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It’s time for Reese to take the hot seat as we switch things up a bit for this episode of Dentist Money™. Dr. Russell Kirk takes the lead and interviews Reese for The Business of Dentistry podcast. Enjoy a different point-of-view as Dr. Kirk asks the questions and Reese offers his advice. And Reese has plenty to share with ideas on how a well-planned financial strategy can make a huge difference to both your practice and your preparation for retirement.
Dr. Russell Kirk: For the audience that may not know you, and I know that you’ve been on quite a few of the dental podcasts, give us a little of your background.
Reese Harper: Yeah, I founded a company called dentistadvisors.com. It was basically like an evolution where I didn’t always work with dentists. I started in the financial services industry in 2003, and I had business owner clients: I had service industries, like tax, I had a CPA as a client, an attorney as a client, some dentists as clients… but I had manufacturing companies, a lot of different industries, and I kind of just asked a lot of questions, and got to know my clients really well, and over time, I kind of saw how dentists as business owners, they really were different from a lot of other business owners that I was interacting with. Their questions were very different, and they were one of the highest earning people in my clientele, and nationally, I just knew that dentists probably, you could argue, have between the number one and number two highest earning income, even if you just take GPs, let alone specialists, who, like yourself, can sometimes be in a much different income category. But dentists make a lot of money, and they have a great job in terms of quality of life, and life balance, and they get– US News and World Report last year gave dentists the number one and number two jobs, the collectively group specialists into the GP category, but dentists have the best job, and probably the highest paying job in the country, and I knew that was the cast, but then talking to them, I felt like they, compared to my other clients, they had a lot more financial questions. Some of them were really fundamental questions, you know, like, “I don’t know where my money is actually going” (laughs), right, or questions like, “for how much I’m making, it feels like there should be more leftover,” or “my taxes are super high, and I feel like my CPA is not doing good planning.” And some of those things were true, and some of the questions were just their lack of understanding about their own situation. So they were making more money, they had a great job, but compared to a lot of the other industries of customers, business owners I was dealing with, dentists had more questions, and it seemed like, to me, they were carrying more financial anxiety and stress, and what I figured out was that the generic solutions that the financial planning industry was providing to dentists were just not meeting their needs. Dentists have a more complex financial picture; they have a lot more complex situation. The environmental factors that dentists deal with are very different than an average business owner, even different than doctors, very different than even private practice doctors! In a lot of cases, I just think that dentists have a different financial planning picture, but the industry was providing a lot of generic advice. You know, they would have the same advice for a pool table manufacturing company as they would for a dentist.
Dr. Russell Kirk: Maybe like a cookie cutter plan that they would tweak based on circumstances?
Reese Harper: Yeah, it was more of a marketing tweak that they would make, rather than an actual substantive tweak. Dentists have a really really high predictable monthly income once they get to their peak earning; it’s a very steady monthly cash flow, and that creates a very different set of options. It also creates different spending patterns. Like, the average business owner gets an annual bonus, or a quarterly distribution, but their salaries are relatively low, where most dentists take distributions kind of however they want, whenever they want, and they try to keep their practice checking account at a certain… maybe one to two times monthly overhead, but they’re not really truly separate from the company, right? They’re living in and out of it, and psychologically, that’s a very different place to be. It also creates different retirement planning options, and it creates a different investment strategy in terms of how you would buy securities. Also, they have different staff needs, different overhead metrics… a lot of the business and personal are just really intertwined. I’m trying to publish a book, if I ever get around to it… I’ve been writing it for like six months now… the second chapter, basically, is just a bullet pointed list of seven or eight reasons of why dentists are just really different from the average business owner, and when you pair that with a genetic, we’ll call it like you said, a cookie cutter, almost just a sales approach, like buy a 401k, or give them the same investment solution, and give them the same advice, the same debt reduction advice, the same tax advice that you would any other business owner, you just end up having a situation where dentists are just confused, because they are like, “dude, you don’t get me. You don’t really know what’s going on in my case!”
Dr. Russell Kirk: You’ve been talking to my wife! She says that we’re different, and that we are confused, so yeah! Yeah, I’m totally tracking on what you’re saying there (laughs).
Reese Harper: Anyway, it was three to five years of working with these different business owners, and probably by– it’s been a little over ten years now where I’ve said I’m going to go exclusively dental.
Dr. Russell Kirk: You did make that pivot, so you’re exclusive to dentists now?
Reese Harper: Yeah, like our website dentistadvisors.com, I mean, it says “Dentist Advisors is a fee-only, fiduciary advisor, which focuses exclusively on dentists.” My brother-in-law, who is a podiatrist, you know, he listens in and gets value… we have podiatrists that listen in, we have chiropractors that listen in, but we don’t get a lot of inbound sales requests from them for a reason. I mean, it’s just– the platform we’re building, it’s really about how our financial advisors can learn more and more and more about dentistry, and so if you ask one of our financial advisors, you get a lot of free advice from our guys that you wouldn’t get from anyone else. Like if you said, “who is the best supply rep in my area?” our guys are going to have an opinion, you know? If you said, “who is the best dental lender in town?” we’re going to have an opinion. If you said, “who is the best transition expert?” we’re going to have an opinion. If you said, “who is the best CPA for dentists in the Omaha, Nebraska area?” we’re going to have an opinion! You know, I find that in today’s financial planning world, if all you’re getting from your guy is products, like a generic set of mutual funds, and a 401k, and some life insurance, you’re getting a commodity that you could get directly online for free. So, if you’re going to work with someone, I just feel like you should be getting advice that’s really useful and in context of your situation.
