Fee-only vs. Commission Investing: Which is Best?

Posted by Brogan Baxter on Fri, Apr 18, 2014

wallstreetIf you’re looking on advice for investing, and all you want is a few hot stock tips, you’ve come to the wrong place. What we will talk about is how to build a comprehensive investment plan that will build wealth in your dental practice and home accounts. There are two main things you need to keep in mind when building the framework of that plan.

The first is that you must do your best to invest in a fee-only environment, as opposed to one where your broker or manager is being paid on commission. The vast majority of people – up to 95% – use commissioned advisors. What’s the difference?

Look at the kinds of investments each type of advisor makes. A commissioned advisor will have you invest more in mutual funds that have commissions or “loads” attached to them. Do you have investments in mutual funds that end the description of the fund with “Class A”, “Class B”, or “Class C”? If so, you are in a commissioned investment. All make your advisor a commission in different places – class A will have a 3-5.75% charge at the front end, class B will have the same charge at the back end, and class C has a back end charge that’s a bit smaller. In other words, if you invest $100, only $95 will actually go into the market if it’s an A share. The rest goes to your advisor and the company they work for. And these fees pile up.

A fee-only advisor is much cheaper in the long run, and much of the time will also make you more money, since investment returns are eroded by these higher commissions. In a relationship like this the advisor is paid only on the value of your accounts rather than by the transaction, meaning that there’s a much closer correlation between the performance of your investments and the amount that you’re paying your advisor.

That’s all important because of the second thing to keep in mind when building an investment strategy – minimizing cost is crucial. There are a lot of hidden costs associated with investing, especially for a commissioned advisor. Administration fees, management fees, 12b-1 fees, the commissions themselves – again, they all add up. Together, they could eat up 5-6% of your return. You have to look at the net returns to see if your investments are really earning you what you need them to earn.

A difference in rate of return of only 3% can change your final values by up to 16% over ten years. In 20 years, the difference grows to 41%. By boosting your rate of return only slightly you can earn nearly twice as much over two decades. That’s a lot of money.

Any book on investing will tell you that a fee-only advisor is the way to go as soon as possible. But most fee-only advisors will only work with accounts that are already over $500,000 or more. That’s why you need to get your practice and personal finances in order generally, so you can take advantage of this and other useful wealth-building strategies.

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Topics: Practice Transition, dental retirement, dental tax, dental financial planning, dental accounting, Financial Planning

It’s Not Too Late to Save for Your Retirement

Posted by Brogan Baxter on Wed, Apr 16, 2014

piggyIt’s never truly too late to start saving for your retirement. Starting early is certainly better. A person who saves $20,000 a year for 25 years will, at the end, have $1.46 million saved. But to get that same amount in only 15 years, you’ll have to save $54,000 a year. In ten years, it’s $101,000 a year.

But if you’re already 50, 60, or even 70 years old it’s too late for that now. Now, it’s more about ambition. It’s about wanting to fight to better your situation, to be in a better place than where you are. If you don’t want to settle, you don’t have to. But the margin of error shrinks considerably. According to the ADA, only 4% of dentists will retire to a lifestyle similar to that which they had while working. Most dentists under 40 years old think they’ll retire at 61, but after 40 reality sets in and most say it won’t be until age 67.

Read the Guide: Financial Planning for Dentists

To get back ahead of the game, everything has to work harmoniously. You need a comprehensive approach that is focused only on building wealth. No new debt, unless it’s crucial to your practice’s operation. You can no longer overstaff just to keep things comfortable. Overhead has to be cut. An older dentist can’t just work more to make more – your practice has to get leaner and more efficient. You need to know your financial numbers, and know them fast so you can react quickly to any issue that comes up.

After your general finances are squared away, you’ll need to prepare to sell your practice. You’ll get 60-70% of your previous year’s revenue as a sale price, most likely. If you’re in a geographically desirable area you may get more than that. But remember that this should supplement what you’ve been saving already – less than a year’s revenue won’t get you very far on its own.

But if you’ve taken these steps and built your practice into a lean wealth-building machine, you shouldn’t have any problems. Even if you start late, you’ll still be able to retire very comfortably.

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Topics: Practice Transition, dental retirement, dental financial planning, Financial Planning

INFOGRAPHIC: 4 Symptoms of a Sick Dental Practice

Posted by Jason Smith on Sun, Mar 30, 2014

You run a successful practice and you're making a good income - but you know things can be better. You've tried practice management and marketing with short-lived results. You're not willing to settle with the status quo, but you don't quite know where to look or what to do about them. You see the signs of problems under the surface, but you're out of ideas for how to deal with them.

