coaching is a relatively new development technique, people may not understand how the coaching process can help them become better business professionals. The sooner you understand the process, the sooner you will see the results. Most coaches offer a free sample session to establish rapport because chemistry and background are important, as well, coaching is “experiential”.

How to Structure Associate Buy In

“Does anybody out there have advice on how to let associates buy in?”

Today’s associates are from a different generation; their values and perspectives are different. They want a greater clarity on expectations and timelines. They have more options and more leverage, and they are looking for a place that “feels” right. Money is key, a foundation piece in any business plan, but so is lifestyle. The high cost of associate turnover is well known and not what you want. So, it’s important for you to know three things: 1) Design an associate agreement that defines the timeline for a potential buy-in. Associates who do not buy-in within a 2-year timeline are building their own goodwill and they can take that with them when they potentially move in down the street! 2) Have a restrictive covenant where they agree not to set up their shop next door and compete within a certain period of reasonable time or distance, reasonableness being the key. 3) Agree on the methodology for a future practice valuation early, so when the time comes to discuss a future buy-in, you have already agreed to the method of establishing your practice’s value.

Associates want to know how the practice sale transition will unfold, how they can afford to buy the practice and how their income will be determined. It is difficult for the dentist/associate looking at the purchase of a practice or portion of a practice to understand that the “purchase of a practice” is an investment and as an investment they are entitled to a certain return on that investment (ROI) over and above any salary. Further, they are typically ill-prepared to understand “the practice” as an investment and don’t know how to read normalized financial statements, let alone how to normalize them or what a cash flow projection is. So they, like you, probably haven’t a clue what the practice’s financial statements mean to the investment value of the practice. Why is this important?

Because as an owner of a practice you would want a certain return for your investment into the practice. You would also want some control. Now, here is the rub, you want both and to get both you have to manage the practice to a profitable business. That includes management of the staff and all the issues that come up around operating a business. If you were not getting a certain return on investment, why invest at all in a practice, why not just be “an associate” and invest in some other market, the stock market or the real estate market for a “passive” rate of return. You avoid all the management stuff, you just do clinical dentistry, you do it very well, and you take your savings and invest passively without all the bother of operating a practice. Sounds good, doesn’t it? Think about it; when it comes right down to it, you either want both a “greater return” and “control” from owning a practice, (that’s why you are buying a practice), or you are just working in the practice as an associate. Associates who remain an associate don’t need both, apparently, or at least at this stage of their career. A good question to ask an aspiring associate is: “What do you see yourself doing in five years, what are your possibilities?”

Assuming you are hiring an associate to eventually buy all or part of your practice, then you would hope that the associate can generate enough practice revenue to pay the agreed upon purchase price, (typically 5-7 years). But, when creating an associate agreement, how do you define the future method of valuation that you will use to establish the purchase price?

There are three primary approaches to the valuation of a dental practice; income approach, asset approach and market approach. The truth is that all three methods are valuable, but for different reasons. One excellent 4-hour CE course that explains valuation and helps you get your head around financial literacy, at least enough to ask good questions and to understand the answers, is ABMD’s course, “Run Your Practice Like A Business, Think Like A CEO”. You can Google it.

“How much money should I pay my associates?”

Make sure that your associates’ salaries and benefits, or percentages of collections are, at the very least, market competitive. If you pay your associates less than market value, then they will eventually figure this out and leave for a place where they feel properly valued. Besides the money, it is about control and this brings us to how much you are selling, 33%, 50% or what have you. It doesn’t matter if you are talking about selling part of the practice or the whole thing. The important thing is to sell what you can of your practice more than once because that is the only way you can capture your goodwill value of your practice more than once and not wait until typically you have slowed down and your practice is not worth as much.

Every 10 – 15 years you will have depreciated down your assets and built up a substantial amount of goodwill, goodwill that you can’t capture unless you sell. Don’t miss out on one of the most missed opportunities in dentistry, and that is selling your practice more than once in your career. Build up your goodwill, then sell it, over and over again.