Dr. Russell Kirk: So if it’s sitting on the shelf as a product, you might as well buy it yourself instead of going through somebody else.
Reese Harper: Totally, man! Like, products are not financial plans. A product is not a financial plan, like, a 401k is not a plan. A plan has dimensions to it, and “retirement plans” is one of, like, fifteen dimensions to your plan… a 401k is one type, and you should be reevaluating that every calendar with your new employee census based on age and income data, and making adjustments every calendar year to maximize the tax efficiency of your deferral. And that involves going from maybe a Roth 401k, or a traditional IRA, to a traditional 401k, to new comparability, to safe harbor, to profit sharing, to defined benefit, cash balance pension… there are eight or nine different designs of retirement plans that you should migrate to throughout your career, and your plan is, “when are we going to make changes to our qualified plan?” not, like, “do I have a 401k?” You can have a product but have the wrong plan. Only a good, experienced financial advisor, or maybe a friend who has seen this dozens and dozens of times, he can give you good context. That’s why you pay someone: to give you the things that you just can’t buy directly, and to save you time. If it’s a service, really, I feel like you should be able to really outsource it, and know that you are depending on that person to make these decisions for you, as opposed to just selling you stuff every time they meet with you.
Dr. Russell Kirk: Oh, understood, and I’ve been in both of those situations. You said something that caught my attention: dentists, we tend to ask different questions. Do you think that’s part of the analytical component of kind of the way we’re wired that we are those questions, or is it just because– and maybe this is setting it up a little bit– but, you know, historically, we’ve always heard that really good business people were not taught business in school, were not taught that part of what we should know when we go out into practice. Do you think that is a mixture, or does one lean to the other as far as what caused us to ask those questions?
Reese Harper: I think that objectively, your financially is much more complicated, number one; you have a financial side to your business that is quite complex, just because of the number of assets and the number of debts that are on your financial statement. When you add, like, real estate as a subject that you have to think about, and then you have equipment, and you add acquisition debt, you have a fairly significant student loan for most people who are graduating… the way I would think about it is if you just look at someone’s personal financial statement, and you add up the number of accounts, the number of real estate assets, the number of business entities, if you add all those up, and then you add up all the debts… for every asset that you have, and for every debt you have, there is probably like two to three questions per year that come up relating to that, just based on the quantity of assets and debts. So, anyone with a lot of assets and a lot of debts is going to have a lot of questions. It’s just dentists, for how small your business is… I mean it’s not like a big business, it’s a small to in some cases a medium-sized company… for someone who does a million in sales, you have a ton of assets and debts to do a million in sales. Like, manufacturing businesses will do ten million in sales and only have like, one bank account, and no debt, and like one entity, and one product, you know? And so, the complexity is part of it; you just have more stuff to track, and more questions that are naturally going to come up during the course of the year. The second thing for me that really is a big issue is you’re really torn between two jobs: you can be a clinician exclusively, and go and just dive extremely deep into being the most seasoned, clinical expert you can, high-producing, efficient, clinical expert, and outsource all the business, maybe one location, but you’re just a pure, clinical expert, and then you have the other side where you don’t even have to produce at all, and you can just run a budding DSO venture, you’re trying to get an exit, or you could be an associate, even, or a two location owner, or maybe multiple partners. There’s not just one business model, but every has to be at least decent, if not excellent, at clinical skills, and then everyone has to be at least aware of business issues, but the spectrum of your choices is like– it’s really broad. You don’t just go into dentistry and then you’re done because you picked going into dentistry: you have a business model decision to make after you go into dentistry that really causes people a lot of anxiety. It’s like, “how aggressive do I get? How entrepreneurial should I be? How many locations should I own? Or maybe I should just focus on the clinical. Maybe I should just be high-producing.” You open that first location and it’s not very profitable, and you’re like, “maybe I should just go back to single location; maybe I should let go of some overhead; I was making more money before.” Your whole career is kind of this comparing yourself to all of the other business models that are available, and I think that creates a lot of indecision, and a lot of uncertainty, and so that creates a massive vacuum of time that, for me, all the time gets spent in that decision, and then financial planning kind of gets left to the side, where a lot of businesses, you kind of know that you’re not going to be the clinician, or you know you’re going to be the clinician. Most doctors work for a hospital, get a W2, and just go work on clinical skills, and they get a 401k, and the HR department handles the Q&A about all their financial issues. Even in a lot of– like a vet, or a chiropractic business, or podiatry, these operations are much simple operations, and the business model possibilities– the reality of dentistry is that it’s a much more robust economy, and so there are a lot more business model opportunities there, and I don’t know if that’s probably really philosophical, Russell, but anyways…
Dr. Russell Kirk: No, I’m sitting here listening to you, and I’m like, I’m that point in my career, and I’ve talked about this is so many shows, where I’ve been a solo practitioner for sixteen years, a single location solo practitioner, and looking at it now like, “okay, do I just continue on this road, I’m 51, do I continue down this path and just keep being a high-income earner, and I really don’t have a business, as I understand it now as some new information came to light with me, or do I look to expand? Do I look to build that DSO, whether that be a single location or a multiple location DSO, and then do I phase myself of the clinical side and go more into the business, entrepreneurial side, looking for the exit strategy? And it brings a fair amount of anxiety, because it’s a big decision! You’re sitting here, and what’s really hard– and maybe this doesn’t apply to everyone– for me, I’m sixteen years in, and I’m in my comfort zone; I’m very comfortable now, and now I’m having to push out and go, “is this something that I really want to take on? Because it’s going to require a lot more work, and there’s no guarantee that it’s going to be better than where I’m at now. So you’re right, and I think that brings some anxiety; I think it was much more simple, maybe years ago, when we had the traditional: you go in, you start your practice, you work until you’re ready to retire, you sell it to the next guy, and you go retire somewhere.
