The People Who Ruin a Dentist’s Retirement – Episode 62

Did you hear about the dentist who lost his shorts in a scam? No? That’s because nobody likes to tell the world they got hosed by a con artist. But it happens—a lot. And unless you know the warning signs, you might get wrangled into the same type of deal and put your retirement on the line. In this episode of Dentist Money™, Reese and Ryan respond to a special request from a loyal listener who asked for stories of dentists who fell victim to bad advice from people they should have never trusted. They also share the warning signs to watch for so you can avoid making the same mistakes.

Podcast Transcript:

Reese Harper: Welcome to the Dentist Money Show, where we help dentists make smart financial decisions. I am your host, rocking Reese Harper. Here with rusty old, Sir Ryan Issac.

Ryan Isaac: Oh, is this the day that we are getting new nicknames?

Reese Harper: New titles, rocking Reese Harper and rusty old Sir Ryan Isaac…

Ryan Isaac: Wait, what’s the rule on self glossing? Can you appoint your own nickname? I always thought that was kind of…

Reese Harper: Fine, what would my name be?

Ryan Isaac: I mean we’ve called you Big Hoss, it’s from a television show, but we’ve called you Big Hoss for a long time.

Reese Harper: It just doesn’t rhyme so I can’t do, Big Hoss Reese Harper. So I’ll be nameless Hoss.

Ryan Isaac: The nameless hoss.

Reese Harper: I like how we kicked this off, Ry. What I want to talk about specifically comes from a long time listener who loves the show. He emails in with a special request for us. He teaches a class to other dentists. He said that he wanted us to give him some examples from our experiences working with dentists that he could share in a presentation of characteristically how dentists are taken advantage of with financial issues. So doctor, we cannot say your name, but Ryan, I will let you introduce the rest of your segment.

Ryan Isaac: Yes, we cannot say the name here, but we hope this suffices and is great for everyone. We are responding with a podcast, so hopefully that works. We think this is an important conversation though and this is not the first time we have ever talked about being taken advantage of different scams that happen. We hope that it is helpful to everyone and not just the doctor and his group. For some reason, dentists tend to be prime targets for scams. Some of the ones that we will talk about today, I don’t even think they start as scams. Sometimes they are just really poorly put together investments. They can just be people who are really excited about an investment and they get people excited about it. There are not bad intentions there but it ends up being as bad as a scam.

Reese Harper: I think what we will do rather than telling you all of the ways this can happen we will just tell you a few stories and we will talk about some of the reasons behind it later. The goal of this is to help you identify in advance situations when you might be taken advantage of, or when people might not have your best interest at heart. There are a lot of different things that cause dentists to have huge financial problems that delay their retirement, just falling subject or victim to one of these can sometimes wipe out ten plus years of hard work. You have to keep in mind that working for a full calendar year, most dentists can save between 18%-25% of their gross income, but in order to save that much you had to pay that much in taxes to even get that money left over. It could take the average guy ten years to accumulate half of a million dollars. Sometimes easily one of these scandals can be a multi six figure problem, if not more.

Ryan Isaac: We will cover a few examples. Then, Reese, I think it will be important to talk about principal. Why it happens and what are some of the reasons why these things have happened and what can somebody do about it in the future. What are some things you can be aware of or actions you can take so that it doesn’t happen to you.

Reese Harper: This first one has to do with what we call a direct investment or private placement. Direct investments in real estate or investment funds are very different from making investments in publicly traded investments like mutual funds or exchange traded stocks or bonds. Direct investments carry different risks and they are often what Ryan and I will call a silent killer. It is something that you assume is going to destroy your retirement but most people also don’t openly discuss them. That is why I called it silent. People don’t like to tell their story of these problems. You don’t hear somebody say, “hey, I got taken for two hundred grand!”

Ryan Isaac: Ya, it usually comes out pretty reluctantly.

Reese Harper: Yes, sometimes people don’t even want to tell their CPA’s about it because it is so embarrassing. It will come out eventually to an accountant because they have to write it off. That might be the only person that might ever know because who wants to admit losing money in a really bad investment, right? People want to find opportunities that appear really attractive but they don’t really want to spend time researching and doing their own due diligence to sort out the good from the bad. They don’t find out which investments have good financial strength and which ones have good management teams and anyway, a lot of times people want to do these well before they deserve to do direct investments, right? They want to do them early in their career so that if that one goes good they don’t have to work as long. You will see dentists making pretty serious commitments and gambles pretty early in their career with direct investments. One example that I wrote about was what we call a MMO, massively multiplayer online player game, called Stargate Worlds. Metro Goldwyn Mayer, MGM, sponsored the development of this video game which promised to be a super exciting competitor to the World of Warcraft series which Ryan plays all the time…

Ryan Isaac: Ya, that’s me. I wear the T-shirts and I play the games.