Check out our new infographic, 4 Symptoms of a Sick Dental Practice, by clicking on the preview image below. It's designed to show you a few things that could be amiss in your practice's finances and help you determine whether the worries you have are minor - or the start to something serious.


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Topics: dental advisor, Practice Transition, dental retirement, dental tax, dental financial planning, dental accounting, Financial Planning, business of dentistry, Tax Advisory

How Your Practice Can Survive a Few Slow Months

Posted by Brogan Baxter on Fri, Mar 28, 2014

tortoisePut simply, the secret to making it through slow times as a dentist is great planning. If you have a good idea of what’s coming, and you have a plan in place to deal with it, you’ll be able to get through short periods of low production with relatively low financial impact.

Your most potent weapon is thorough information on historical financial trends for your practice. Four years of data or more will get you the best results but use what you have. This will give you a good idea of when production drops tend to happen, and will help you determine why. For example, if your practice is located in a vacation area and you tend to have less production in the summer months, you can safely bet that’s going to be a trend. You’ll be able to plan for that drop occurring on a yearly basis.

There are a few ways you can use that information.

  1. Schedule vacations: If you know a specific month or season is your slow time, close the practice for a week. You and your staff can have a vacation, and then you can condense four weeks of work into three, and avoid spending on overhead when you don’t need to.
  2. Cut hours: You don’t need to schedule at full capacity if you know that you’re going to be light on work. Lighten the load of hours during slow periods – maybe only have one assistant work each day, for example – and then when production ramps up again, you can go back closer to capacity.
  3. Reactivation campaigns: Do you have patients who haven’t been in for a while, and have fallen through the cracks? Get in touch with them, and get them in for a cleaning and a checkup, or schedule them for the operative work they’ve been putting off or haven’t scheduled yet.
  4. Run promotions: Things like giveaways and discounted procedures can bring in patients who might otherwise have avoided a trip to the dentist.

More than anything else, you must have an adequate safety net in place. If you don’t, you’ll be tempted to cut your pay or adjust your cash flow to make up for slow times, and that’s not advisable. It’ll hurt your home finances and lead to stress. Instead you should have 1 to 1.5 times your typical practice monthly expenses in your accounts at all times. You should have access to a line of credit that can cover between ¾ and 1.5 times your monthly practice expenses as well.

You need to be proactive with your taxes and expenses as well. Use your practice’s trends to shape your tax payments and your purchases. You should be adjusting tax estimates on at least a quarterly basis. Not only will this account for the fluctuations that happen when a slow month does happen, but it protects you from a nasty tax surprise. And a five-figure tax bill will hurt a lot more if you’re fresh off a dip in production.

That goes for expenses as well. Boring cash flow is a lot better than “lumpy” cash flow – in other words, paying off a large expense all at once is not ideal. When lean times hit, you’re going to be a lot happier paying off four months of $10,000 checks rather than one for $40,000.

Proactive planning – in taxes, in expenses, in savings, and in reactions – goes a long way towards helping your practice get through a lean month or two without suffering too much.

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Topics: dental advisor, dental financial planning, dental accounting, Financial Planning, business of dentistry

How Much Do You Need to Save for Your Retirement This Year?

Posted by Brogan Baxter on Fri, Mar 21, 2014

savingretirementCommon sense and logic tell us that the earlier you start saving for retirement, the better off you are. Interest compounds, so money saved at age 30 ends up worth more than what you save at 50. For example: a person who saves $20,000 a year for 25 years will, at the end, have $1.46 million saved. But to get that same amount in only 15 years, you’ll have to save $54,000 a year. In ten years, it’s $101,000 a year.

You probably don’t want to save $101,000 every year, so start now. But how much should you be saving?

That’s a loaded question, because the real answer is that it depends. Helpful, right? Beyond your age, there are several factors to consider. They include your retirement goals, how much you make, and how much (if anything) you’ve already saved.

At Four Quadrants, we plan for our clients to have the same income in retirement as they do while working, if not better (after adjusting for inflation). You’ve probably never been told this, but it is possible for a dentist to retire with between $8 million and $13 million in retirement savings. And we’ve had clients do even better.

Read the Guide: Financial Planning for Dentists

To determine what you’ll need in retirement, think about your current expenses. If you’re making around $400,000 a year, your personal expenses are likely to be around $20,000 a month right now. In five years, because of inflation, you’ll need $22,000 instead to meet that same value. In 15 years you’ll need $31,000 a month. In 25 years it’ll be $54,000 a month.