Reese Harper: It’s not the model anymore; it is a good thing though. Like, the more robust, and the more options there are in an economy, the higher the income will go, and the higher the revenue will climb. It’s good, right?
Dr. Russell Kirk: Yeah, no doubt. Options are great! The fact that we have all of these options, the fact that we have the ability to take certain paths to build something that we want to build that meets and suits our personality and our goals, and our dreams, for both us and our families, and our teams… I think it’s wonderful, because we are not locked into a single thing, but it does bring with it that decision fatigue that you’re sitting here looking at all these options, like, “okay, I’ve gotta figure this out,” and you do, you tend to get the old “paralysis by analysis” thing going on, and you look down the road five years, and you haven’t made a decision, and you’re still where you’re at.
Reese Harper: I think that’s one of the root causes of– if you say, like, why are dentists different? That’s a real issue. There are statistics that show that dentists struggle to retire as early as the average American. You know, the ADA has their research out showing that dentists retire, on average, at age 69; the average American, according to Gallup, is retiring at age 63.
Dr. Russell Kirk: Why do you think that is?
Reese Harper: Well, it’s because of what we’re hitting on just right now: it’s that personal financial planning requires a consistent amount of effort, making minor adjustments, and if you take all the time away that people have, and you take all this indecision, and you take– I haven’t gone through all the other reasons, but there’s like eight… if you add all these eight reasons up, and then you say, “all of these are causing dentists to either neglect, or procrastinate, or in many cases, they just don’t need to plan… I mean, you’re just comfortable. More income creates less urgency; more liquidity creates less need for planning. And like, you’re highlighting the most urgent things, like, “what business model should I be? Who am I? What’s my entrepreneurial journey? Like, no one cares about cash drag, dollar cost averaging, investment tilts, making the right qualified plan contributions, small tax deductions that you’re just skipping on because you’re too busy, reducing your insurance premiums because you’re paying too much and you’re over-insured… there are a lot of things that just chisel away: 500 bucks here, a thousand bucks here, five grand there…
Dr. Russell Kirk: Slowly out of the bucket!
Reese Harper: Yeah, and because you make more money–
Dr. Russell Kirk: It doesn’t seem to be as much of an impact.
Reese Harper: Yes, but I’m just saying that your standard of living, Russell, is much better than the average person, and you get used to it. You don’t live like someone who’s making $100,000 a year: you live like someone who’s making 250, or the average GP is at, you know, low 3’s, now according to national data you’ll read through US news, or any data, but if you look at ADA statistics where guys combine their salary and their profits… like, if you look at average dental incomes across the country, it’s usually their salaries are the only things to get reported, which, you as a business owner know that the minor part if your income is your salary (laughs). You’re hoping to minimize your salary, but that’s the only one that gets reported in these national studies; dentists make a lot more than these national studies show.
Dr. Russell Kirk: I’m looking at them going, “all the people I know, they are not fitting this criteria. That didn’t poll us” (laughs).
Reese Harper: They just get the payroll data that you submit on your quarterly taxes; that’s all they see, the payroll stats that you’re doing your salaries with, and so that’s the reason that they’re low. But if your income is as high as it is, and you get used to eating the way you do, and vacationing the way you do, and living in the properties that you live in, and being able to afford yourself the luxuries that a higher income provides, and then you combine that with procrastination torn between this entrepreneurial journey and clinical plus the fact that your financial picture requires more time, it’s more complicated, you have to put more time into it because it’s bigger, then you will just retire later, because you didn’t accumulate enough money. And so, people are waiting, because they’re like, “well, if I retire now, I have to drop this part of my lifestyle, so I’m just going to keep waiting, and waiting until that social security kicks into the highest possible deferral amount, which isn’t bad, I’m not saying that’s a bad thing, I’m just saying that for someone who makes the most money, you should always have the option to retire at least at the average age of the average American. Like, you should have the option, even if you choose not to.