“What is an example of where lifestyle is important and what are some other intangibles?”

Well, beyond recreation and proximity to friends and family as examples, it is important to communicate your practice’s “vision”, short and long term strategies and the part that the associates will play in these plans. This gives the associate a sense of direction, that the practice has a mission, goals and leadership. Inherent in leadership is the culture of your practice and what sets you apart from the others. This could include any expectations you may have for the associate to become active towards the greater community you serve, to focus on a particular demographic, or simply to be encouraged to “dream” the dream practice, share the dream and to work towards it. Tell the associates as directly as possible what would make them more valuable to your practice. This then would serve as a roadmap to make them feel more secure and see the practice’s “vision” and how they are a part of it. For example, consider a mentoring program where your new associates team up with more experienced ones who will also advocate for them. Or, consider providing CE for learning skills not taught in school, like how to read and interpret a set of financial statements (after all, after you graduate, your report card is replaced by your financial statements and your financial statements can be a wonderful motivator if used in the management of your practice because you will be able to see trends and identify where your operating efficiencies are and where they are not!) and how to ask great questions and how to listen for great case acceptance.


“How long should I have them work as associates before offering them ownership?”

Two years would be maximum; after that, if they are not interested, then they should move along as per the associate agreement that states their option for a buy-in or move-along clause within a strict timeline that you agree to. It they choose not to buy-in, and you retain them, then you run the risk of developing their goodwill at the expense of yours.

“I am also concerned about the tax implications of buy-ins and the best way to avoid Uncle Sam and his lust for our hard-earned money.”

Traditionally, taxes seemed fairly stable. You could count on the tax laws remaining relatively the same from year to year. However, as I note from the Naden/Lean Group at http://www.nlgroup.com/resources/taxtips.htm “the so-called "kiddie tax" was one provision that was unchanged for many years. Recently, Congress changed the kiddie tax rules for the second time in two years. It's very likely that you'll have to adjust your tax plans if you have children in your household.”

And again, from the N/LGroup’s web site, “just this past May, Congress extended the WOTC even further. Under the Small Business and Work Opportunity Tax Act, the WOTC is available through August 31, 2011. If you aren't taking advantage of this credit in your business, now may be a good time to start. The WOTC is designed to help individuals who are economically challenged or who live in areas that are economically disadvantaged. They do so by helping businesses to employ them. Generally, the maximum credit is $2,400 (40 percent of the first $6,000 of qualified first-year wages). The credit is lower if the individual is employed for 400 hours or less”, etc. (And it’s the “etc.” that answers why you need professional advice.)

Or, for example, you can visit the Costin Company 2007 tax changes, http://www.costincpa.com/tax/2007changes.shtml, to see what’s new with Traditional and Roth IRAs, 401(k), 403(b), Health Savings Accounts, Educational IRAs and miscellaneous changes, etc.

The bottom-line being that tax laws change regularly and you need current tax advice and advice specific to your set of circumstances, from a professional.

And remember, anything that helps your practice run more smoothly or efficiently is practice management. Anything that improves the value of your practice, as improving profitability or efficiency would, is business management. Therefore, practice management is business management and you really are an investor in your practice! So, keep in mind that as a business, your number one in expense is your taxes and the best way to save this money is not to spend it. This underscores, once again, why professional tax and management advice is critical.

Good Luck!

Q & A for the ADA's New Dentist

• First, some general advice you often give to new dentists.

I would suggest that dentists should choose to practice where they want to live when they retire. The reason for this thinking is that only about 6% of dentists can afford to retire in a manner to which they have grown accustomed, so they may have to keep working. And the reason they may have to keep working is that a similar percentage of dentists do not recognize the importance of practice management both from a macro and micro level, the ultimate result being a practice not realizing its full financial potential. Micro management is the day-to-day running of the office efficiently with a satisfied staff, and macro management is the dentist taking an ongoing and active role in understanding the financial aspects of the practice as a business, having a plan.

