The Crazy Markets You Are Invested In (Part 2)

The Negative trade balance began in the mid-70s, less than 30 years later both the government and consumers were running up debt at an alarming rate. See Chart on the left-hand side of this page.The only way America can continue in its role, is to borrow. How is this borrowing made possible? Let’s first look at gold.

Gold has a past and a present and it has not been a great preserver of wealth during the last 30 years and in this respect it has not been any better than paper money. A bull market in gold or in technology shares or in real estate are all the same, no real wealth is being created, people are just switching their preferences. In the end, trust in gold is the same as trust in paper money until you go back even further in history and then you realize that gold has a much longer history than the paper dollar and because of this, both gold and paper dollars have a future, but gold has much more of it.

Jesus said, “Render unto Caesar that which is Caesar’s” referring to gold and silver coins with Caesar’s head on it. America has dead presidents on its money too but the difference is that a gold denarius is worth today, in terms of buying power, what it was worth 2,000 years ago. And US paper dollars lose 2 to 5 percent of their purchasing power every year. What do you think they will be worth 10 years in the future?

The world’s two largest currencies, the US dollar and the British Pound have both lost 95% of their value in the past century, which is especially remarkable because gold was linked to these currencies for most of this time. For the dollar the final link with gold finished 37 years ago. 70% of the world’s central bankers and Warren Buffet have been increasing their reserves in Euros since 2005.

That is not so surprising given this background of rising debt against the dollar. The dollar is in fact and rational thought, nothing more than electronic information that exists to keep track of it. Relatively few dollars ever make it to paper and many end up in the pockets of drug lords and African politicians. Therefore, most of the US dollars made are not even useful for starting a fire because they do not even tangibly exist.

Gold is the only money that exists in tangible form. Sure it goes up and it goes down just like money say the economists. You can protect yourself from inflation in other ways say the speculators. Gold pays no dividends or interest, gold will not make you happy, but it is better in the long run than anything else. Longevity is not the best recommendation, especially if you do not live as long as the ½ life of gold which is already inert, or nearly immortal. But this feature, gives it staying power, and this is what gives it virtue.

Gold is money that no central bank promotes and none destroys. The world’s improvers will always be with us. They spend more than they have to boss us around, they use civil service jobs and bombs to get their way. Given enough money, the poor can be fed and housed, the middle class can be given free medical, low cost housing loans and social security, and the rich get contracts and favors. Enemies can be created, then bombed, and then reconstructed into seeing the world from our point of view. It is all a circus show and it all costs money.

How do you get more money for these spectacles? Gold refuses to cooperate. US dollars and other paper money barely needs encouragement, the printing presses are already hot. But everything in life has a beginning, a middle, and an end, just as surely as each day passes. Each day that passes in which the present trends don’t come to an end brings us a day closer to when they will end. Stability, leads to instability. The longer things remain stable, the more people are convinced that they will never change.

Today’s house flippers are taking on riskier positions, instead of buying one house, they buy two. Instead of living modestly, they live large, they gush in the direction that the market leads them. What does this really mean? It means that investor’s perceptions of risk are over influenced by recent history. It means that people look for meaning in things where there is none, that they misapprehend the randomness of events. Over the broad sweep of market history, prices have gone up from barely 100 after the crash of 1929 to over 10,000 where it is today. However, adjusted to inflation, the Dow is only about 500, and most of that increase is cyclical.

The Dow, having moved from under 1,000 to over 10,000, from 1982 to 2008 investors would have to believe that the tendency is to go up, that’s its recent history, right? Today’s current investors have made their bets as to whether prices will go up or down, and this is reflected in the stock market or real estate markets currently. Some believe it will go up and some believe it will go down and so the cycle repeats itself as investors eventually come to realize (by a feeling) that they are paying too much for the opportunity to follow the prices going up, and then, some event, and things tend to crash.

Over the last 100 years the average price investors tend to pay for $1 of stock market earnings is $12. Today, investors are paying $20 on the S & P 500. They believe it will go up, they are not wrong, they are just paying too much to find out when. What were the odds that Bear Stearns would disappear this year, let alone in 2 weeks? A crash in the stock market would be accompanied by the usual complaints, but a crash in the real estate market would be much worse.

Households that have come to rely on equity build-up to keep themselves solvent will have to cut back on consumption. This would produce job loss, personal bankruptcies, mortgage failures, and falling prices. We know how America was built on debt and an increase in the money supply to feed it. We don’t know how it will end or when it will end. It is rather like thinking about your own death, you would rather not, and generally you tend to avoid the subject. Still, it is the kind of thing you ought to be prepared for! A sensible man may not know the hour, the day of his demise, but he does not doubt that it is coming! He does not want to wake up to a market crash with a portfolio of junk bonds, tech stocks, multiple homes or US dollars. He wants to pour himself a drink of Tequila Gold.

After 20 years of mostly falling interest rates, mostly falling inflation rates, and mostly rising asset prices (stocks and real estate) Americans have come to believe that this is the way the world works. Interest rates mostly go down, real estate prices mostly go up. It’s a beautiful thing. What would happen if real estate prices start to go down as they already are? The answer is, nobody knows. Everyone is scrambling to add more money, re-write the rules, and change the benchmarks.