Dr. Russell Kirk: So, I know that in talking with my colleagues out there, some of us love the profession of dentistry. They don’t want to quit; they’re like, “I am going to work until I can’t work anymore because I enjoy doing what I do.” And then there are others of us out there that go, “wow, this is just a means to an end, and if I could quit and find something to do tomorrow, I would do something different,” so there’s a love–hate relationship with the profession if you talk to enough people, and then there’s several in between. So, if you wanted to take the middle of the road– and let’s say for me, I look at myself and I trained for several years, we all did… it’s part of my identity. I am a dentist, and to sit there and to say, “I’m no longer a dentist,” that bothers me from a personal standpoint, because I’ve worked so hard to get to where I’m at, and to carry that title. I would like to do it on my own terms. I would like to be able to pick the time that I work as the dentist, and I am the dentist. And so when you’re looking at financial planning, and you’re looking at that, how do you figure the number– you hear people talk about, “what’s your number”– to make that an option for you? Like, “I don’t have to work. I would choose to work a day or two a week, or three days a month,” or whatever the case may be… how do you figure that out? Is there a formula?
Reese Harper: Yeah, it’s pretty easy, man. The way I would suggest that people look at it is that I don’t like people talking about retirement. It’s a fast track to getting unhealthy and just not being active, you know? Like, think about work being optional, and even when you are not practicing dentistry as rigorously as you are today, man, you’re still finding ways to just enjoy it. Whether you’re giving back, like I know you do with a lot of humanitarian trips, or you’re just managing a small group of associates, and those associates are really enjoying your mentorship and leadership, or whether you’re just passively collecting the profits from the practice, but you’re paying out all of the production-based comp to your team, and bonusing your hygiene well, I mean, dentistry is much better if you don’t need to sell the practice, and you’ve just built it to the point where work is optional, and dentistry is optional. And dentistry is a lot more fun, you know?
Dr. Russell Kirk: Anything we do, when we choose to do it because we want to do it, it’s so much easier; it’s so much more fun that way. But when you feel like you have to be there, when you have to show up, you have to do it for whatever reason, it’s more of a burden. I think we as humans were built to work. I think that is part of what we were put here for, and people will disagree with me. I just can’t see myself– I can enjoy myself, but after so long of time off and not having anything active to do… I can’t see myself doing that long term, and that’s why I think optional.
Reese Harper: I love it. We have a statistic that we track called “Total Term,” you can go to our website, and you can look at how it’s calculated, and watch a video on it, but if you go to our website and go to “Elements® Planning” under our “Services” tab, you’ll see a brick of periodic table elements. I came up with this system called Elements® that I have a trademark on that measures a dentist’s overall financial health, and one of the primary questions is, “how much well do I need to make work optional?” Like, “when is work really optional for me?” And really, what it boils down to is, you need to track your personal spending for at least like twelve months, because if you’re like most of us, you don’t really know what you spend really. Do the normal spending, don’t try to like, cut back, like live normally and just track it through an app like mint.com, or some online free spending tracker. Our clients have one that we just plug them into, and for a year, we track their spending. I like to get like two years of data, because good vacations usually don’t happen, the big vacations aren’t usually annually. You’ll see like a big $20,000+ expense pop in there every few years, but never really like every quarter. So you want to average the fun stuff in their too, kind of make some assumptions for that. But once you know what your spending patterns really look like, I would just take your today’s spending on an annual basis, just take twelve months of your spending, and then if you want to say, “when is work optional for me?” It’s possible that work will be optional if you have a 25 multiple of that number, so your annual spending times 25, it’s possible that work will be optional if you keep your spending right at that level, and your investment returns are at least in the 4.5%-5% range, okay? But, I would say that you would want to shoot for a 30 multiple of your spending as a little more comfortable. Not a lot more, right, you don’t have to accumulate a lot more wealth, but a 30 multiple compared to a 25 is definitely, I’m feeling really comfortable at that level. Now, depending on how conservative you want to be, you can either include your primary residence equity in that calculation or not. Like, some people, let’s say they spend $100,000 a year, and they have a $3,000,000 house that’s all paid off, free and clear. Technically, that person is financially independent. I mean, they have $3,000,000 worth of money that’s sitting in this asset that they could get a return on, and keep the house, and they would have to borrow the money out of the house, though, to make it happen. And so, a lot of people are uncomfortable with getting a reverse mortgage, or borrowing money out of their primary residence, because they just want to get it paid off, and have their investments be independent of that. And I’ll just say for most of you, that’s going to be a hard thing for you to do. You’ll find at some point, as real estate prices continue to climb, I mean, if you’re anything like my 65 or 70-year-old clients now, it’s like, “man you’ve got a lot of equity in that house, and it’s becoming one of our main assets,” and so I use the house in that calculation, but the ideal would be that you didn’t have to. So if you had 25 times your annual spending, or 30 times your annual spending is my preference, excluding the equity in your house, you’re fine. You don’t need to worry about work anymore; you’re good. And what I like to do is I like to track the pace at which people are arriving at that multiple. So today, if me and you ran all your numbers through our system, Russell, we might find that you’re at a 75 Tt score, way more than you’d ever need, like, you’re the wealthiest guy in the world. Or, we might find that you’re a 6 Tt score, or somewhere in between. Wherever you’re at, if you’re