• What are classic pitfalls of inefficiency in the dental office?

One common mistake in monitoring efficiency in the dental office is not relating your expenses to a percentage of your production. For example, there is a world of difference between staff wages and benefits at 20% of production vs. 36% of production. This is a measure of productivity; productivity is the “end game” of efficiency. Know your numbers!

• What common mistakes should new dentists avoid, and how?

A couple of answers:

Make sure your staff is happy. There is nothing like staff who are working for you because they love what they do and because they feel valued. Have staff meetings regularly. Define your ‘vision’ of your practice to your staff and have your staff define ‘their’ vision for you. Work collaboratively to realize your collective visions by establishing goals. Consider hiring a dental coach to facilitate this process.

New dentists should recognize that their practice is an investment, like any other investment and should realize a return (ROI) at least equal to and preferably greater than a passive investment into real estate or the stock market, for example. Before you purchase a new practice analyze it from an investment perspective, i.e. understand the numbers. If the numbers indicate a likelihood of a lower return than you can be guaranteed elsewhere, then why not just be an associate, invest your money passively and not worry about the management of a dental office? Why, because you want security and something to sell in the future. So, once the practice has been purchased, manage it actively, know your returns and recognize that your practice is a business and that practice management is also BUSINESS management.

• Is there a commonsense aspect of increasing productivity that dentist might already know — but not actually do? What would you recommend?

Most dentists already know and recognize that procedures per hour is an important dynamic to productivity, but few recognize that it is the most important clinical dynamic that is within their control. Further, there is no evidence that speed of procedures actually compromises quality of care. There are, “How to Do a 35 Minute Crown Prep” videos and literature out there, however, most dentists don’t take ownership of the fact that they may be part of the problem.

• Any other words of wisdom that you’d like to offer.

My parting comment is rather radical but worth considering and that is regarding one of the most missed opportunities in dentistry - the transition from one practice/one career to many practices/one career. By years 10 –15 you have already depreciated most of the value of your assets and you have built up a significant portion of your goodwill. You can only capture the goodwill value of your practice when you sell. Selling your practice more than once can be an excellent way to leverage your return on your investment into your practice.
Note: This does not necessarily mean you would have to move your family from your community as you could sell ½ of your practice or commute to a new area outside any restrictive covenant. Further, this strategy allows you to capture the value of your practice while it is “peaking” and not sell when you are retiring and typically have slowed down.

That’s it!

Shush! Did Someone Say, "Marketing"?

What is the largest known “brand” or name in the dental industry? Arguably, it is the American Dental Association (ADA) and what is the ADA doing to preserve and expand market share? They are associating themselves with known industry sectors of online CE and Marketing through their recent equity position with two Utah companies, ProBusiness Online and Intelligent Dental Marketing, (www.adaceonline.org and www.adaidm.com). One, of course, is designed to offer “the standard” in online continuing education and will prove to be an excellent resource; the other is all about marketing.

Why think marketing? Because today’s consumers are spending their discretionary dollars in our economy and they are buying lots of other things besides dental care. One of the fastest growing segments of dental care is cosmetic care. Why, because patients don’t care about dental care like they do about “feeling healthy”, “looking younger” and if it doesn’t have to hurt, looks good and is convenient, then you’ve got yourself another cosmetic patient. Congratulations, boomers are going to be spending 2 to 3 billion dollars to have great looking smiles in the next 10 years. How are you going to take advantage of this opportunity? It’s a gold rush, only it’s porcelain.

An important piece to anyone’s image is how they present themselves to their public. Isn’t it interesting that the ADA who has long taken the lead in endorsing practice management as a necessary competency in dental school education, is now again taking the lead at endorsing online CE education and marketing as important components to its own marketing strategy? Why has the ADA done this? Because it knows that today’s dentist needs the additional help that is available through these two mediums and because its very survival is based upon providing value, in addition to leadership.