Reese Harper: S the video game community was super excited about this and investors had committed millions of dollars of capital to this business called Cheyenne Mountain Entertainment. That business was to help build what was going to be one of the most anticipated games in MMO history, and it was going to be better than World of Warcraft and have a more diverse character setup and be a bigger world. Anyway, the bottom line is, I ended up visiting the headquarters in Mesa, Arizona to do some on-site research. After interviewing some of the staff and management and asking questions, I told the people that had hired me to go research this that I felt like there was some red flags that completely turned me off to the venture. During my visit, in my opinion, I felt like I found a really overly ambitious executive who was developing multiple games at the same time and wasn’t really focused directly on Stargate Worlds. He felt like these were good opportunities, but an analyst or someone like me might have looked at it and saw it differently. I saw it like a distraction. They weren’t completely focused on developing this one game and they had started developing a wild west shoot em up at the same time they were trying to wrap of Stargate Worlds and it hadn’t even been launched. Everything was pre revenue. The bottom line is, to make a long story short, that CME went bankrupt and millions of dollars worth of code never even made it to the market. The game wasn’t developed in time to meet the contractual deadlines that MGM wanted in order for this company to still retain the rights to Stargate. The investment opportunity was ultimately wasted and lots of investors lifestyles were put in jeopardy because they had exposed a lot of money, I mean tens of million of dollars, in to the development of this game. I don’t know the exact number because that was never really disclosed, but if I had to guess it was North of 40-50 million dollars just went up in smoke. That is rough. A lot of dentists were involved in that venture. The people that hired me luckily took my advice and did not invest more money into this project and I felt like they made a good decision in order to listen to some good judgement. I knew of two or three people who were heavily invested in this that ended up not being able to recover as much from that project. It probably extended their working life, could have been as much as ten years in some cases.

Ryan Isaac: I think the real issue here is that it wasn’t necessarily fraudulent. It wasn’t stealing. This was not like taking advantage of someone, necessarily. How it did take advantage of people was that most of the investors in this project were not financially independent. They could not afford to lose the money that they put into this project.

Reese Harper: Meaning that the liquidity they put in was 100% of the money that they had in the first place.

Ryan Isaac: Yes, and in our business we call someone’s liquidity their LT ratio. It measures the number of years that they have in liquid assets if they just had to spend and live off of their liquidity. Most of the people that were invested in this project probably wiped out almost all of the liquidity that they had in order to try to double their money or triple their money in their game. I think that ultimately this was an execution issue. If I had met that manager again, in hindsight, I am sure he would say, “look we gave it our best shot, it didn’t work out, we learned a lot from it.”

Reese Harper: Well, that happens all the time in software right!? You invest your money, the developer doesn’t get it worked out, and you cut your losses.

Ryan Isaac: Ya, I think in hindsight it is easy to look back and say, “oh, this manager or team was over zealous trying to develop multiple projects.” In business I can tell you that it is super difficult to stay focused. It is hard not to pursue opportunities that seem obvious. I know at the time in this game they had paid Danica Patrick to be a sponsor at some Nascar event with the name of the game on the side of the car or something. They had used the dollars for marketing that they felt were essential to get the brand out there. When I saw that I thought it was really random. Was that the audience? In hindsight the millions of dollars it cost to spend on marketing could have been used to cover payroll for another couple of months. The timing was tough too. It was a bad year, a bear market, recession. It was challenging, but most often what people don’t think about is what if this is a mis-managed investment. If the investment itself has legs, which this one clearly did, MGM backed it, it’s a great brand, great idea, huge Asian and European following of Stargate, so it wasn’t like it couldn’t have succeeded.

Reese Harper: Yes, there is a precedent for something like this that has happened and been successful. Yes, but management and execution failed. Whoever made the decision to pursue multiple ventures or maybe even just slightly getting distracted caused them to run out of money and ultimately invest money in things that didn’t pan out. That is a very common story in execution or management. Businesses that invest in things that don’t end up coming to fruition and cause their business to have a shortfall in cash in other areas. Think overall the thing to remember from this is that it is not always about fraud. Sometimes it is about mis management and poor execution. That is the story of the video game submarine.