To plan for a thirty-year retirement (including inflation), that $400,000-a-year dentist must save about 27% of their gross income in order to hit their retirement goal. That amount doesn’t take into account any profit from selling the practice or any related real estate deals – but you can’t put all your eggs in that basket when it comes to the transition. Those sales won’t net you more than 60-75% of your revenue from the previous year and that’s not enough to maintain your lifestyle. Even if you take the above example and plan for a net $1 million to be invested around the retirement age, that only drops the savings percentage from 27% to 23%—hardly the game-changing difference that many dentists think it will be. One only should count on that inflow as supplementary income alongside years of savings.

For a younger dentist, somewhere from 20-30% of your gross income should be saved for retirement. If you’re older – say, within ten years or so of retirement – you should be saving closer to 30-40% of your gross. That way, your retirement won’t be filled with financial worry, and you’ll be able to continue in your current quality of life.

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Topics: dental advisor, dental retirement, dental financial planning, dental accounting, Financial Planning

Reducing the Risks of a Partnership Failing: Part 2

Posted by Brogan Baxter on Sun, Mar 16, 2014

handshakeLast week I talked about the preparation that needs to be done before hiring an associate to make sure your partnership works out. After all, 75% of them end up failing, so it looks like dentists need some help. Once you’ve made the hire, though, the work isn’t over. You need to plan for what happens after the hire is made and the buy-in is triggered, and you need a plan for what happens when you’re ready to call it a career.

You’ll be coexisting with your new partner hopefully for several years at least, before you ride off into the sunset. Your practice will not function in the same way it did when you were the only executive in charge. You’ll have to work together to make things work. Communication is key, and regular management meetings are a necessity.

Decisions must be made about how decisions will be made when you’re working as partners. How will you develop strategy as a team? Who decides when new equipment is needed, what equipment you should buy, and how? What will your schedules be – will you work together, or trade off shifts? What happens if one of you wants to run a personal expense through the practice but the other partner does not? You need answers to these questions before the situations come up.

Another thing that’s helpful is finding a new corporate accountant. This should be someone who hasn’t worked with either you or your new associate before – any accountant who’s associated with either of you might have more loyalty to one than to the other, and because of that, one of you will be favored. That’s a bad way to start out a partnership.

And since that partnership won’t last forever, you need to plan for how you’ll dissolve it once you’re ready to retire. Phasing out slowly is the best option for all involved – it helps your long-time patients get comfortable with your partner and with the idea of you leaving, your partner gets to ease into being totally in charge, and you don’t have to give up working all at once.

Any plan should be focused on making sure that you don’t have to stop working before you’re ready. You created this practice and it’s your life’s work – it’s yours as long as you want it, and as long as you’re an asset rather than a liability. But at some point, your 50% stake will need to be passed on to your associate. The deal should be fair and also flexible. It benefits all parties involved.

Whatever happens, don’t fall into the trap of thinking there’s one right answer that works for everyone. The only right transition is a custom transition. Your situation is unique, and so is your associate’s. Your plan needs to reflect that, and serve the unique individual needs that each of you have.

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Topics: dental retirement, dental financial planning, business of dentistry, Tax Advisory

Reducing the Risks of a Partnership Failing: Part 1

Posted by Brogan Baxter on Fri, Mar 14, 2014

equal75% of new associates hired in dentistry never become a partner. There are a lot of reasons for that, but one of the primary ones is that many practices that hire fail to devise and implement a good transition strategy. Not enough preparation is done beforehand to make sure the hiring and the full transition process goes smoothly from the beginning.

The first step is to research every angle of the process. Answer four main questions before hiring an associate.

  1. Can you afford it? How many practices do you know who hired an associate who was gone in less than a year? Don’t bring someone in hoping your finances will improve. If you don’t have the money or your overhead cannot currently support the hire, the time isn’t right.
  2. How will the associate buy in? There has to be a carrot to motivate the associate. Triggers should be in place that activate the associate’s transition to partner, like time put in, a production goal, or a combination of the two.
  3. What happens to pay after that? Once the associate has bought in, they will need a pay jump since they will have a new big loan from their recent buy-in. You need to know already how much of a jump that’s going to be, and what’s going to happen to your salary as well.
  4. How will your stake be treated? The endgame is for you to retire. Full control then will be turned over to your new partner. You need to decide ahead of time at what price you’ll sell your remaining stake in the practice to your partner. You should also clarify when that’s going to happen, and what will trigger that sale.

It’s absolutely key to make sure the partnership is equitable. No 51-49% splits – the associate has to be treated as an executive from day one. With the massive debt today’s dental school graduates incur, you won’t be able to compete with corporate dentistry if you aren’t offering stable salary from the start so keep this in mind. They have to be treated as your equal as much as possible to make the transition smooth when you do eventually leave.