Go figure, the world richest economy lives off the savings of the world’s poorest. Americans buy what they cannot afford, and the Chinese build factories to produce stuff that we cannot afford, but buy anyway. It is the dandiest thing, the whole global “economy” advances apparently so long as U.S. Housing prices continue to rise, as long as more and more money is made.

Whatever this new “economy” is, it is not a traditional economy. Income that should be helping consumers spend is not there, manufacturing jobs are disappearing or being outsourced overseas. Savings have disappeared. Most of what we read is “noise” – more meaningless stuff. In America the average home went up in value 44% in real terms between 1995 and 2005. People buy property now like they did in the tech stock bubble, there are demographic factors they say, earning don’t matter. It is all a greater fool’s game, betting that someone else will come along and pay you more for it. There is no real economy in that. How the new homeowners are going to pay higher prices on falling incomes is not clear, is it?

Remember when people felt the reason why stocks would continue to go up was because baby boomers must save money and they had to put it somewhere? Then, when stocks went down after 2000, they reasoned for the same reasons, why real estate prices would go up, and so they end up chasing bubbles while the real story of what is happening in America is lost in the “noise”.

Well, after an unprecedented rise in real estate, the biggest boom ever, twice as big as the last one in 1980s according to the FDIC, we are nearing, one day at a time, the edge of the abyss. Perhaps the real story is prices for houses have risen in real terms 66% since 1890, but most of the increases happened in two periods: right after WW II and since 1998. Other than these two periods the real prices for real estate have been either flat or going down. Today lenders have come up with creative means to lend money to people who can’t pay it back. Go Figure, and now maybe you can understand why the Fed has increased our money supply and reduced interest rates, to keep the consumer economy working, to increase our apparent standard of living at the expense of great indebtedness (40trillion) payable ultimately, by the many generations of the non-voting unborn.

Things have changed since the last real estate bubble in the 1940’s, then the U.S. economy was growing and healthy. America had a positive trade balance, the biggest in the world. Wages were going up, families were expanding. Now, families are getting smaller, incomes are stable or declining, and for culture of consumers who spend more than we earn, we desperately need housing prices to go up in value and we need the saving of the poor in China and elsewhere in the 3rd World.

The more things change the more things remain the same. The time is now, the rational man and the prudent man get prepared while the crowds wait anxiously for the next signal.
The probable reality is that the Feds will “fix” the problem by throwing more money at it, continuing to devalue the US dollar knowing it holds a trump card in its military that has a vested interest into convincing the rest of the world from seeing things from the American point of view, and that is to keep using the US dollar.

This means that the dollar continues to be the world’s primary currency, backed by a stable government of laws and order. You see, our US dollar is really the equivalent to Imperial currency. As long as it is the world primary currency and everybody wants it to trade with, then it has intrinsic value to foreigners. This is also why it is in the US military’s strategic interest to advance a net work of trade routes around the world, so the 3rd world will continue to invest their savings in US dollars and so the American consumer will continue to consume, so long as housing prices keep increasing and so the dance goes until it stops and it always will.

Purchasing Power Meltdown
Since the US dollar began falling and emerging markets began booming in 2003:
Corn is up 39.5%
Coffee is up 71.1%
Wheat is up 133.9%
Crude Oil is up 140.8%
Gold is up 149.8%
Soybeans are up 159.2%
Gasoline is up 203.6%
Platinum is up 224.2%
Silver is up 257.7%

And thousand s of products that contain these things cost you more everyday.
Cheers!


Author’s note: This discussion paper for the dental audience is largely re-edited content taken from Empire of Debt: The Rise of an Epic Financial Crisis by Bill Bonner and Addison Wiggin, 2006, John Wiley & Sons. Its academic use and private study is permitted under the "fair dealing" guidelines which allow for its use here for the purposes of criticism and review.

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The Crazy Market You Are Invested In (Part 1 of 2)

Is Your Retirement At Stake?

Have you been reading the news? Just today I heard that Delta Airlines took a 7 billion dollar loss in this first quarter of 2008 and they are not the only ones losing their shirt. General Electric shares fell the most in 2 decades on April 11th after reporting a 12% fall in the first quarter. UBS, the biggest of any bank in the world, took a $37 billion loss from the subprime crisis. Defaults of credit vehicles based on subprime mortgages have risen from $54 billion at the beginning of this year to a current total of $170 billion.
How does that make you feel? Let’s take a step back from the news and see what is really going on, OK? Why, because it is your retirement that is at stake.

Let’s pick up the story with the cost of housing. The cost of housing in many areas has not just inflated, but it has been blown up by speculators buying and selling each others houses. Are you one of the geniuses who is making big money by buying a condo before it is built, then flips it to another investor who keeps it until it is built, then flips it to a professional couple who intends to stay for 2 years and sell at another huge profit to still other buyers… everyone is getting richer – so you believe – as long as prices continue to rise.

But the real story is Americans are getting poorer! With less that 20% of U.S. workers now in employer pension plans and with Social Security typically replacing less than 40% of pre-retirement income, personal savings has never been more important – and yet, few people save any money.