Ryan Isaac: I have another example or two if you want too. We have seen investments that start out legitimate, but they start out right from the beginning from people who aren’t very experienced or qualified to be starting the company or the investment itself. Then they recruit a lot of other investors that are likewise not very sophisticated or informed or qualified to make that investment. They may just not know much about the decisions and it derails quickly. We have seen a couple of examples of real estate raw land development deals, where the person directing it wasn’t out to scam anybody and for all they know these are people that come from various backgrounds. Could have been an attorney or software person that decided they have some money on their hands and the perception to their friends and neighbors is that they are very successful so they want to jump into something that is really hot at the time and this all happened during pre recession when real estate was just booming. We saw these deals where you have this investor or the guy starting the investment who is going to develop some land and he needs some investors so he reaches out to close community neighbors and friends. He gets all the money and raises all the capital without really having the experience on what it takes to develop land, and get it ready for sale or however he is going to do it. The investors don’t know either. They are not professional real estate plan developers and it quickly goes off the rails. One of our clients loaned about half a million dollars and didn’t even know until he filed a lawsuit to try to get some of that money back that there were multiple people ahead of him in a lean position in similar law suits. We have seen that a few times. Do you want to talk about that a little bit? It doesn’t start out as a scam, but it starts out with someone who doesn’t know what is happening and then recruits a bunch of other people who don’t know what is happening.

Reese Harper: I mean, I can think of a couple examples. The one that kind of comes to mind most commonly is the free capitalist, Rick Herber, back in 2004 or 2005.

Ryan Isaac: Things were good.

Reese Harper: I just saw an article recently where Rick Herber is now facing a new federal indictment and it is like eighteen new charges that were just put against him in 2017. He thought he was off the hook because it was such a messy paper trail, but the grand jury brought charges of wire fraud, money laundering, tax evasion, and fraud as it relates to real estate securities. Basically, Rick ran a series of entities that were looped around a company called Founders Capital, or Franklin Squires, and he taught a real estate investment strategy called equity milling. He took in about one hundred million dollars of investment capitals from potential investors telling them that they could earn between 2%-5% a month. What is crazy to me is that I met with probably twenty people in around 2005-2008 when the market was steadily climbing, and this is when the federal reserve lowered interest rates again, expanded FHA housing rules and allowed people to buy homes with less money down, with lower credit, there was better financing than ever before. You could have a really bad credit score, foreclosure, and bankruptcy on your records and still buy a home. There were a lot of conflicts of interest, bottom line is, so many dentists put money into this equity milling concept. So many individual professionals and private wealth managers were using it as a place to put clients money unknowingly. I had neighbors at the time that were raising money from friends to put money into this, and they were getting paid a portion of that 2%-5% per month. They would go around saying that you were going to get 5% a month, and then they get 2% of it. The indictment says that Herbert used about 50 million dollars of investment money to pay other investors to make the operation appear profitable, but it never had a profitable year, ever. That is what the indictment is trying to prove. They never made money, ever. He was using new capital to pay out old investors.

This was a guy who didn’t start up to scam people. He believed in the equity milling system. Which was basically to go and use all of these easy loans to get properties and everything was climbing so quickly that you could hypothetically rip the equity out in a new loan and put that new loan in another property and continue somehow indefinitely. Ignoring the fact that you can’t do that forever, but that was his intention. He realized quickly it wasn’t going to work for very long.

Ryan Isaac: There was some good data on this one. Out of the money he raised, he used almost a million dollars to buy restaurants which was not an authorized purchase. He used over a million dollars to buy luxury cars. You remember seeing all of the cars that were floating around. This one happened here in the mountain states region, usually on these types of investments you usually don’t hear about them until they are close to home. People in Florida right now have probably never heard about this, and same with New York. You have probably had
Ponzi schemes or big investment schemes in your communities that we have never heard of.

Reese Harper: A lot of them spent five million dollars financing it. There was apparently about about five hundred thousand spent on specific gold coins. Anyway, he has never been put in jail until this district judge brought in some new evidence that brought him to this third indictment. It seems like there are more legs right now and we will see what happens. The principle on this one is that there are a lot of people that believe that they have a real estate opportunity that is unusually lucrative. Whether it is buying a piece of raw land and taking it through the city and tilting the property and building condos on it. Whether it is rehabbing condos or single family homes and flipping them. It could be building a hotel or multi family house. The reality is that if returns on this type of project exceed 10% a year, there is something that should start to seem off. That is offering 2%-5% per month. That is like 60% per year. It is not sustainable, you would end up owning the whole world in like a decade. Returns just don’t work that way. I was just meeting with a client this morning and went through normal investment returns with their staff and their 401 k and..