I have had a look at the marketing package that the ADA’s Intelligent Dental Marketing (IDM) sent me and it was excellent as it allows you to pick and choose what your custom marketing plan might look like and cost. I found the materials included in their sample proposal to be both comprehensive and attractive. You can relate to IDM, by choosing from their catalog or by working with their marketing consultant online and over the phone.

How much does the ADA’s solution to a comprehensive marketing approach cost? Well, it depends on you and what you want. For example, if you are just starting out or attempting to re-define your mix of procedures to reflect your interests and core competencies, then you should be spending as much as 30% of your operating budget on marketing. After you are more established, you should be spending less and less. How much money is 30% of your operating budget? Well, the ADA/IDM thinks this is about $2,400 per month.

What’s included? Logo, image design and coaching, identity package printing, website design and coaching, website hosting/maintenance, direct mail post card and coaching, direct mail print/delivery (3,500 pieces per month), practice brochure design and coaching and printing (2,000). Of course you can cherry pick through their catalog of possibilities and, for example, just decide to purchase office wall art posters that promote “healthy smiles” that you create, $129, or case presentation tools or on-hold messaging systems, etc. or any number of options available from the ADA catalog, www.adaidm.com, 1-877 942-8855.

Ask Your Financial Advisor to Explain This:

Ask Your Financial Advisor to Explain This:

As always, there are some things that you can control and some things that you cannot control - things like the economy, demographics, and supply and demand. Today, I will be writing about the economy because we live in “interesting times” and because things are different now than they have been in the past 50 years.

First, there are high short-term interest rates in Europe and the United States. Why mention Europe? Because the point of this article is to make the point that the US is not in control of its money and to ask the question, “Is that your money too?” This discussion is being put forth to start some dialogue and to get you to think about some of things that are out of your control, like the economy, and to prompt you to ask your financial advisor for their take on this change.

Case in point, right now there is a fully inverted yield curve on U.S. Treasuries and the global economy is thriving, new records of economic activity are being measured, stock markets are up, and debt creation is soaring. Traditionally, this situation is the opposite of what one would expect. Why?

Let me explain… an inverted yield curve, defined as three-month Treasuries yielding more that 10-year Treasuries, always means recession, not boom. “The yield curve has predicted every U.S. recession since the 1950’s…”, so what is going on?

To understand this logic, you have to understand that the banks, (the source of all money), make their money by borrowing short and lending long for cars, mortgages, boats, etc., so the greater the spread between the short and long rates, the more profitable the banking business. But, invert this yield curve and the banks find themselves paying more for deposits on savings accounts than they earn by lending. For the global economy, traditionally, this used to mean bad news because the U.S. spending fuels export driven economies of Asia, Latin America, and the Middle East. A credit crunch, (increased short-term lending rates), used to mean world pain. Not so today, what’s changed?

Consider a new paradigm, that the structure of the world’s economy has changed. Author, John Rubino, says consider these things:

1) Today, we have the free flow of capital around the world. This means that cash moves in and out of any one market without any restrictions. This also means that the inverted U.S. yield curve is only inverted from a U.S. investor’s perspective. For example, over in Japan, where they have artificially low over night bank interest rates, (something like 0.5% on what in the U.S. would pay 3%), there is an interest in investing their Yen into our U.S. over night notes because for them, a U.S. inverted yield curve is a steep yield curve! This concept of investing in one bank from another is called the carry trade, the over night carry trade. What has changed is that now Japanese banks and other capital from around the world are participating in the carry trade.

2) There is, at least, one more reason that is even bigger than the amount of money the Japanese are pouring into the U.S. over night market carry trade. I’m talking about the central banks, the mother ship of all banks of any given country, that are buying U.S. dollar debt. The central banks of Japan and China have something like 3 Trillion dollars of U.S. bonds. These government banks have chosen to recycle their trade surpluses back into U.S. Bonds. The reason they do this is because if they did not do this, their own currency, the yen and renminbi, would become less valuable at international exchange rates making the cost of their exported goods more expensive to the U.S. market that they serve.