Savings rates have never been lower, we are talking about zero savings for the average American. Are you average? Of course not, but still you are lumped in with the lumpen crowd. The low savings rates, coupled with large deficit financing by Asian banks to the U.S. economy is dangerous for the U.S., but it is even more dangerous for both you, your staff and your patients.

37% of your patients do not have any savings of any kind. 11% of all Americans have retirement savings of $250,000 or more. Yet, people are forever focused elsewhere, there is the crisis in healthcare, in our moral values, in the Middle East or in the media. There is usually little any one of us can do about those things, and if left alone, those things generally take care of themselves in their own way.

Unlike these issues constantly being shown to us by the media, lack of savings is the greatest crisis facing the country that you can do something about, and it is personal. It is your retirement we are talking about!

Or, like so many others, you can just complain and hope things work themselves out. Until now, you weren’t going to put an extra dime into your savings when real estate prices were going up at 10% per year and the Federal Reserve continues to give money away at rates below real inflation. Eventually, however, things that must happen sooner or later will happen. Of course, that is when you will have wished you had saved your money. Now that we are already here, where things that must happen are already happening, let’s take a closer look at how we got here.

Savings, like manufacturing is one of those early American virtues that were once part of the American economy and culture. But now, all this seems to have been exported to China. The Chinese now make our products and do our saving for us. They save more than 25% of their income. And with all that savings, the Chinese are thankful to us for giving them a place to invest it. Go figure!

Let’s figure, OK?

In traditional America, people save. Their savings are borrowed by business interests to build new factories and new consumer items that are sold at a profit which creates new jobs, higher incomes, more purchasing power and savings, etc.

In modern neo-conservative America there is no savings, and hardly any factories have been built in the last 20 years. Mind you, there have been lots of shopping centers built. Go figure; how can this be if the per hour jobs pay little more than they did 30 years ago in real terms, and yet American purchasing power is seemingly increasing more than ever? WRONG!

Have you been noticing that America is borrowing unprecedented trillions of dollars from foreigners, a sum that is reflected in the huge budget and trade deficits.

How then, can American live so well? Some argue that the amount of personal savings is understated because it does not take into account the increase in housing values. True!

But, these increasing housing values do not increase America’s wealth; it is simply money flowing into the seller’s pocket from the buyer’s pocket. Elevated home values do not add to the national saving rate unless the seller saves the money – which is generally not the case. They generally go out and buy something with their easy money. In the new economy, people (not Americans) save to get rich, we, consume and get poorer, yet hardly notice.

China, over there, is where people make the things we buy and don’t buy the things we make. American households are rich and buy a lot. Chinese households are poor and buy little. Only 42 percent of the Chinese GDP is for consumption, in America its 71%.

The deception that led to this false sense of security was from our own Federal Reserve who set the key lending rates below inflation and misled everyone beginning back in 2001. The dollar I knew in my childhood is worth 1/10 today. And yet, despite this fraud, the U.S. economy has done no better than Europe. It’s true Americans earn more and spend more…but that is because they work more! Even so, Europe saves more and has less debt. Bully for Europe and the Euro too, as we have seen against the fall of the dollar.

But nationwide homes have grown by 30% since the 1980s, you say. And how did they do this? By the Fed making it possible for lending institutions to extend such a long ropes of credit to the common everyday American, that sooner or later, as all things come and all things go, they will surely hang themselves in debt. And this is what is going on today!

A baby born into America in 1913 came into the world with nothing and he owed nothing. Today, a baby born into America owes approximately $40 Trillion in debt, about $130,000 for having a heartbeat. Such is our democracy, even the unborn get their share of our debt and our politicians are more than happy to stick it to them.

The total value of all assets in America is only about $50 trillion, about $40 Trillion are in current debts, add in future government liabilities and America is broke. When people do not pay their debts, they do not pay them, but the debts do not cease to exist. They are merely paid by the creditor. American debt can be paid in three ways: the currency can be devalued, the currency can be made less valuable through inflation, or the debt can be simply refused. The U.S. doesn’t have to refuse its own currency; after all, it is the worlds reserve currency, that’s like Imperial currency.

Currently, our debts are largely being paid by China who continues to give us credit because even though it is our dollar, it is their problem. Having the world Imperial currency, the dollar, means you can apparently stiff your creditors up to $40 Trillion because everyone wants US Dollars... but not if it is falling in value.

Today, our currency is falling in value because the alternative is to have all those housing loans collapse even more than they already are. It would be very unpopular to put all those millions of Americans out on the street, so, the government is currently re-writing the rules and guess what, it is issuing more currency (inflationary) and more credit to sooth this crisis. That is what it does with everything, it just creates more money to fix the problem for the short-term and then passes the ball off to the next administration, and the next generation!

You and your patients have only the most remote idea, the smallest understanding of what kind of debt obligations are being undertaken on your behalf. The Asians own so many U.S. dollars that any attempt to sell them would cause the very thing they most worry about - a drop in the value of their single biggest asset, the US dollar! Even so, back in 2002 the Euro could be bought for 86 cents, and today it’s worth $1.60.