at the five or six score, like a lot of your listeners might find themselves at today, you want to move every year at a certain pace, and we look at the pace that you’re moving as really important. So, if it makes sense, I’ll try to give you an example that your listeners can understand while listening. It’s a little tricky, but let’s take someone who has $3,000,000 of investments and they’re spending $100,000 a year. That’s a 30 Tt score, or a 30 multiple of their spending; they’re in great shape. Let’s say that ten years ago, they were at a million dollars of investments, and they still spent $100,000 a year: they were at a 10, right, ten years ago, maybe. What we want to do is figure out how fast you are moving from a 10 to a 30, and every year we can look at it and say, “this year, you went from a 10 to an 11, or an 11 to a 12.” The way you calculate it, you just take someone’s total wealth and you divide it by their annual spending, and that tells you every year what their score is, and the faster they’re moving, the healthier their financial picture is. So some of our clients are what we call a 3 to 1, which means they get ahead 3 years, 3 Tt score units: they’ll go from a 10 to a 13, or a 13 to a 16, or a 16 to a 19, in one year. That’s super fast progress, and it usually only happens at the latter part, you know, you’re late 40s, your early 50s: that’s when you’ll be going at a 3 to 1 pace. It’s because you’re saving money, and the debt is almost gone, and investments are growing well, your taxes are lower because you’ve managed them properly, your insurance premiums are coming down because you’re older and we don’t need as much disability, and life insurance, and property and casualty, and homeowner’s, and malpractice, and all this stuff kind of starts coming down. And then when you’re early in your career, you might only move a half a unit a year. So, you spend a hundred grand, but your net worth only grew by $50,000: that means you only got ahead a half a year. That’s not super exciting for people in their early years; they just feel like they’re barely trudging along. But little adjustments make a huge difference, and we try to quantify how much progress people are making every year, because some people just don’t move fast enough, because they’re not making good decisions with their spending, their savings, their debt, their taxes, their insurance, their investments, their retirement plan, their practice profitability, or they’re making poor real estate decisions… all these things combined, they slow the speed at which that unit moves.
Dr. Russell Kirk: So you have been doing this type of work with dentists for a decade plus. You’ve seen a lot of folks come and go, and I’m making the assumption across a wide range of practice models and ages. What are some of the habits that you can recommend to me and to us that you’ve see that make us better planners for our retirement to help us succeed to make that 30 to 1?
Reese Harper: Well, let’s start with– if you go to the website and look at the periodic table, that is the reference that I’m going to be using in my head as we look at it. There are twelve elements, and the one in the bottom left is what we call “Liquid Term.” It’s liquidity. And this is a measurement that shows me how liquid someone is, like how much money they have in after-tax investments and bank account; what their cash and investments look like. Not retirement plans, or practice equity, or real estate, but just their liquid assets. In this subject, there are quite a few things that I see as setbacks: one is that people carry too much cash in their personal or their practice checking; we call it cash drag. So, a lot of people don’t work with a financial advisor, or maybe their financial advisor isn’t very confident in his investment strategy, and so they are constantly wondering, “what should I do with this extra money? Should I do this? Should I buy real estate? Should I invest in the stock market?”
Dr. Russell Kirk: Yeah, the question I get– and I had some dental students ask me this one when I did a lecture with them, I got this question: do I pay down my debt, or do I save it? Basic question, but it’s like, “uh… I really don’t know how to answer that.”
Reese Harper: Let’s talk about that debt and investing decision here as a secondary topic, but this first one, I would just say that cash drag starts appearing in people’s’ early forties, late thirties, sometimes mid thirties, where they know they need to do something with the money, but indecision makes them hold onto too much. Even if you’re only holding on to like, $50,000 more than you should over a five-year period of time, it could be hundreds of thousands of dollars in your net worth, you know? It could be approaching a million dollars in your net worth that if you just carried on average 50,000 too much in your practice, or 50,000 too much in too conservative of an investment allocation because you’re just uncertain about what to do, it’s a massive game changer. So, a good financial advisor’s job is– we were just having a conversation about this in our office the other day, like, “what is my responsibility as a financial planner to help people be able to invest in things that will still be predictable but grow their money at a higher rate of return? Because it’s not speculating, okay? You putting money, for example, in a United States Stock Market Index Fund is a very different decision than whether you’re holding it in a conservative municipal bond, or cash account, or a CD, or even a corporate bond. Those are very different decisions, and none of them are speculative, they’re just two broadly different decisions: One of them is going to get you 10% a year for the rest of your life, and one will get you 3% or 3.5%, and that difference over a twenty-year period is hundreds of thousands of dollars of difference in net worth, and that’s only assuming that we are talking about forty to fifty grand, plus or minus, right? Either go take the money, and go grow more locations, and go be an entrepreneur, and go build a business asset, or invest that money as aggressively as you can and make sure it grows a lot, but don’t be stuck in the middle, where you’re like, “I’m not putting it towards entrepreneurial growth, I’m not investing it aggressively, but I’m kind of just squatting on it (laughs), and so that’s where a good financial advisor really shows up, right? When you say like, “I don’t know if it’s worth paying somebody 1% a year to manage my money…” well, the reason that you pay someone a percentage is because you’re trying to get their incentives aligned with the right incentives for you, which is: the bigger your portfolio gets, the more successful a financial advisor is, right?