3) The reason why this is working is because of the new paradigm in the economy, namely that 90% of all foreign money that is buying U.S. securities, is no longer private investors, but foreign governments. They are buying Treasuries, Corporate bonds, mortgages, and stocks because by doing so they keep their own currencies “fairly” valued so the status quo continues, namely the Japanese and Chinese keep selling competitively priced goods to the U.S. consumers, and at the same time, by actively exchanging the trade surplus created into the purchase of U.S. debt, they effectively are giving the U.S. the equivalent of unlimited credit with which to buy more goods at an ever increasing trade surplus that keeps getting “sanitized” by the re-investment of the trade surplus back into U.S. Securities. Got it?

OK, good, because there is just a little bit more to all of this. What has happened with this recycling of debt to a seemingly unlimited potential, is a massive demand for high-grade debt notes, more in fact than the entire U.S. Treasury has. In fact, that’s the reason for something called, “Securitization”, or the building of lesser-grade debt into higher-grade bonds, like gathering up a bunch of home mortgages or credit card imbalances and creating a SPV, “special purpose vehicle.”

Now, here is the reality check… Securitization’s impact on business practices in the financial sector has been seismic. U.S. banks no longer have to hold debt for long periods of time. They can sell it to foreign central banks and use the proceeds to make more debt available and hence, banks have been transformed into the suppliers of raw material for the global economy. This also explains the U.S. banks willingness to lend money in spite of the inverted yield curve. Knowing that they don’t have to hold this debt, they repackage it into an SPV and sell it to central banks with a trade surplus.

The final piece of this transformation is the credit insurance that has recently come on side, meaning they have created new ways to insure against losses involved in borrowing, enter the CDS, “credit default swap” that insure against any losses involved in defaults by a given borrower. Enter hedge funds that have discovered that writing CDS is like writing flood insurance in a drought period. The challenge in finding flood insurance is in finding people who want it, but who doesn’t want cheap money. So, what has changed is that now the banks provide the credit as they always have, but this time the hedge funds are providing credit insurance so the resulting re-packaged “high-grade” debt is being snapped up by central banks that have a trade surplus with the U.S.

I’m not finished yet… armed with cheap credit, a growing number of companies are buying back their stock. For large companies, a strategy of stock buybacks is used to support share prices in the absence of any internal growth opportunities. For the smaller companies, this could make them a target for a leveraged buy out from private equity firms armed with cheap money. Global M & A rose 38% in 2006. And default rates are falling because even the most troubled company can get credit these days.

The result is that the U.S. government is not totally in control any more; securitization has made bank reserve requirements irrelevant. Meanwhile, most financial transactions that are electronic are perceived to be safe and liquid and so can perform some of the functions of money. Combine this new-age credit creation with huge trade imbalances and the result is a unique set of challenges for today’s central banks. Imagine that you are running the U.S. Federal Reserve Board, your economy is running an alarming trade deficit, U.S. dollar backed bonds are ending up in the accounts of your biggest trading partners’ central banks and in response you have engineered an inverted yield curve, which always worked in the good old days, but you know what, it isn’t working now, is it?

This time is different, the banks are still lending like crazy and credit is still cheap. Why? Perhaps the global financial system has shifted away from gradual interest rate changes that were connected simply to shifting mortgage rates. This time, there is a new player on the field that is driving demand for the supply of money and that is the M & A lending activity that is trumping the mortgage backed securities of yesteryear.