Something else is happening too, America is getting older. The average American is 45 years old. He no longer is a young man with 60 years ahead. Something odd happens to him, even though he has less years to lose, he becomes careful. He won’t even have a cup of coffee at night before bed for fear it will disturb his sleep. He has a lot to sleep on, he has effectively 10 to 15 years to retire, and he still needs to save $500,000 and you know what, he can’t. Rather than take a chance, he typically shifts his portfolio from capital gains to income.

Over cocktails 1o years ago, all the talk was about stocks. If he got into the stocks in 1997, his portfolio in 2005 was worth about the same when he first entered the market. But in the meantime, his debts increased, his savings went down, and the cost of living rose 12%. Investors took the fall from grace during this period in good form, but now they are 8 years older…

Will 50 something investors panic out of the stock market – yes. Will they panic out of real estate – yes. Will they panic out of the habit of consumption – I don’t know. Who is going to believe he is getting poorer when property prices are still rising, and they are still rising aren’t they, or have things changed? And when he does get his money out of the market without working for it, it is hardly surprising that he spends it. Easy come, easy go. Apparently, the housing bubble has peaked the stock market bubble of 2000 based on P/E and again on irrational exuberance.

The Money Supply

The amount of money, currency in circulation has grown too, faster than in the past 30 years. It rose 20% alone in 2003 –2004. Why was it increasing so rapidly, because the Fed was trying to avoid a deflationary Japan-like slump. It has succeeded so far, through increasing real estate prices, by keeping interest rates artificially low due to the low cost of Chinese made goods, but we creep ever closer to the abyss as more and more money is made available.

So how is it that the increase in money supply happens? It works like this: the U.S. consumers spend more than they can afford buying Asian-made goods. This leaves billions of US dollars with Asian exporters who convert it to local currency through their own central banks which raises there own money supply. Thus, the US is exporting inflation and importing deflation (cheep goods). Back in the 70’s the bond traders would have noticed the rising money supply and sold their bonds causing rates to go up. But now, the rules have changed. No one notices the money supply figures it seems, because the prices for goods don’t go up as they normally would have back in the 70’s because of China. Now the central banks can create what no one thought possible back then, that you can create as much money as you want with out causing consumer price inflation because we are not manufacturing the stuff any more. The good news is that we have delayed the day of reckoning, the bad news is we have reduced American competitiveness by placing all the trade deficit money into Asian hands to invest in new factories, which is deflationary for them as new technology increases production capacity and quality, balancing out the inflationary effect of any increase in local currency. On our side of the pond, lower consumer prices has allowed the Feds to hold down lending rates lower and longer than would otherwise have been possible.

We have already seen what happened to Japan’s currency. Eventually, their domestic real estate and stock prices fell (Nikkei Dow in 1989 at 38,915.87 and today it is at 13,579.13, a 70% loss.) After 1989 Japan’s real estate prices fell for the next 13 years. Imagine if residential real estate prices were to fall in the US? At least in Japan the consumers could stop shopping, but in Japan the consumer shopping was never more than 55% of GDP, unlike in the U.S. where the consumer appetite is responsible for 71% of GDP.

Imagine you are a foreign holder of US dollars and you suspect that the Feds are going to start printing more money, you are not likely to wait till inflation reduces the spending power of your money. This is the situation with US dollars today, if it weren’t the world’s reserve currency and logically going to stay that way with its military dominance, it would signal a mass exodus. But America does have staying power, backed up by its military and the good news is that a 50% fall in the dollar would wipe out half the real value of the US dollar debt overseas. Good for the U.S., bad news for the individual whose savings can’t buy what it used to.

It is note worthy to wonder why corporate profits would continue to go up beyond what they have already experienced, that is, the biggest trillion dollar stimulus jolt in Federal Government’s spending history, and 25 years of falling interest rates, including 3 years of the “prime” rate below CPI levels most recently. Is there any reason to expect any more profits? Yes, they are re-writing the rules as I write this, they have doubled the central bank’s over night lending amount, and proposed new extended credit terms, further out, etc.

What happens to the stocks when corporations like Delta Airlines and GM stop making a profit? What happens when the share price goes up anyway, when investors vote for higher prices? Aren’t they all a little bit richer? Yes, they are richer compared to those non-holders of stock and, no, we as American aren’t any richer. We have merely switched our preferences, from stocks to real estate to stocks, again, and again.

The history of the stock market is one of cycles, in the 1930’s and 40”s you would buy a stock for 5 to 10 times earnings. In the 60’s you would have paid 10 to 25 times earnings followed by the 80’s when it dropped down again to 5 to 10 times earnings and we hit the latest boom in 2000 when guess what, prices were again at 20 to 30 times earnings and guess where we are headed now…

These cycles come and go, and while they may make any given individual richer, if he sells at the right moment, they do not make American society any richer. An investor who follows the crowd cannot expect to make any money towards retirement for he will get what everyone else gets.