Dr. Russell Kirk: Yeah, we both do well.
Reese Harper: We both do well. Now, if you’re just paying them hourly, or you’re going and doing it online with Vanguard, and you tell your hourly planner, “I don’t know man… like, I just kind of want to sit on this; I’m a little worried right not; the market is expensive.” The guy is getting paid on an hourly basis! The last thing he wants to do is give you pushback. He’ll go, “sure, whatever you want!” (laughs) and then if you go online with Vanguard, they have this compliance checklist up on their screen in their call center– I’m just imagining it, right? I don’t know what they actually see on their screen, but let’s imagine you call in and you say something like, “I’m a little worried about the market.” Well they’re probably required to put a checkbox right there and say, “he’s worried about the market? Okay, I’ve gotta recommend this or that,” like–
Dr. Russell Kirk: They have an algorithm; they have a decision tree that they’re going through.
Reese Harper: To protect themselves from you sueing them, right? So, they are less concerned about the right outcome, and sometimes, they’re just concerned about how they can not get thrown under the bus if you get upset with your investment portfolio. A good financial advisor, if he is pushing you to be a little bit more precise with your money and say, “this money, I do not need this block of money. I’m going to invest it this way, and this is how we should invest it.” Whether it goes in a rental property, commercial real estate, commodities, the U.S. Stock Market, Europe, I mean, that’s a whole different question. And I’m not advocating for one particular investment here, I’m just saying, put it in a business and grow it, not by having a bunch of money in a checking account, but by opening another location, hiring another associate, like, spending it on a digital marketing campaign, improving your hygiene production. Grow your business, or invest the money, and make sure you get a good return out of it; I think that’s a really crucial area. So, I spent five minutes on that one, but I’ll try to go through some other ones faster. The second thing in our period table is the retirement plan contributions: it’s called “Qt.” Your financial advisors should be collecting a census every year, and testing it to make sure that you can’t put any more money in than you are. What I mean by that is, when you’re doing a 401k, you can but $16,500, or $18,500, or whatever the annual amount is in any given year.
Dr. Russell Kirk: Make sure you’re maxing it out, basically.
Reese Harper: You max it out, but then there’s a test you run beyond that to say, “can he do another ten grand, or will he have to give staff another 2,000? If he does ten grand more, does he give away 1,000? Does he give away 3,000?” You want to see what the ratio is between more money in and staff giveaway, and if that number, I would say if 85% of the additional money is going to you, then it’s worth putting in more. If it’s 70% going to you, and 30% to staff, it’s not worth it; you’re wiping out your whole tax benefit by doing that. So ever, you should be testing– I just finished an annual contribution with a 41-year-old where he put away $247,000, and he gave away to staff like eighteen grand. Even at early aging it’s like game-changing testing. Now, some of your practice demographics– this was a person with nine staff people, high-income specialist, with collections probably just south of 2 million a year. So, a healthy practice– I mean, it doesn’t matter if it’s a GP doing a million in collections, making the same amount of money, I mean, if you can afford to put away that much money, then it’s a great combination.
Dr. Russell Kirk: And that as pre-tax?
Reese Harper: All pre-tax, yeah. That was a cash balance pension combined with a 401k and profit sharing plan. So, three plans combined instead of one plan. I mean, that’s an $80,000 tax swing in a calendar year, you know?
Dr. Russell Kirk: That’s really good!
Reese Harper: Right? Yeah, you’re saving 80 grand a year on taxes! And I know that this particular person’s income will be lower in the future; their net worth won’t be big enough for them to make a million plus a year in retirement. Their going to have a lower income in retirement, so this is a really meaningful tax arbitrage. And I would just say that everyone has the ability, in my experience, to do more into their retirement account than they will do. If someone is not testing this on an annual basis– and your 401k platform is not going to do it. I mean, the cheaper the 401k platform is, the less they test. (laughs) I mean, because it’s a manual thing! Yeah, it’s like, “well I have to go collect a census and make sure the payroll date is accurate, and submit it to the department of labor,” and if you don’t ask for it, they won’t.
Dr. Russell Kirk: There’s a nugget right there: if you have one, we have to ask. Because I was unaware of that. Now, do I have to go and say, “I want that question answered?”
Reese Harper: Yes, your third party administrator, your person that is over your plan, they should be providing you with an optimal recommendation every year; that would be the ideal. But most of them will just sit around on the plan that you started with until you do something about it, until you ask them for it. So, just go and ask them to run a test, and every year, I can kick you, as an asset for your listeners to download, I’ll kick you a spreadsheet as a census spreadsheet that I know that these people are going to want to see. You just the spreadsheet out and kick it to your guy, and then say, “run my testing and tell me where I’m at…” What you’ll find, though, if someone is never really used to doing this, and you can tell that this is like a one-off request, and it’s kind of unusual, it’s not likely that they will be the best person at being creative with the testing anyway. It’s not like a 401k where you can put an 18/5 and then that’s it. It’s like, “well, if we exclude this person, and then add them in two years,” or “if your salary is this, instead of that… could we raise your salary? Do we–” there’s a little bit of back and forth there for them to be able to get to the optimal solution. You just want to make sure that you don’t feel like your guy is doing this for the first time, because if that’s the case, you’re probably not going to get a great outcome.