Now for the trillion dollar question - is money this cheap sustainable or are we headed off the cliff inevitably, with everybody’s debt mounting and mounting for a great fall? Eighteen months ago, our overseas debt became greater than our overseas assets, a situation, that in the past, would have caused a decline in the value of the U.S. dollar. The U.S. is now the world’s greatest debtor. Those countries holding this debt, largely Japan and China, are dependant on U.S. consumer spending. A rapid falling dollar would be more of a problem for Japan and China than for the U.S. Meanwhile, U.S. banks are continuing to make money on the inverted yield curve by taking more and more risks on credit. For example, 71% of all companies with Standard and Poor’s credit rating had the lowest quality rating in 2006; in 1980, by comparison, only 32% had this poor rating.

How big is this new economy? The value of global credit insurance alone is half the size of the global GDP and it is growing exponentially. Much of it is held by hedge funds that don’t publish audited balance sheets. So, it is clear we are in uncharted waters, and we already know that the social security is not properly funded so we cannot count on that design for our futures either.

Thinking like a CEO means taking into consideration all the situations that are in your control and all the situations that are out of your control, like the economy. I hope this little piece has given you a heads up and reasons to discuss this overview with your financial advisor(s).

Today’s Investment Opportunities – April 1, 2007

With the economy slowing and sector leadership waning, investor interests may be best served by considering funds, and management teams, that have shown a knack for good, old-fashioned stock-picking. Here’s an updated list of what we find attractive at present and a few thoughts as to why these funds might make sense in your portfolio.

If you recall, we added “bear market” and “market neutral” investment options to our list at the beginning of July 2006. Not the most auspicious time to do so, but we’re not just looking for funds that “zig when the market zags”. In order to make the list, these funds have to provide not only downside protection to a portfolio, but also a modest level of risk-adjusted excess return, or alpha. So, even if we get the ensuing market direction wrong, our market neutral and bear market funds have a good probability of mitigating directional bias.

As it turns out, a good example of a fund with these characteristics is the Prudent Bear fund we mentioned in July. From our work, the fund’s beta relative to the U.S. market was roughly -0.75 over the past year (through March 31, 2007). Given the broad U.S. stock market returned positive 11.28% over the last 12-months, one would expect Prudent Bear to have lost roughly 8.4%. Yet the fund generated positive returns of 7.4%. This difference of 15.9% would have allowed one to both insulate an investment portfolio to short-term moves on the downside while capturing a good deal of the market’s upside. We like that.

We present all three of the market neutral and bear market funds we recommended last July in the table below along with two funds we’d be unlikely to hold in either model portfolios, or client accounts, namely the Rydex Inverse S&P 500 and ProFunds Bear funds. The column marked “Beta Implied 1-year Return” is an estimate of the return an investor should have expected from just fund’s beta exposure to the broad market. The fund’s “Excess Return” is simply the difference between the fund’s total return and its Beta Implied 1-year Return.

A logical question that might arise – why do both the Rydex and ProFunds offerings show any positive “Excess Return”, given that they both attempt to mirror the overall market in the opposite direction? The answer stems from two sources. First, part of this benefit is due to the strategy that each employs - investing the proceeds from shorting futures in risk-free short-term obligations. This accounts for maybe 5% of each fund’s total returns and, given that Prudent Bear is roughly 75% short, about 3.75% of the excess return generated by this fund as well. The remainder of the excess return generated by Rydex and ProFunds can be attributed to the mis-match between the S&P 500 Index and the Russell 3000 index.

We’d be unlikely to recommend, much less hold, either the Rydex or ProFunds offerings simply because we don’t place much faith in our abilities at accurately calling the direction of the overall market over the short term – and that’s what benefiting from these funds requires. Yet in cases where an active market neutral or bear fund manager shows an adept ability to add modestly consistent excess return we’re more interested, as that excess return (assuming it persists) actually mitigates the risk if our directional biases are wrong.

Our opportunity list, shown below, is comprised solely of actively managed mutual funds that should be available through the Fidelity, Charles Schwab and TD Ameritrade fund platforms as “no-transaction fee” options. However, if you find an error in availability, let us know and we’ll be sure to correct it next quarter.