Ryan Isaac: Very underwhelming?

Reese Harper: What do you think are good returns? Some people have no idea what the range for good is. They will say 7%-8%, I had one person say 9%. Then someone said 12%, then someone said 15%, and everyone was like gasping. Everyone in the group of ten people sitting there when someone said 15% everyone breathed in and were like, “are you kidding me, that is insane.”

Ryan Isaac: You are crazy!

Reese Harper: This is 60% per year, ok!? And he raised $100 million dollars!!!

Ryan Isaac: It is crazy. I was thinking about it, like if someone approached you with a weight loss system that said you are going to lose two lbs. a month for the rest of your life it wouldn’t take you long to realize, I will be negative weight in a couple of years. So obviously that’s wrong. We don’t do that with finance though! We go, “oh really, 4% a month, and the stock market -10% last year”?

Reese Harper: Ya, those are some examples of direct investments into business, funds, and real estate fraud. The smaller examples of real estate fraud happen all of the time. I don’t want to go into specific examples of this because we just don’t have enough time today. But we see cases very often when a dentist lends money to someone else to buy some dirt, to build a house, and flip that house together or a dentist will lend money to a builder for a speck home etc. All that I am saying is that building homes, rehabbing property, and developing raw land is a very, very difficult thing to do, and to do well. It isn’t usually a good sign if the person who is doing it needs to come to you to get $100,000 to do it. If they don’t have liquidity to build their own house…

Ryan Isaac: …and that is their profession..

Reese Harper: …from profits that they have from previous projects, no matter what the story is, that doesn’t show me that that person is very capable. Any good builder should retain some money for profits and should hold on to some cash for future projects or have the ability to raise debt from somewhere else. Why not qualify for a nice bank loan, there is plenty of construction financing. The fact that they need to partner with you means that inherently they have very little liquidity and have run out of options and you are the last person or maybe you could be the only person that is willing to do something with them. I can think of ten cases off of the top of the head where that has happened and resulted in significant losses. Fortunately once someone hires a capable financial advisor, if they are capable and confident, that could be a good CPA or financial planner, those people tend to help shield you from making really poor analysis. A lot of times when we get clients they have a, “hey, this happened four years ago” type story.

Ryan Isaac: Yes, really common.

Reese Harper: Let’s talk about another area that people don’t really consider fraudulent very often, but I think we do. Let’s talk about how annuities work in a little bit more detail. You had a case recently, Ryan, that I saw on your desk, that was just an absolute mess of annuity analysis and it made me wonder what happened with this case. Talk to me a little bit about what you learned from the most recent exploit we’ve had into annuities.

Ryan Isaac: Unfortunately, I am working on three of them right now. Three people but the total amount of annuities between the three are about 14. Why does this happen? The very nature of the annuity, is similar to life insurance and the way it gets sold. There is this pitch of all upside, things like avoid downturns in markets.

Reese Harper: Ya, so what is an annuity so people know.

Ryan Isaac: An annuity works like this. You are giving a lump sum of money to an insurance company who keeps it and in turn they guarantee you payments for a period of time. It could be a set period of time, could be until you die, could be until your spouse dies.

Reese Harper: Why do I do an annuity instead of just investing money into a mutual fund or something?

Ryan Isaac: The nature of it is because it is guaranteeing security. You say I need $5,000 a month to live on. If I just give them a million bucks I”ll guarantee that they will give me close to my living expenses every month.

Reese Harper: I give them a big lump sum of money and then I get a payment forever.

Ryan Isaac: Yes. That is the allure of it.

Reese Harper: Sometimes I can do annuities that don’t do that too, right? I see people when they are thirty years old that can put money into an annuity and just grow money. They don’t have to lock it in and get payments right?

Ryan Isaac: Yes, there are immediate annuities which is when you immediately hand over the money and you cannot get it back. There are also deferred annuities where you give the insurance company the lump sum and you can take the money back, however, you cannot take the money back without any consequences.

Reese Harper: That is the trick. Why are there consequences, Ryan?

Ryan Isaac: It turns out that annuity companies are just companies that want to make money. It is shocking, they make profit.

Reese Harper: So, there is a big incentive upfront for them to get my money.

Ryan Isaac: Yes, there are high commissions, annuity commissions. They range all over the place. I don’t know how this happens, but I get phone calls from 800 numbers that say things like, “this month we are rolling out a new product with a 13% commission!” By the way, it is better than the last month’s commission. The annuity doesn’t change but the commission can go higher and lower.