Yet somehow, the investor thinks the markets always have to surprise us, or at least half of us or there would be no market at all. People trade their assets because one believes it will go up and the other believes it will go down. Unfortunately, both the pros and the amateurs are overwhelmingly bullish. On the other hand, there is always the man with bearish sentiment who has his reasons too, like me. In the end, the reasons for both pro and con balance themselves out and it is feelings, not a well-reasoned thought, that move the market.

Why is this? I think it relates to warfare ultimately, or being the good soldier. When in battle, everyman must give up his own thoughts – even thoughts for his own survival to lend weight to the collective action, a troop attack, to give it a chance of success. If the soldier lingers or otherwise holds back, he may increase his own chance of survival, but not the troop’s attack mission. In this case too, there is an illusion of security in numbers, even when faced with clear and present danger.

(Continued in Part 2 of 2, next month)

Pay Now - Pay Later, Why Our Staff Need Our Help

Can behavioral finance solve the problems with retirement planning?

Yes, do “it” for them!
Our staff face very different challenges today in planning for lifetime financial security from what previous generations did.

The Pension Protection Act of 2006 was the biggest pension reform legislation enacted in more that 30 years. What made it so different was its recognition of behavioral finance. I’m talking about the accumulation phase of retirement savings and the realization of how difficult it is to build a nest egg.

The problem, specifically, is that 1/3 of those eligible to participate in a 401(k) or other employer sponsored savings plan, do not enroll. The Pension Protection Act was designed to change that.

But first, why is it so difficult to have a savings plan?

Why is it Americans have no savings? It is because of the consumer-based culture (better to buy than to save) and here is the evidence.

1) Savings provides no short-term benefit unlike a mortgage, which results in being able to buy a home.
2) In contrast to an unavoidable chore, i.e. taxes, there are no deadlines.
3) Unlike penalties that can come from, for example, failing to have car insurance; failing to structure financial planning entails no penalties.
4) Education is not enough. Research has shown that there is a substantial disconnect between what financial seminar participants intend to do and actually do end up doing. In fact, there is very little difference in activity between those who do take educational seminars and those who do not (7% vs. 14% - 2001 study: working paper University of Chicago)

What are some of the reasons given for not saving?
- To little money available for savings after paying for basic living expenses
- Money needed to pay off debt
- Unexpected drop in income
- Changing one’s mind
- Lack of self-control
- Loss aversion – risk

And when they do make a decision to save, they follow the path of least resistance when choosing plan options – often least risky and not necessarily in the person’s long-term best interest. Once they choose an option, they are reluctant to revisit it, or to increase contributions as salaries rise, for example. To make matters worse, employees may become paralyzed by having too many options, which prolongs any decision and can reduce their ability to make a rational decision.

The bottom line is this, how employees respond depends upon how retirement plans are presented. For example, automatically enrolling in an employer sponsored plan results in a higher rate of participation. Employers who actually increase employee contribution rate over time actually find employees go along and overcome the “psychological factors” to do nothing that comes from procrastination, lack of inertia, status quo bias, and a general unwillingness to make small sacrifices today for a greater gain down the road.

The reality is that very few people actually achieve all their goals. According to the 2007 Fidelity Research Institute, a typical US household was in track to replace only 58% of its income in retirement, not the suggested 85%. And among retirees 55 years of age and older who were surveyed, more that half (53%) retired earlier than planned. Further, employees who expected retirement income to account for 28% of income in retirement reported it only accounted for 6%.

So there you have it, too often decision-making biases and shortcoming get in the way of your employee’s ability to choose the “right” things. It is up to you as the “protector/employer” to do the right thing and get together with a financial planner and minimize the behavioral variables by, for example, automatic enrollment, escalating contributions rates and age appropriate investment plans.

Our staff need us to do this for them, it is complicated stuff and we all have a tendency to put it off because it is not fun, don’t we.

Employees know that aside from what they create for themselves, there are few, if any, financial safety nets available to them in old age. The retirement plan is only a hope, and Social Security is uncertain. Longevity and health care costs are increasing. Family support is not as available as in prior generations, and arguably, there are also unrealistic expectations about appropriate savings rates and expected investment returns.
The realty is that the employee’s central concern about how to maintain his or her standard of living into old age is not adequately addressed; the additional risks of longevity, inflation, and principal loss remain for the employee. In a Wealth Management 101 exam, the financial industry would—or should—get an F; as they have not proposed a solution that truly meets the employee’s needs.

How can you help?
With respect to age appropriate investing, there has been a shift as big, exciting, and challenging as when Markowitz’s work first forced investment professionals to recognize the importance of investment diversification or asset allocation. And that shift has been into hedging and insurance as additional means to an investment’s return.
Employees now have access to inflation-indexed annuities for their IRA accounts through a new distribution channel that offers meaningful competition: real-time, apples-to-apples quotes from several top insurance companies. This development may be as big in investing industry as the shift from loaded to no-load mutual funds or from the commissioned broker to the fee-only planner model.

So, your role is to provide retirement planning counsel to your employees for the intangible return of being recognized as a caring, supportive leader in your practice. It is already a win-win; why not make it a win-win-win. Do it now, pay now or pay later.