If done right, all of this planning will help your staff, patients, and revenue make it through the transition from you to someone else pretty cleanly. But if not, you’re likely to end up looking for a new associate.

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Topics: Practice Transition, dental retirement, dental financial planning, business of dentistry

3 Things Every Dentist Needs to Keep Work Manageable

Posted by Brogan Baxter on Fri, Mar 7, 2014

clockA dentist is most productive and most profitable when they’re in the chair. But someone has to run the business side of the practice as well, and often that falls to the dentist. They’re out of their element, they’re not with patients, and they’re adding on more time spent at work – straining home and family life as well. But there’s a pretty simple solution – a team of three advisors to manage the various parts of the dental business.

A strong office manager

Your office manager is in charge of the day-to-day operations of the practice. That includes practice systems like collections, checkout, and patient communication – the manager ensures all parts of the process are running seamlessly, and improving them constantly. The manager also is in charge of human resources, dealing with internal staff issues like lateness, complaints about a specific employee from a patient, or in-fighting between staff members.

An excellent accountant

Your practice’s accounting needs to be in order, or else growth and success are impossible. There are two parts to an accountant’s duty:

  • The accountant needs to create and sustain a consistent income structure. The balance between income from the W-2 and income from distributions needs to be right. Take-home income has to be consistent and regular, to preserve a steady cash flow.
  • The accountant must be proactive when dealing with your tax responsibilities. The books should be looked at monthly. There should be regular contact between the dentist and accountant to review practice numbers and financial reports. Quarterly taxes should, based on all of that data, be handled actively rather than passively. If you’ve had a tax surprise in recent years, your accountant is not doing their job proactively.

An external CFO

Your practice’s chief financial officer has one primary duty – to monitor and manage your business and personal cash flow. Cash reserves can never drop too low, because that leaves your practice and home vulnerable to unexpected expenses. But you should never have too much cash, either – that’s money that isn’t working for you.

Debt plays a big role in healthy cash flow, and the CFO helps manage that as well. Existing debt is structured in such a way as to make the practice as strong as possible, and new debt is built into that structure so that it doesn’t weaken your financial foundations.

In terms of overall strategic planning, the CFO is an asset as well. When deciding whether to expand to another operatory, move locations, add or drop an insurance plan, hire or fire staff, give raises – the CFO helps pick the option and the timing that’s best for you. When these decisions are made hastily or without planning, they often go wrong, and if enough do, it can dramatically impact your finances.

The more these three work together, the better off your practice and home finances will be. The dentist will be spending more time in the chair, and less time worrying about finances. The practice’s resources will be allocated properly. And with reduced stress and more time available, the dentist will spend fewer evenings anxiously poring over QuickBooks and more with their family.

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Topics: dental advisor, dental tax, dental financial planning, dental accounting, Financial Planning, Tax Advisory

When Should I Pay Off My Debt?

Posted by Brogan Baxter on Fri, Feb 21, 2014

debtFor someone without a lot of financial expertise, it may seem obvious that if you’re in debt, you should pay it off as soon as possible. And that assumption can get your dental practice in a lot of trouble.

People hate being in debt, and dentists tend to hate it even more than the general population because they have so much of it. So when they have money available, they’ll tend to put it towards paying it down as quickly as they can. There’s a battle between emotion and logic a lot of the time – the emotional decision is to accelerate debt, while the logical decision is to hold off and invest the money.

Read the Guide: Financial Planning for Dentists

It’s a hard decision to make. Debt can be frightening, and the emotional side of it is powerful. Add in the fact that retirement savings is more abstract – retirement is a lot farther away, while debt is here now – and without guidance, the decision can be pretty hard to make.

One of the first things to think about is what kind of debt you have. There’s actually good and bad debt. Good debt is something like taking out a loan to buy a new piece of equipment for your practice, or your mortgage. An example of bad debt is a high-interest credit card. If you have a lot of bad debt, that should be eliminated – but good debt can be managed more gradually. In terms of taking on new debt this comes into play again: why are you putting yourself in debt? If it’s for something that will help your practice be more productive, that’s fine. But if you’re just living outside your means, well, stop doing that.

When deciding whether to invest or pay down debt, think about the opportunity cost. If you use money on something, you obviously can’t use it on something else – so think carefully about what you’re losing when you’re gaining something else. The simple answer is that you should strike a balance between debt and savings, but the current situation leans a little bit more in one direction than the other.