Changes in Fund Recommendations

Deletions

Chase Growth, Hillman Focused Advantage (CHASX & HCMAX) – both fund’s risk-adjusted returns have fallen off markedly since last July. We recommend swapping out of each into Janus Contrarian (JSVAX) and/or Allianz NFJ Dividend Value – D (PEIDX).

Fidelity Value Discovery (FVDFX) – still producing solid returns, we recommend continuing to hold in taxable accounts, but we’d rather dedicate new money to either Kinetics Paradigm (WWNPX), Kinetics Small Cap Opportunities (KSCOX), or Delafield (DEFIX). Realize the overlap between Kinetics Paradigm and Small Cap Opportunities is sizeable, so we’d select either one or the other.

James Equity & James Small Cap (JALCX, JASCX) – deterioration in both funds merit a move to greener pastures. We suggest Delafied (DEFIX) for owners of James Equity and Cambiar Conquistador Inv. (CAMSX) for James Small Cap holders.

Touchstone Small Cap Value Opportunities (TSVOX) – Shorter term prospects might be brighter with Cambiar Conquistador Inv. (CAMSX) or Royce Value Plus Service (RYVPX).

Fidelity International Discovery (FIGRX) – fund has closed. We’d recommend continuing to hold but new money is advised to look to Quant Foreign Value (QFVOX).

Additions

Janus Contrarian (JSVAX) – it looks like Janus is getting its groove back, and Contrarian is one of the timeliest of their offerings. Solid risk-adjusted returns for the past few years add to its attractiveness.

Allianz NFJ Dividend Value – D (PEIDX) – steady, consistent performance along with a modest expense ratio make this fund attractive in the large-cap value sector.

Delafield (DEFIX) – a solid way to get mid-cap value exposure. Much more cyclically positioned than either Kinetics Paradigm (WWNPX) or Kinetics Small Cap Opportunities (KSCOX) and hence a likely complement to either.

Royce Value Plus Service (RYVPX) – a nice small cap opportunity, Royce has done a great job with many of their small cap offerings and Value Plus Service is both well diversified and most timely.

Cambiar Conquistador Inv (CAMSX) – a relatively unknown fund with only $63MM under management, he performance has been solid since inception. This looks like a good opportunity to get in on the ground floor though the ride may be bumpy at times.

Fidelity Real Estate Income (FRIFX) – a nice conservative offering that seems to be completely misunderstood by Morningstar, who give it a one-star rating. The fund invests in preferred shares of real estate companies (REITs and operating companies) and is much more comparable to fixed income offerings than other REIT funds. A good fund for those seeking retirement income with some upside.

Alpine International Real Estate (EGRLX) – in our opinion the U.S. REIT sector is both picked-over and over-priced relative to the risk inherent in the sector. However, international REITs are in their infancy and, as the market develops, we’d expect a lot of opportunities for early investors. The yields are currently low, but expected to rise over the next few years as the REIT structure matures overseas. Funds in this sector are not without risk, but tuck this fund away for five years and we think you’ll be well rewarded.

Tax Deductibility of Management Fees

A few questions have come up from clients regarding the tax deductibility of investment management fees paid for ongoing advisory services such as those offered by Pariveda. Here’s a quick overview.

Investment management fees are considered a “below-the-line” miscellaneous expense for the taxpayer and are therefore deductible to the extent that they, combined with all other miscellaneous expenses, exceed 2% of the taxpayer’s adjusted gross income (AGI). The taxpayer is eligible for the deduction regardless of whether the account(s) in question are taxable, tax-deferred, or a combination.

However, in cases where the taxpayer falls under the Alternative Minimum Tax all “below-the-line”, including those for investment management fees, are disallowed.

Until a few years ago, there was confusion surrounding whether advisory fees paid for tax-deferred accounts such as IRAs and 401(k)’s had to paid from funds within the account, or whether these fees could be paid from outside funds, and if so, if these fees would be considered tax deductible. All this was cleared up in a 2005 private-letter ruling:

Advisers say the IRS clarified a gray area when it ruled that a wrap or asset-based fee for an IRA can be paid with outside money - and not run afoul of contribution rules - as opposed to having to be paid with pre-tax dollars from the IRA. The rule also clarified that the wrap fee paid with outside money would be tax deductible.