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”, improving their smile a little 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 self-image is how they would present themselves to the 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 in the first few years or attempting to re-define your mix of procedures to reflect your interests and core competencies, then you could 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. There is any number of options available from the ADA catalog, www.adaidm.com.

Managing the Smile of Baby Boomers

Baby boomers, the group born between 1946 and 1964 and the largest generation in U.S. and Canadian history, represent a huge market for dental practices. But this age group is also the least homogeneous of any to date. It's a lucrative market for those dentists willing to take the time to understand this generation.

Seventy-eight million Americans are baby boomers. The first of this generation turned 60 2 years ago. As this group continues to age, more than 8,000 baby boomer Americans are turning 60 every day, how can dentists serve this generation's restorative and “emotional needs”? This is the group that has three times the restorative needs on the next generation and is the wealthiest generation in all of history.

First, recognize that this is not a homogeneous group. Some baby boomers have accumulated wealth and are nearing retirement. Some are still in the work force. Still others will benefit from some type of wealth transfer from their parents. It's a prudent practice to regularly update what’s happening in the patient’s life and up date the “treatment plan strategy to take action”.

Second, recognize that baby boomers are also members of the "me" generation. And while they are used to having companies cater to them, they are not used to having a dental office cater to them. Expectations are high. As a dentist you already have an archetypal image, therefore, blow them away with an exceptional, wonderfully special level of service.

Third, recognize that this generation is very technology-savvy. This group is accustomed to real-time information feeds. According to JupiterResearch, baby boomers make up the Web's largest constituency, accounting for one-third of the 195.3 million Web users in the US. Examine your traditional communication methods and adjust accordingly.

And finally, keep the very best of the holiday season’s spirit alive and well within you and yours, all the year through.

Cheers,

The Changing Retirement Paradigm

I recently read the results of an AGD sanctioned survey of some 1600 online members. The operative question was, “What are their retirement goals?”

Practice management pundits often throw around 6% as the percentage of dentists who can retire in a manner to which they have grown accustomed. 6% doesn’t sound like very many, what’s behind this statistic. Thankfully, Kim Graham Lee, (CEO of Hufford Financial Management) has a research report in the AGD Impact, November 2007, which details some interesting observations and limited encouragement.

Here is her “30 second story”:

• “Full retirement” is not in the vocabulary of most dentists. Dentists enjoy what they do, and most do not have any intentions to retire fully from their profession. Only one out of three dentists plans to retire completely.

• AGD dentists have sought information and engaged in a number of financial planning activities to help them with retirement funding, yet many admit to not being entirely knowledgeable about investing or confident in their planning.

• Most dentists are not on track financially to meet their retirement goals, especially considering that the majority intend to live a lifestyle that is on par with, or higher than, their current standard of living. The best-case scenario is that 3 out of 10 AGD dentists will have enough income at retirement to meet their current standard of living. There is a gap between perception and reality.

The results showed a surprising result that represents a changing paradigm, that most AGD dentists have no intention on full retirement. Gone is the notion of retiring at 65. This is actively being re-branded into “the new” aging workforce.

More than half envision working part-time well into “retirement”. What is retirement anyway? There seems to be a new trend, like double income families, now its called “bop till you drop”. And, “yes”, it is a necessity, without proper planning, to do what most (70%) have to do, and that is, KEEP WORKING.

All money aside, and most say that money is not the primary reason why they keep working; they say they work to keep busy, to stay in touch with colleagues and patients, and continued learning. Yet, only one out of two in the sample has even calculated how much they might need in retirement, if ever they were to fully retire.

It is interesting how we perceive the future; either it is something that comes after the present or it is something we anticipate and plan for.

Amazingly, only 50% have worked through retirement goals and financing with their spouses. I wonder if this is the same number of dentists who don’t have any intention of retiring and have yet to calculate how much they might need?

The paradox is that of 11 competing financial priorities, including planning for a vacation, saving for retirement comes in at the top of the list, the number one priority.

In terms of actual retirement savings, Brian Hufford says, “Which situation is preferable: 1) having no debt at age 50 and the ability to have $700,000 saved at age 62; or 2) having $300,000 of debt at age 62 while having $3.7 million saved? This seems like a silly proposition, but the great majority of dentists choose the first strategy. To realize the second alternative, a dentist must start saving early and save consistently every year.” Making savings your primary goal”. This is also called the power and magic of compounding returns.

Why is it that among these dentists, their savings percentage peaks between ages 50 and 54 (the median is 16 percent of net profit)? Is it because they did not start saving early enough?

It was learned from the study that the most common source for retirements funds were from investments in stocks, bonds and mutual funds even though 70% acknowledged that they were not very investment savvy. Despite this, 77% were confident that they would not have to work in retirement, even though they intend to. And this is where reality and wishful thinking hit the road! The survey concludes that 70% of those surveyed will not have sufficient retirement income to maintain their current standard of living. Surprised? You can learn more from the article directly. http://www.agd.org/publications/articles/?ArtID=2450

Leadership: Positive Change Management through AI

AI - Appreciative Inquiry is a philosophy and methodology for promoting positive organizational change through creating meaningful dialogue, inspiring hope, and inviting action – it builds relationships and unleashes learning!