Reese Harper: We get these calls all the time people, every couple of weeks. Now Ryan and I do not make commission off products that we sell. We do not sell annuities and we do not get paid commission on things. That is why we are called fee only advisors. If you hear fee based, that means, “I do take fees, but I will sell you life insurance and annuities.” A fee only advisor means that they do not sell financial products to you to make commission, and that is a different type of financial advisor. What Ryan is emphasizing here is that most advisors are commission based, there are usually like commission based, fee based, and then fee only. Commission based are guys or girls that generally sell products for commission only. These annuity companies call you every month or every other month and they say, “we have got a new product we are rolling out you are going to really love it! If you get three of them sold by December, then you get the Cabo trip! You will get paid 12% commission upfront, with a 2% trail!” It is a really big racket, a huge racket!! Ok, finish the story.

Ryan Isaac: So what are the consequences of this? I’ve got three people right now that I am trying to undo these annuities for. At some point in their lives, before we met them, they bought the story.

Reese Harper: Give us one specific example.

Ryan Isaac: Ok, a guy is in his sixties. He has run a very successful practice and his son has recently taken over. He is basically giving the practice to his son because he is just a great dad. He has saved a lot of money for himself and he has a few investments that have done well and he feels like he can just give the practice over. The problem is that he has made these decisions without really realizing how illiquid he is because a significant portion of his net worth is tied up in eight annuities. A lot of the money that he has saved is in eight different annuities. The problem with this, and these are all deferred annuities, so he can technically call the company and say, “send me my money.” Why doesn’t he do it then? Despite the fact that fees are in excess of 3%-5% a year? His investments in these plans are costing on an annual basis between 3+ percent per year. By the way, to figure that out you have to call the same company almost a dozen times to even get that answer. The first three or four people will tell you that there are no fees in these contracts, it is bonkers. He is paying a lot of money in fees and the investment options inside of these accounts are severely limited anyways. He only has access to really high expense ratio funds to put his money in. It is not diversified well or allocated well. The nature of these investments too is that in order to guarantee that you don’t lose money in them, they typically cap the upside. He has had money in these things for twenty years and I don’t even know if the returns match inflation.

Reese Harper: Meaning the returns are going to be very low, in this case they are probably 3% or so.

Ryan Isaac: Yes, the problem is that he is in a position now where he would like to stop working, in this particular case he has a lot of equity in a commercial building so he has to be a landlord for a while. The equity he built is in a business he gave to a family member, he technically still has a lot of money to retire and live on in these annuities. The problem is that he either takes his monthly payments from the annuity and continues to pay 3%-5% and having these horrible investment options or he calls them and says “give me my money” but he gets charged a big fee. A BIG fee. It usually starts at 10% and every year racks it down one percent. In some of these he still has serious surrender charges. Some of these he started twenty years ago, but lots of them still have surrender charges. The surprising thing is that some of these are super old but have an indefinite surrender charge. What happens there is that the insurance company is not stupid so they say, “if we are going to give someone access to their principal that they gave us forever, we will charge a fee to get our money back”. He is trying to figure out how to live in retirement and it is a huge mess. There are minimum amounts that you can take out penalty free every year and that changes every year. It doesn’t fix the fact that these fees are there. The investment performance is terrible and you know the other annoying thing, which you see all the time, is that people get sold annuities for their IRA’s because it is really common that people have IRA’s, retirement funding rollover from previous jobs and stuff, so these IRA’s get put in annuities. The weird thing about that is that the benefit about that is tax deferral. That is also the benefit of an annuity. So you get this redundant benefit. You have all of these people who have IRA’s inside of annuities which doesn’t make it doubly good.

Reese Harper: Not at all.

Ryan Isaac: People are just being taken advantage of. That is just one case. Their is a younger guy that we have with three different annuities that have severely underperformed. Two of them have been left in cash since he bought them years ago. He is paying 2%-3% in fees and two of them are sitting in cash and we have surrender charges to take the money.

Reese Harper: It is an absolute mess. You are probably twenty hours of research into this before you even figure out what’s going on.

Ryan Isaac: Oh, the first guy, easy. Just to even build a spreadsheet to figure out what is what. It took at least twenty hours.

Reese Harper: It ends up this way because you have got a broker who is getting phone calls every couple of months saying this one is better and he says to his client, “if you just take your money from this one and move it over to this one it is a lot better than the old one you had.”