Dr. Russell Kirk: It’s pretty vanilla.
Reese Harper: Yeah. And all I would say is that there are a ton of platforms out there, and combining defined benefit plans and 401k plans into one kind of easy-to-understand system… you know, there might be twenty or thirty people who are doing a great job at it in the country, and you might be working with one of those people. But just know that most people just work on 401k plans; most people, that’s all they do. It’s the most scalable, profitable business; it’s the one that you can just do no testing on because it is already defined, and people who work on the defined benefit plan side, where you can put money in a pension plan for yourself and combine these two together, that’s more rare. Actuaries that work on that are people– like, I hire someone to do that for our clients, so we have to go find a dedicated actuary. The one we use is called Nyhart, and they are integrated with the 401k platform that we’re using. We currently use one called BenefitGuard, it’s a HealthEquity now, they went through a rebranding last year, but you have this 401k place that’s used to doing 401k, and they you’ve got a defined benefit place, and you have to make these people talk the right way behind the scenes so that you get the recommendations proactively every year. It’s a little bit more complicated, but your financial planner who is getting paid usually something on your 401k plan, or if you don’t have one, that’s okay, you just need to do this work yourself… either you have to make these to people talk to each other, or your financial planner really should be the one doing it, because he’s getting paid to do this, and recommend the right investment accounts for you, and what you should be putting your money into.
Dr. Russell Kirk: Dude. This is all– I mean, I’m sitting here writing notes down (laughs). That’s awesome!
Reese Harper: Well I feel like I probably shouldn’t go through every one of these, or we’ll run out of time today!
Dr. Russell Kirk: Well, here’s what I’d like to do, because we’re bumping up against an hour now, and in respect to your time, I want to get you back. I’d like to bring you back on, and then maybe go down through some more of these, because I literally opened my eyes to a couple of things today that I’m like, “you know what? I didn’t know that! I just straight up didn’t know it.” And so, I’d like to bring you back and continue the conversation if that’s okay with you.
Reese Harper: Yeah! That’s great, man. Two more things that I would do is, I would analyze my debt every year, and what you’re trying to do here is you’re trying to not just analyze it, but you’re trying to get your existing debts out and get proposals back from your existing lenders on them that say, “what’s the best rate you can give me on this remaining debt?”
Dr. Russell Kirk: Renegotiating it.
Reese Harper: Renegotiating your debt every year, and consolidating your debt into shorter schedules. So, rather than just renegotiating it, saying, “okay, I’m on a nine-year, I’m going to go back and I’m going to move these all to a seven-year, and I’m going to consolidate a couple. I’m going to lower my interest rate, because I’m going to a shorter term.” What I mean by that is, if you start out with a ten-year loan, you might get a 5% interest rate, and if you would have gone with a seven-year loan, they might have given you a 4.5% interest rate. But now, three years in, you’re at eight, and you’re still at 5%, but they’re doing new loans still at 4.5% on the seven-year, and you’re really close to a seven-year loan. So, you can go back to your same back and say, “I want to move this to a shorter term: what kind of rate can you give me on the shorter term?” And the shorter your terms are, the better rates the banks can provide. Doing this exercise every year on all of your debts is going to– I mean, it’s hundreds of thousands of dollars in interest savings, and most people would just term out their loans on whatever original schedule they had.
Dr. Russell Kirk: That’s awesome!
Reese Harper: And it’s a hard job!
Dr. Russell Kirk: Well, it’s work. Again, you know, you’re in your practice, you’re seeing patients, you’re doing all the things, juggling all the balls that are required in the office. These are not urgent things that you have to put out fires every day on, these are the important things that we tend to put to the side, and don’t pay attention to.
