Steve Steinbruner

The lead story in the money section of USA Today earlier this year was that Exchange Traded Funds just topped 1 trillion dollars in asset value. Exchange Traded Funds are traded on stock exchanges much like individual stocks, and they track an index, or try to mimic, virtually anything: the S&P, Gold, particular market segments. In addition to being easy to trade and generously diverse, they tend to be very inexpensive. The growing interest in this flexible and low-expense investment is a suggestion that people are starting to take investment expenses - often carefully hidden - very seriously in 2012.

Just as dental offices are not all alike - cosmetic, restorative, holistic, spa, dentures, etc. - investment firms are not all alike. Most financial advisors are commissioned-based, earning fees when investments are bought and sold. Others might charge an hourly rate mixed with a commission platform. A very small percentage might be a pure "fee only" model, charging a percentage of the total portfolio value and are tied to the success of the client - or lack thereof. Firms are often very discreet about the cost of their services and various offerings are are not required to disclose them. One of the more problematic elements of the entire investment process is a lack of cost transparency, and at worst, costs that are really concealed. An unfortunate reality of many investments is that the fees are either not clear or not fully evident. When we analyze a dentist's portfolio in an attempt to advise them, we pull the curtain back to reveal a complicated, and often very expensive, investment world.

Invisible Costs

Most mutual funds are pretty expensive to run. There are managerial fees to pay the folks deciding what companies make up the fund. There are so-called "soft dollars" paid to service providers, compliance fees, and marketing expenses that all add up. Not to pick on the big boys, but somebody has to pay for all those Charles Schwab and Fidelity commercials. Ultimately, these are all paid for by the investors. This means that as much as 4% of what investors could hypothetically be earning on their investments is going out the window. Investing in annuities, variable annuities, hedge funds, or private equity can skyrocket those expenses two or three-fold. Unfortunately, in many instances, these costs are not visible to investors entering these investments. It is also important to understand generally how the mechanics of cost work.

The industry sells performance and does not talk much about cost. The reality is that the two go hand in hand; good investment performance is eroded by high costs. Of course performance is important, but what you really earn from your investments is performance minus cost. It is unrealistic and dangerous to view the process any other way.

Many banks and brokers like to sell hedge funds and other sophisticated investment products. While both these investments have a legitimate financial place in many portfolios, the fact remains that they are particularly lacking in transparency and plentiful in risk. Low transparency can be associated with high costs so buyer beware.

Think about this. For a dentist that is saving a very respectable amount of money, they also bring a ton of unnecessary risk. It is also very easy for investors to not worry about cost if the investments seem to be doing OK. You can argue that as long as the bottom line is nicely in the black, all appears to be well. But that is not always true. For example if a cost-laden portfolio is earning you 6% a year, a more efficient one might earn you 9% or more. Even a 1% difference in an annual rate of return can make all the difference between an early or comfortable retirement and a constant struggle into old age. When you reduce investment expense 5% over 20 years, you will have double your money in retirement.

If You Can't Beat Them, Make It Cheaper

Some investment literature will argue that on average, financial managers who try to soundly beat the market indexes generally do not succeed over time. This means that investment success really depends on reducing cost. After all, you can argue further that even those select few brokers and fund managers who really do beat the market will do so only by a couple of percent over time. Over the long run (durations of 15 to 25 years) few, if any, outperform their respective benchmarks. You are more likely to achieve benchmark-beating returns if you lower investment costs by that same couple of percentage points. If you add up redemption fees, brokerage fees, back-end load fees, management fees, inactivity fees, 12-B1 fees, transfer fees, commissions, and the hidden marketing expense within funds, you might be 6-7% behind the market at the starting line.

More About Four Quadrants... 

Sally McKenzie

Excellence can be an intimidating concept. After all, an entire industry has been built searching for it since Tom Peters released his bestselling book in 1982. With all the guides, formulas, and special reports that have dedicated countless pages to the topic we've learned this: Achieving excellence comes down to hard work, commitment, and, most importantly, leadership.  

We've also learned that a fair number of businesses that claim in their advertising and marketing to be "excellent" are merely average - if that. We routinely encounter dentists who believe that if they market their practices as being "excellent" that's enough. Unfortunately, patients discover soon enough whether the practice is or isn't.  

At the root of excellence - or even "very good" - is change. And change in any organization, be it a corporate giant, such as Apple, or your own dental practice, is a huge challenge. Why? Because the culture of most every business is "hardwired" from the top down.  

But the beauty of that reality is that if you, doctor, are not achieving the goals or the success that you desire, you are the one with the power to change it. Yes, your team must be actively involved. But real change, true excellence, begins with you.  

You set the course to create the change and that begins with the development of the plan, which involves asking a few fundamental questions. Starting with: What's your vision for your practice? What does an excellent dental practice do differently? How do you get there? And how do you maximize it in your marketing?

Next, is "market research." Talk to your patients about their experiences. At a minimum, ask how your practice can do things better. Just remember that only a handful will be honest with you. And those that share less than stellar comments are doing you a huge favor. Here's why: Studies indicate that if one person complains, at least seven have had the same negative experience and each of them has told nine others about the problem, meaning that at least one negative comment about your practice has been shared with 63 others in your community - not exactly the word-of-mouth marketing you want out there.  

From there begin to assemble the building blocks of excellence by examining each individual system and how it fits into your practice vision. For example, what does the new patient experience involve in a practice that is dedicated to setting itself apart from the others in the community? How do patients feel when they call a practice that is truly committed to excellence? How is the team involved in carrying out the practice culture that you want to create? Once the broad-brush concepts are identified, take an honest look at how your team currently handles specific systems. Don't sugar coat it. Finally, recognize that excellence is the culture that you create in your practice day-in and day-out.

More About McKenzie Management...