Ryan Isaac: That is exactly what happened in that first example. The broker is a good friend. He is a big city, big time guy and admittedly he will say, “ya, he calls me once or twice a year and says we have a better one.” Here is what happens when you move the money from the old to the new, the commissions and fees start over again. So the surrender fee that was down to 3% is now back to 10% and the commission you paid in the beginning, the 13%, the broker gets that again!

Reese Harper: Oh, the old churn and burn! I used to do that.

Ryan Isaac: It is so angering.

Reese Harper: I used to do that back in my day, nope wait I never did. Wish I knew what it was like to make thirty grand to take advantage of someone’s IRA. If you look at the state’s securities department website they have scam risks and worries. One of them is annuities. They are on the list of “be careful”.

Ryan Isaac: Isn’t it near the top?

Reese Harper: Yes, I do believe it’s in the top ten. The first question is “what’s your goal with this annuity?” Is it to get a specific income stream or save for the long term? Annuities are not really suitable as short term investments at all. They have high surrender charges, big tax penalties, and basically the state is trying to convince you not to do it. They also try to say there might be some circumstances which it is ok, but they don’t list what those are. Number two is, “is the annuity being purchased through an IRA?”

Ryan Isaac: Oh really, it lists that?

Reese Harper: It says there is no additional tax benefit if you are doing that. You are paying for something you don’t need. The third thing says that you are looking at variable index annuities. There is no guarantee that this investment will guarantee anything and some products that are based on underlying securities carry the same risks as stocks.

Ryan Isaac: Those are the ones that are baffling to me. If you are willing to take the risk of capital loss in an account, why would you do it in an annuity?

Reese Harper: You cannot write off losses in an annuity! Especially if it is in an IRA. The next one that it addresses is, “have you have talked to your CPA about this?”

Ryan Isaac: Have you asked someone smart? Has someone yelled at you about this?

Reese Harper: It should say, “because your CPA will tell you not to do this.” “Do you understand all of the fees and expenses they are charging?” Annuities have tons of fees detailed in the fine print, ask questions, verify with the insurance company.

Ryan Isaac: Just so you know it will take twenty five hours! Most of the people that sell it and for sure the servicing people in the call centers where you pick up the phone do not know about those fees. I mean it is hard to figure them out.

Reese Harper: They have a call center full of ten dollar an hour employees to interpret the complex financial instrument that people were getting paid millions of dollars a year in salaries, invented. So trust me, Bernie Madoff knows how to make it really hard for his ten dollar an hour people to read his financial stuff.

Ryan Isaac: Yup.

Reese Harper: Just kidding.

Ryan Isaac: And explain it to clients.

Reese Harper: Then it just talks about a bunch of other things, the charges, the surrender periods, there are other ways you can get growth, do you understand all the features, are you paying for things you don’t need, are there any writers outside of the policy you could buy outside for less money? This is a big issue and I have never met someone in an annuity that I’m like, “oh my gosh, that has been an amazing investment for you.” Now I know of several annuities that I would be ok if someone owned. They mostly come from companies that don’t have sale commissions, TIAA Cref, they are the sponsor of a lot of colleges and university retirement plans. They don’t have commission’s, surrender periods, weird charges, they just have an annuity with a broad investment selection.

Ryan Isaac: If you are convinced that you need an annuity, find a TIAA Cref advisor. Call them directly, have them send you a proposal, and then send it to your other annuity sales people and say, “why should I buy yours when I can buy theirs without all the charges and only normal investment fees?”

Reese Harper: Right? Just see what they say. We won’t go into any more life insurance detail policies because we did that in another episode a few weeks ago, but that would be another example very similar to this. We feel like people are being taken advantage of on a regular basis. Let’s talk about why this happens. Why do people get caught up in annuities, life insurance, real estate fraud, embezzlement? Embezzlement is another major issue. It is usually like direct investments into someone’s business, real estate investment, it is embezzlement or life insurance and annuities, financial products.

Ryan Isaac: I can think of a few financial products that have convinced people to put their investments in a normal investment account into really crazy, poorly timed investments.

Reese Harper: Why does this happen?

Ryan Isaac: We made a list. The first one that came to mind was that a lot of people get sucked in because the people who present this to them are close to them. It is usually a family member, or a community friend, or a patient. Affinity fraud is where the fraud originates from someone in a religious organization. A person in a position of power or trust in a religious organization that brings it to them in the first place. A lot of this happens because it is brought to them by people they trust and respect a lot.They don’t want to say “no” and feel dumb in front of friends, family, religious leaders, community members.