Reese Harper: Yeah, and I would shift– for me, sometimes it makes sense to shift some money from your investments to a loan balance, just to qualify for a better rate and get your term accelerated. You don’t have to pay it all off: you might move thirty grand from an investment over to a debt so that you can accelerate that reduction in a way that’s really meaningful. On your liquid investments: most people don’t know this, but you can borrow money against your investment accounts. So like, if you have $500,000 worth of investments. Most custodians, or banks that are good investment banks like TD Ameritrade, that’s who I use a lot, Fidelity, Charles Schwab, it doesn’t matter to us which bank the money is at, but some banks are better at lending against investment accounts than others, and so you’ll have a $500,000 loan, or a $500,000 account that you get a line of credit against, basically, and that line of credit could be like 2%, or 2.5%. And so, by having this liquid bucket of securities there, I can borrow money against my account, pay off a loan that might have been at 5%, right, or at least accelerate the debt reduction faster, so that I can keep rolling– this is where you really need to talk to a financial advisor who knows what they’re doing. But, let’s say you’re in a market environment like right now where, you know, the United States Stock Market is at– we’ll call it a fair value, if not above-average valuation, okay? So you’re not getting a smoking deal taking another $100,000 and buying more stock if you already have, let’s say, a bunch of stock. Let’s say you already have like $500,000 of United States stock, and you have a choice to put another 100,000 towards it at today’s prices, or pay off debt, right? In my mind, sometimes the debt reduction decision has more to do with how much debt you have, and what interest rate it’s at, and where you’re at with your cash flow, meaning, how long is it going to take you to pay this debt off if we just keep going on the schedule? Versus, should we borrow against your account and pay it off on an accelerated basis? Should the new money that you’re going to be saving every month buy more stock, or just reduce the debt now? Should it pay down the loan balance on your investment account, and we just pay it all off all at once by borrowing against your account, and then we just go pay the loan balance off on the investment account instead of buying more stock? Or do you keep the debt on the account for awhile and buy more stock because it’s 2009 or 2010, and like, the world’s ending, and no one’s– that’s a really hard thing to know, and even a good financial advisor shouldn’t be speculating on the direction of a market, or whether things are cheap or expensive. It would be one thing in isolation if you’re just saying, “I’m just making a decision whether to invest in the market or not.” But like you highlighted, a lot of times, you’re making the choice to either not pay or debt, or invest in the market. The debt has a fixed return that you’re going to get by paying it off, and the stock market has an unknown return. It could be a negative 30% next year for all you know! (laughs) now, that decision, I think, is really important to be made with someone who is less emotional than you will be about that choice. So, borrowing money against your investment accounts to pay of practice debt, pay off student loans, even pay off some property… like, I do that all the time with our clients, and it’s really important! I mean, it’s an essential financial planning tool. You’ve got this million-dollar investment account sitting over here that’s growing really well, but we have $500,000-$600,000 of credit that we can use to pay off debt or to invest in– I mean, why go get a startup loan for $500,000 if you could just borrow against your own investments at 2% and pay yourself back, and save yourself the interest headache and the underwriting fees? There are just a lot of ways that– a lot of people think life insurance is the only thing you can borrow money against, so they go buy a stupid life insurance policy so they can borrow against it, and it’s like, dude, every legitimate, high-income– financial planners who work with dentists are not typically the most savvy people. They are typically the insurance-brokering, product salesman types; that’s typically who you’re dealing with. Dentists don’t have a lot of liquidity, so you end up working with the people who are going to make a lot of commision off of a small amount of money, and that’s typically who’s servicing the dental community nationally. But, if you look at the high-end financial planners who are working in the $5,000,000 to $10,000,000 account balances, which, I would consider us kind of one of the elite, higher-end planners within the dental community– our average account balance is… we have guys that have started with five grand, and we have people with tens of millions of dollars, but we grow across the spectrum. We just know that you’re an associate who one day is going to have $10,000,000. We have to service the whole market if we’re going to be exclusively dental; we can’t say, “you have to have a minimum,” or, “we can’t work with you, you’re too small.” So, we just have business service models that work for each person. What I’m telling you is that high end of the market, that’s where most planners live, and those guys at the high end of the market, they use margin and borrowing on their accounts all the time. What I’m saying is pay off debt with it, which is super conservative. A lot of time, what they’re doing is buying more stock with it; they’re leveling up. (laughs) they’re doubling down. And I’m not saying that’s bad, I’m just saying, that’s what Bear Stearns did, and that’s why it went under in 2009! It was 31 to 1 leverage, if you ever saw that in The Big Short. But I’m just saying pay off your debt with the cheaper line credit, and you’ll accelerate your net worth growth by a ton! I’ll end there, but I think those are some really really good nuggets, at least, if someone only listened to this podcast, they’re going to walk away feeling like they have some questions to ask their advisor, or ideas they can run by their CPA that I think, for me, are conservative; they’re sophisticated, but conservative.
Dr. Russell Kirk: And they’re valid. Totally. Reese, man, thank you so much. This has been over-the-top helpful for me, and I know it’s been helpful for my audience, so thank you again for taking time out. And again, I want to get with your team and get scheduled for somewhere down the road to revisit this, because I’ve got a few more questions I’ve jotted down as a result of this.
Reese Harper: Alright Russell, I’d love to do it again any time. So, if anyone wants more information from us, they can just go to our website and sign up for our podcast, the Dentist Money™ Show, they can sign up for our newsletter that gives them these tips all the time… probably the thing that is the most helpful for a lot of people is just clicking the “Book a Free Consultation” button: we do up to three hours of free consultation for prospects and clients that just want to learn about us. We don’t sell; we’re pure educators; we’ve got three service models to pick from, and if one is the right fit, then you’ll know it after a few calls. We’re just not sales-y, and I feel like I really have a passion for education, and I hope that that shows in our content, and I hope that people feel like they can reach out to us and feel confident that they’re getting good advice and good education.
Dr. Russell Kirk: Dude, I love your side of inlook about it as we’re talking here and clicking around. It’s dentistadvisors.com, correct?
Reese Harper: Yes, that’s right.
Dr. Russell Kirk: Perfect, man! Thank you so much. Again, we’ll get you back on the show, and have a good rest of your week.Debt & Financing, Spending, Cash Management, Tracking Progress