Although the literature speaks to compelling evidence for improving communication and increasing staff member’s involvement in decision-making, there is little guidance on how to implement changes in communication with-in the office environment.

Setting the Stage
What if we set a goal to improve our practice work environment and enhance quality patient care?

What if we had goals like:
1) To improve communication and collaboration between staff
2) To enhance staff involvement in decision-making
3) To enhance awareness of cultural awareness and sensitivity to patients, families and other staff by the day, by the hour, by the minute!

Here is a Project
To discover your practice’s “positive core”
To combine AI – Positive Change Management results with previous results – begin by collecting benchmark data, reporting examples of positive or inspiring performance data and stories at the end of each day within the office, on a practice blog as it may relate to patient’s interest, and at staff meetings 4 times per year. This “positive attitude change” coupled with online CE resources and tools, email contact, etc. brings about powerful positive change, improved staff morale and patient care.

What is different?
Most change management models guide individuals to search for problems and then to identify options to “fixing it”. In contrast, AI is a strength-based approach to change management that guides organizational members to discover what is already working and then design ways to do more of what works as a foundation for change. By focusing on the positive – what already works well in the office, AI supports futuristic thinking. Practices grow in the direction toward which they focus their attention and repeatedly ask questions about.1

“Unconditional positive questions” ignite conversation and action based on peak experiences, best practices, and noble accomplishments.1

According to Stravros et al, “Change requires action, action requires a plan. A plan requires strategy, a strategy requires goals and enabling objectives. Goals and objectives require a mission. A mission is defined by a vision. A vision is set by values. And the AI approach starts by focusing on the strengths of the organization and the stake holders values.” 2

It is a shift from problem analysis to positive core analysis. The old paradigm, “where change begins with a clear definition of the problem” was painfully slow, always asking people to look backward to yesterday’s causes, rarely resulted in a new vision, and was notorious at generating defensiveness.

The Appreciative Inquiry cycle goes in 4-phases.
1- Discovery – What works? What gives life to your practice at its best?
2- Dream, Imagine – What might be?
3- Design (strategize) – Determine what should be.
4- Delivery/Destiny – Create what will be

Discovery Phase
During the Discovery Phase the staff conduct interviews with all involved, and then interview each other about positive stories within the office, eventually summarizing them into what you see as the practice’s “positive core” attributes based on these stories.

They ask questions that are designed to bring light to the practice’s positive attributes in a chosen topic in order to discover what works. They do this through what’s called “powerful flow” questions reflecting first on past experience (backward), then exploring what about the experience worked (inward).

For example,
Backward Question (Anchored in a past experience)
Can you describe the situation when you collaborated with other staff when all parties treated each other with respect, and appreciation and everyone’s expertise was needed to make a difference? Or, can you describe a time that you consider a highpoint experience, a time when you were most engaged and felt alive and valued in the office?

Inward Question (reflect on what worked)
What was your contribution? What was it about you, your co-workers, the office that made it special? What did you most value about the other staff members? Without being modest, tell me what it is that you most value about yourself, your clinical work, and your practice?

Forward Question (built on past, imagine what might be)
What 3 wishes do you have to improve the vitality and effectiveness of communication and collaboration within the office? What is the one thing that if done well, would make the most difference to improve collaboration at this office? What factors give life to your office when it is at its best?

Dream Phase
Strategic Shared Collaborative Vision of the practice:
Take a look at the positive stories gathered form the Discovery Phase. Look at the “positive core” of these stories and say what it would look like if the “positive core” grew 10X more? What would be the practice’s greatest potential for a positive influence and effect in the world?

As these dreams are shared, compelling ideas are put forward, summarized, and then, become the basis for some action.

Design Phase
What does it mean to have staff involved in decisions, what decisions, who is involved here? What all is there for the stakeholders to decide? Here the rubber meets the road –
Articulate values publicly
Invite action + staff enthusiasm for their work
Propose Provocative Propositions and Principles

Delivery/Destiny Phase
Staff focuses on maintaining AI’s positive approach to improvement. The staff make a habit of noticing what is better every day, every hour, minute by minute, every conversation. Staff identify what they are doing right, and what others do well. By building ever widening circles around them, first person to person, then group to group, the destiny phase of AI ever broadens into the community…Good news stories are used as “possibility perspectives” to bridge the best of what is with the collective aspiration of what might be.

Answer the question, “What would our practice look like if it were designed in every way possible to maximize the qualities of the “positive” and enable the accelerated realization of our dreams? Harness the synergy of group cooperation! Realize the dream in alignment with its principles. Create new levels of partnership.


Use of AI by Others
Appreciative Inquiry has been used by the US Navy, US Department of Health and Human Services, MacDonald’s, BP, John Deere, GTE, Save the Children and World Vision among others. AI is just now beginning to be used in Heath Care, for example, in hospitals in New Mexico, Pennsylvania, Kentucky, Indiana, and the UK. This is its first sighting in dentistry.