Reese Harper: I think another reason is that the don’t want to offend a patient. Have you ever seen a patient bring a deal to a doctor that worked out? I can think of a lot of bad ones that we have seen, and a lot that clients have said, “no, thank you”, luckily. It is awkward. People say, “let’s trade, you do my work, and I’ll let you into my development deal.”

Reese Harper: Yes, I have not seen one go well, but I am sure there is at least one in the history of mankind, but I have not seen one. I was meeting today with another client and their office told me that a doctor brought some kind of magic milk or cereal to the office and tried to get them to sign up for a network marketing scheme recently.

Ryan Isaac: Which was it, milk or cereal? I might be into the cereal one. I am a big cereal fan. I love it.

Reese Harper: A GP tells an Endo’s office that he is going to bring lunch in, and he brings in cereal, I didn’t go into product details because I was so blown away that he tried selling his colleague an MLM to his staff, in the office, during business hours. Apparently he goes in the office, brings a box of cereal of some kind in.

Ryan Isaac: Oh my gosh.

Reese Harper: I don’t know what it is, I got to find out what it is now. I should have got more product details, and I’m like, “you knew this person, they were a referral source?” The Endo was like, “ya, I thought they were just being nice, bringing us lunch, doing some marketing.” The staff was like, “he was trying to pitch us on his business.” I would have just told him he can go sit out in the chicken coop in my back yard and I would peck him with a stick and chicken beak right in his head for like an hour. I would just keep doing that if he tried to do that to me. That is a real thing that happens to people who try to sell me marketing…

Ryan Isaac: You put a chicken beak on a stick and peck them with it?

Reese Harper: Yup, for a couple of hours. Ok, so you don’t want to look look bad to patients, or apparently now referring doctors in their network. We’ve had clients now who really don’t want to do an investment or a deal with someone they know but they don’t want t o look dumb or unsophisticated and they will come to us and be like, “can you just give me some talking points, so I have a rational reason to say no?” They just feel embarrassed that they don’t know as much as the person pitching it, and they end up giving in.

Ryan Isaac: They are like, “Ok, you’re the smart one, take my money.”

Reese Harper: Yes, “you are using the big words, I might as well do what you say.”

Ryan Isaac: You are the person that has the history degree that is now qualified to do real estate development.

Reese Harper: I remember an email from someone who is not a client, but they were thinking about giving their money to this guy they had just met, the last line was something about, “it was so sophisticated. I don’t know, I can’t even really tell you what it was about, lol, but I’m going to do it.” That was what convinced him to do it, It sounded so complex that he couldn’t relate what it actually was. He couldn’t explain it if he had to.

Ryan Isaac: Ya, like, “dude, you wouldn’t understand, because I don’t get it, and it’s awesome, and I’m going to do it.” There are some pretty compelling sales pitches, that’s a real thing. It is tough to say no to people who are really well trained in sales. I mean they get to manipulate people’s emotions to win sales.

Reese Harper: If you combine all of that with a pretty legitimate business, like the video game thing we were talking about, that was a real business. There just wasn’t enough investigation and the risks weren’t assessed up front, but if you combine a good pitching hand with an actual business then it is tough, man.

Ryan Isaac: I think greed is also a factor. You want to hit a home run but you don’t really want to take the time to decide if the thing is a legitimate opportunity. I think emotionally this is a bigger thing in dentistry. I think this is a really common thing. Just to even get out of school, a decade of your life is gone. You are already a few hundred thousand or more in debt, and a lot of your friends and colleagues have already been working for five, six, or seven years making money. I know a lot of guys that are not even started to earn a profit in their dental business until mid to late thirties. They have got a wife, kids, and mortgage, and they feel behind. I know the pressure is there. They have got more debt than any of their friends and neighbors, and they are already behind. The temptation to want to find one big thing that will wipe out all of the debt and get you far ahead is a really big temptation.

Reese Harper: Here are some thoughts about how to protect yourself, then we will wrap up.
First, get a second opinion from someone who has a strong financial background. That could be a CFA, CFP, someone with some credentials who has experience, or who has been in a financial field for ten plus years. Someone who has seen a lot of deals. Ryan can give you an opinion, and then you can blame it on him.

Ryan Isaac: I was going to say, it is a nice excuse to say, “my CPA or financial advisor said told me not to do it.” We get those calls where clients will tell them that, and then the client says that the salesperson wants to talk to us now. He wants to pitch you. Oh, I have had some uncomfortable conversations, man. I still remember the worst one I ever had was when a client used that excuse over life insurance inside of a qualified plan in a new C Corp for a dental business. Then the guy shows up to the office with no appointment, and he had his trainee with him. It was so weird. It was the most uncomfortable experience of my life.