Interest rates today are the lowest they’ve ever been, and probably the lowest that they will ever be. Now is actually the best time in the history of money to be in debt. So why would you be in such a hurry to get out of it? Low rates mean that your practice debt compounds less than it would with higher rates, and the interest is tax deductible anyway.

On the other hand, if you fail to invest now in your retirement, you will miss out on returns for every day your money’s not in the market. An intelligent capital preservation strategy is critical as well – to focus on saving more and taking less risk with that money in the market. If you don’t invest in your future now, you’ll have a lot of catching up to do in the future.

You can’t make up for age. The idea of compounding of interest over time makes this very clear. There’s too much to be lost by failing to invest now, too much money to lose by failing to get returns for years while you concentrate on paying off debts that aren’t hurting you that much.

So what should you be doing? Pay off bad debt first. Then concentrate more on saving money and investing it in your retirement now, putting yourself on the prudent path. Once you’re on your way towards a healthy retirement, then you can start building a strategy to pay down your good debt as long as you are also making what you want from the practice. Make your decisions based on numbers and logic, not on emotion. Debt might not be fun, but it’s a lot more fun than realizing you can’t retire until you’re 80.

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Topics: dental advisor, dental retirement, dental financial planning, dental accounting, Financial Planning

3 Corporate Structures Explained - and the One That's Right for Your Practice

Posted by Brogan Baxter on Fri, Jan 17, 2014

paycheckWhen forming a business, there are important decisions that have to be made, decisions that will end up impacting you for years to come. If you’re starting a new dental practice, one such decision is the corporate structure. Should you start an S-corporation? A sole proprietorship? The chances are good that you won’t know the answer. In fact, you probably won’t even know the options. There are three primary structures that most dental practices look at.

The C-corporation

To be blunt, do not start a C-corp, unless you’re reading this blog in 1986. Decades ago there were tax loopholes that made C-corps beneficial to dentists. Those loopholes are now closed, and the corporate structure that was so popular in the 1980s has now basically died out. There’s no benefit to a C-corp today.

The sole proprietorship

If you’re an accountant, you likely see the sole proprietorship as the simplest choice. Unlike some other options, there’s only one source of taxed income, which means only one tax return. That’s good news for an accountant.

But for a dentist, it’s bad news. Why is that? A sole proprietorship doesn’t allow for you to be paid in W-2 income. That’s the kind of paycheck you might give your employees, one where state and federal taxes are automatically withheld. Instead, all of your income comes from “distributions,” which are basically payments the business makes to the proprietor when deemed necessary. That can lead to problems.

Read the Guide: Financial Planning for Dentists

One is that if things aren’t going well, a dentist may not feel that he can afford to pay himself. That leads to dentists taking big chunks of money at irregular intervals, and possibly going months without getting paid. That’s really bad for home cash flow and causes a lot of stress around the house. Additionally, the fact that no taxes are withheld can hurt practice cash flow. Instead of paying a little every two weeks or so, a sole proprietor pays taxes all at once or on a quarterly basis. It’s extremely hard to plan for.

If there’s as little as a 3-4% change in income or overhead, the tax owed can change drastically. Quarterly payment figures change rapidly and erratically, and if you (and your accountant) are not on top of it tax costs can balloon, up to $80,000 more than you expected.

The S-corporation

In the long run, this is the better choice for the dentist. In an S-corp, you still have the ability to take some of your income in the form of distributions, and that money is taxed the same as in a sole proprietorship. But you also take a frequent paycheck like a regular employee, and taxes can be withheld from that normally. It also gives the ability to invest in a 401k, rather than being restricted to a Simple IRA.

All of this builds a base level of stability in your practice. Rather than 100% of your income fluctuating with changes in your practice, only a fraction of that volatility crosses over into your home. Rather than your whole tax bill being uncertain, only a fraction is paid on a quarterly basis, and the same amounts of fluctuation in income or overhead have less of an effect.

On the other hand, an S-corporation does have one negative that the sole proprietorship lacks. An S-corp must suspend any losses for tax consideration until profits are recorded. The tax floor for an S-corp is $0; a sole proprietor has none. That means that if you have $80k in income but a $10k loss on the practice, an S-corp would be taxed for the full $80k where the sole proprietorship would be taxed only for the net of $70k. That money comes back later, but when you’re first starting out, sometimes that’s not what you want.

But overall, Four Quadrants tends to advise our clients to form S-corporations. The benefits of stability in cash flow and home income outweigh any concerns about covering losses. And stability is a crucial part of the health of your finances, in the practice and at home.

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Topics: dental tax, dental financial planning, dental accounting, Financial Planning, Tax Advisory