Interestingly, while advisory fees paid for tax-deferred accounts are deductible, brokerage commissions are not.

Retirement Savings of Dentists in Private Practice

ABSTRACT

Background Retirement planning is an issue that concerns all working people. In this article, the authors present their analysis of the results of a 1995 American Dental Association survey that asked dentists questions about their plans to finance their retirement.
Methods. The ADA's Survey Center conducts a periodic "Survey of Current Issues in Dentistry," which gauges dentists' opinions about a variety of topics of interest to dentistry. The authors analyzed the results of the 1995 survey in which retirement savings was one of the topics.

Results The majority of responding owner/dentists whose primary occupation was private practice (40.7 percent) indicated that they were relying only "a little" on the sales of their practices to finance their retirements. Overall, dentists whose primary occupation was private practice reported saving an average of 10.5 percent of their income specifically for retirement. The average total amount of money dentists invested in various retirement plans increased with age and was highest for the 55 to 59 and the 60 to 64 years of age cohorts. The only exception was the 401(k) plan, in which the peak occurred in the 65 years of age and older cohort.

Conclusions Fifteen years ago most dentists retired between the ages of 60 and 69 years. Recent trends show that dentists are retiring at younger ages. This means that while in practice, dentists must save enough to support themselves for 20 or more years of retirement.

Practice Implications The transition from private practice to retirement can be difficult. Therefore, planning for the future is important. Dentists can benefit from making appropriate decisions based on age, investment goals, risk tolerance, monetary constraints and time until retirement.


Brown LJ, Lazar V. Retirement Savings of Dentists in Private Practice. JADA 1999; 30(8):1210-18. Copyright © 1999 American Dental Association. All rights reserved. Reproduced by permission. For free access to the full text of the article, please click here; http://jada.ada.org/cgi/reprint/130/8/1210.

What Does Your Future Look Like?

Some say that tomorrow's dental industry will become more polarized, with the more successful practices working, acting, and looking radically different from the less successful ones. This is pretty important in light of a 2004 CNN study that found that only 43% of American workers were happy with their employer.

Leadership is often the quality that separates the great practices from the good ones, where are your going with yours? To advance into the future with confidence create a business vision by involving your entire team in the process. Please note that ultimately, handling stress, teamwork, working in a professional manor towards patient satisfaction and service is our goal, the higher purpose to which we serve. Yet, we have to arrive in the future financially sound and to provide dentistry of the highest quality, the dentists themselves have to be financially fit. What to do?

Did you know that in 2010, demographically speaking, there will be more baby boomer dentists selling there practices than is any time in history before or sense. It will be a peak year in supply; it will be a buyers demand market placing downward pressure on the value of dental offices. What else do we know? We know some good news and we know some bad news. Let’s take a look at some good news first. According to a study on ‘The Economics of Dental Practice – Present and Future’ by H. Barry Waldman and Steven P. Pealman released late last year in CDA Journal, the good news is “The combination of increased practitioner income, increases in proportion of the population reporting visits for dental services, decreases in the number of dental school graduates, decreases in the dentist-to-population ratio, and increases in the numbers of female students and practitioners (many of whom report significantly fewer work hours than their male counterparts), portends favorable economics for the dental practice.”

The bad news is that “the cost of dental care is “felt” in a greater extent than for other health services. Current and future funding arrangements for dental services could be vulnerable to economic downturns, efforts to control business overhead costs and continued minimal government support… Compared to other health services the reliance on 1) out-of-pocket funding for a major share of dental expenditures, and 2) limited government support of dental services raise questions regarding the infrastructure of dental economics.” The details of these findings are in the report, November 2006, Vol. 34. No. 11, CDA, Journal.