Reese Harper: I remember that. I think be conscious of all the biases that get in the way. Everyone get’s greedy, we all make decisions sometimes out of fear, and we all, or a lot of us, tend to trust people too much. We don’t ask enough questions when the person is close to us.

Ryan Isaac: Just be aware of that. Just be aware that as human beings we tend to make decisions a lot less rationally than we think we do. We are way more irrational than we think we are. Just being aware of them won’t fix the problem, but being conscious of it will lead you to ask for a second opinion or go a little bit slower and do some more research.

Reese Harper: Do everything legally, binding contractually, and make sure that it is business first and friendship second. I just don’t like the idea that you knew the person well enough that you just spit and do the handshake. It might even be a blood handshake.

Ryan Isaac: Ok, no spit and a handshake like a farm.

Reese Harper: But if he/she is willing to do it with a blood handshake, I would do it without a contract, yes. That is true. I would not commit to things ever just to not make someone feel bad. Just say “no”. Tell them they are an idiot and deal with the uncomfortable feelings.

Ryan Isaac: Deal with it.

Reese Harper: You don’t have to tell them they are an idiot, that’s rude.

Ryan Isaac: Consider never ever mixing business deals with patients, really close friends/neighbors, and probably especially family. It might mean a few times in your lifetime and career someone out of that group approaches you with something that sounds really good. If you just make that rule now, you just say, “I don’t do business with people close to me, for many obvious reasons.”

Reese Harper: No exceptions? Come one, maybe one?

Ryan Isaac: The twin cousin.

Reese Harper: That is an inside joke we will not go into.

Ryan Isaac: You mentioned this earlier, just do the math. And if you can’t, then don’t feel bad, but 4% a month for very long would make you own the whole world.

Reese Harper: You will be wealthier than Donald Trump in about a decade.

Ryan Isaac: Not easy to do. Do some math, ask for financials, involve people. If it offends the person that creates the deal than there is probably something wrong.

Reese Harper: If they don’t like you asking so many questions there is a problem. In our business if a dentist says, “I don’t really want to work with you.” Then I say, “ok that’s fine, I”m going to go ahead and get back to work than, ok?” If someone is like, “you don’t want to work with me? What do you mean!? Let’s meet again, let’s talk about it again. We should talk about it again.” That is not a good sign. If people are busy people, what they do is say, “ok thanks, I appreciate you not wasting my time.” When people are desperate you will find that they really like to chase you down a lot.

Ryan Isaac: I am going to bring my manager with me. Let’s just bring in the big guys. If they bring someone with them just stand them up for lunch, walk out. Send them a pizza and be like, “sorry, too busy. Can’t do business.” Last one, trust your gut.

Reese Harper: I hate that advice. That is the worst advice ever.

Ryan Isaac: No, its great. If you think that you trust your gut with trading stocks that is bad advice. If you get a crazy pitch with high returns than you should trust your gut.

Reese Harper: If someone feels weird, I don’t jive with this person, including us, than just don’t work with us.

Ryan Isaac: Turn off the podcast, and walk away.

Reese Harper: Don’t work with someone that feels weird to you, that’s good advice.

Ryan Isaac: I would think, Reese, that over a whole career there would be less regret from maybe having walked away from a couple big deals than the regret of getting into one bad one. I would rather have the regret any time from passing.

Reese Harper: I have walked away from a lot of deals. Probably like one a week for the last twenty years. I have done very, very few deals. I regret most of the very few deals that I have done. That is the crazy thing.

Ryan Isaac: The ones you have said “no” to, how many do you regret?

Reese Harper: None! What I regret is if I have ever done something that ever lost money for any reason that probably violated a principle. That is where you just look back and think, “shouldn’t have done that.” Luckily that was only ten bucks and it was a slot machine, just kidding. Ultimately, I think follow some of these rules and keep yourself away from anything that feels uncomfortable. I like this, this is great. What do we tell people to go and do now?

Ryan Isaac: We love to hear comments and questions, go to dentistadvisors.com, click on the listen tab, find the show episode, and you can leave comments and questions. If they are mean, direct them to Reese. We also really appreciate if you go to iTunes and leave us a good review.

Reese Harper: Yes, thank you to all of those this week who left reviews.

Ryan Isaac: If you ever want to get in touch go to our website, the phone number is right on there, so call us. However, the better way is to click the link on the top and schedule a free consultation any time at your convenience on our calendar. We would love to hear from you.

Reese Harper: Carry on.

Behavioral Finance