“I would like to commend you more particularly for your methodology of Appreciative Inquiry and to thank you for introducing it to the United Nations. Without this, it would have been very difficult, perhaps even impossible, to constructively engage so many…” – Kofi Annan UN Global Compact Leadership Summit in 2004

“Morale has improved dramatically, relationships have grown tighter, teamwork has significantly improved – and equally compelling – sales and profitability outpaced the rest of both organizations. A holistic “appreciative approach” has truly become the way of life for this organization.” – Jim Gustafson, VP and General Manager, ELECTRICjob.com

“The Appreciative Inquiry approach unleashes tremendous power, tremendous enthusiasm, and gets people fully engaged in the right way in what we are trying to accomplish. It’s not that we don’t deal with the negative anymore, the value of AI is that, in anything we do, there’s a positive foundation of strength to build on in addressing those problems.” – Jim Staley, CEO of Roadway, 2003

The Structure of the AI Process
The staff interview each other, one-on-one, and define the topic of inquiry (i.e. staff involvement in decision making or optimum patient experience, then find positive stories or patient success stories that illustrated staff involvement at its best).

Collect these stories and share them.

How to use AI
Always begin with what is really going well with regard to the project or goals? Practice the “positive”, appreciate mindfully and practice on a daily basis.

(Pause and notice: What things are already changing again? What are you discovering? Who have you involved? What are you learning?)

Appreciative stories are retold in huddles, blogs, websites, staff meetings and patient email. Morning huddles are accompanied by “positive check-ins”. What can we do more of? What do you want more of? And what can you do better?

This requires follow up and monitoring. Is this a job for ______________, the same person who begins by collecting benchmark data? What data?

Days/months outstanding patient billings*
Daily Cash Report per Pt./day
Days/months outstanding Insurance billings*
Daily/monthly Cash Deposit Reports
Production: $/day/provider
Procedures/hour/provider
New patients/month
Daily/monthly Laboratory Expenses*
Daily/monthly purchase of dental supplies*

* This information is being tracked nationally through the ADA Dental Market Index, the first index of this nature in dentistry.

You have to take measurements to manage!


AI Requires a New Way of Thinking
A New Set of Skills
AI flys in the face of what’s wrong and how to fix it. The AI change management model works on what works or has worked well in the past (recalling excellence) and then identifying what was involved, who was involved, what was done, how it felt, and how they can make this “best practice” happen again. Sadly, getting people to be positive is a challenge.

Adapting AI to Meet Practice Needs
We are now trying to work toward the positive end, not complaining, just trying to look for the positive. We are looking for success and trying to figure out ways to multiply it.

Good Things Are Already Happening
People are using its principles to build morale. Being able to create positive verbal shifts there is more collaboration. Practice it on a daily basis; the image of our future guides our current behavior.

Changes Are Spreading
We can start our staff meeting off with, “Let’s look at what we are doing really well… what are some of our best features?
Who is doing “it” well, and invite that person to show the others.

You May Ask
Why do people get so excited and want to participate in Appreciative Inquiry? Why does participation so readily lead to positive results, such as, innovation, productivity, employee satisfaction, and profitability? What creates the space for people to be their best at work and for personal transformation? And what are the conditions that foster cooperation throughout a whole office?

The Answer:
Freedom to be known in the relationship, all so often people are related to as their role rather than as human beings, i.e. “That’s the front desk, the CDA, the hygienist, etc. who does that kind of thing”.

Freedom to be heard with sincere curiosity, empathy and compassion.

Freedom to dream in community, i.e. unleashing the dreams of all involved

Freedom to choose to contribute, i.e. to volunteer in the community

Freedom to act with support, and break through years of apathy and distrust

Freedom to be positive, its simply not the norm to have fun, be happy, or be positive!

Why?
Because relationships thrive where there is an appreciative eye! – When people see the best in one another, share their dreams and ultimate concerns in affirming ways, and are connected in full voice to create not just new worlds, but better worlds.

Discussion
Appreciative Inquiry offers numerous advantages to the old way of doing things, diagnosing and correcting the problem. AI primary strength is in improving relationships between co-workers. Although AI potential for positive organizational change, its effectiveness within the dental industry remains largely untested.

Summary
AI has potential to unleash and sustain positive organizational change. Bring it on, day by day, hour by hour, minute by minute!

“There are only two ways to live your life. One is a though nothing is a miracle. The other is as though everything is a miracle” - Albert Einstein

“If only the world’s religious leaders could just know each other, the world will be a better place.” – Dalai Lama

Author’s note: This discussion paper for the dental audience was largely a re-edited version of an earlier paper. The original source material was:
Sullivan Havens D. Wood SO. Leeman J. Improving Nursing Practice and Patient Care Building Capacity with Appreciative Inquiry. JONA Volume 35, Number 10, pp 463 - 470 2006










1 Ludema JD, Cooperrider DL, Barrett FJ. Appreciative inquiry: the power of the unconditional positive question. In: Reason P, Bradbury H, eds. Handbook of Action Research. London: Sage Publications; 2000:189-199.
2 Stravos, J. Copperrider, DI., Kelley Di., Strategic inquiry appreciative intent: inspiration to SOAR, a new frame work for strategic planning. AI Practitioner. November 2003: 10 – 17.

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!