The
53 Professional
Advisory For Dental Professionals
IN THIS ISSUE Between a tree and a Hard Place Ian Toms B.Sc. (Hons)
rational aPProacH to PurcHasing and selling Functioning Practices Dr. Ron Weintraub
tax deFerral + time = tax savings
non-comPetition agreements David E. Rosenthal BA., LL.B.
tiPs For managing Your retirement PortFolio Mark McNulty BA, CFP, CIM
Building tHe PerFect claim: You deserve notHing less! Dr. Ian Wexler
David Chong Yen CFP, CA
is Your associate and asset or a liaBilitY? David Lind
plus cHange notes From tHe editor
Vol. 53 : February 2012
The Professional Advisory
Vo l. 53 : Februa ry 2012
The Professional Advisory consists of a group of seven independent professionals who provide services to the dental profession, each of who specializes in a different field. They have gathered to keep each other informed of the latest developments relating to the profession, and to produce this publication which is designed to provide expert information and advice solely for dentists and their advisors.
Change to be deliberately sick or injured. But it can be part of life and Ian Wexler makes it clear that when it does happen then you can change the future by Building the Perfect Claim because You Deserve Nothing Less. And speaking of accidents, how about Ian Toms being caught RALPH CRAWFORD between a Tree and a Hard Place! Ian relates how he was BA., DMD physically prepared for the unfortunate event of being felled by a tree and outlines how the same discipline One of the fun things that my wife Olga and I do is of preparedness in dealing with a premise lease can do volunteer our time at a local thrift shop that is dedicated nothing except change your future. to helping youth in our community. Recently a poster came into the shop that caught my attention: You can’t change your past, but you can change your future. Digging into the Internet I found it was written by Reggie Dabbs of Ft. Myers, Florida. Born into poverty, adopted by loving parents, Dabbs, after graduating from college in the late 1980s, has become a popular public school and event speaker addressing more than two million people worldwide annually. For the past 20 years he has spoken regularly at thousands of church and civic gathering around the world. And thinking about Dabbs’ wisdom there’s not much you can do about changing the past, but certainly, with David Lind begs the question of changing the future thought and planning we can change and influence the by asking Is Your Associate an Asset or a Liability? And then stresses that it is imperative that you engage future - to make our lives better. an expert “dental lawyer” to prepare a reasonable David Rosenthal points that out clearly in Non- associate agreement that is enforceable and assignable. Competitive Agreements where one of the things that Ron Weintraub’s opening sentence “Purchasing and a properly drafted agreement can do to change your selling functioning practices in an overheated market future is protect your goodwill - goodwill being the reflects circumstances today” tells us what’s happening dentist’s most valuable asset. Is there is anything that around us, particularly in the Greater Toronto Area, affects our lives more than taxes? David Chong Yen but the very title of his article, Rational Approach to with his Tax Deferral+Time=Tax Savings points out Purchasing and Selling Functioning Practices leads us abundantly that proper advice and planning with a into a scenario where you can change your future knowledgeable advisor can definitely change your again for the better. future. Thinking of the future is there anything that holds as much importance as retirement. With this Indeed, as Reggie Dabbs reminds us, we can’t change in mind Mark McNulty’s Tips For Managing Your the past but as each of the Professional Advisory Retirement Portfolio outlines seven strategies that can authors outlines, there is much that can be done to Pa indeed influence the years ahead - particularly those change the future - for an even better future. years of retirement. I don’t know of anyone who has plans in the future 1
crawford@dccnet.com
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Between a Tree and a Hard Place IAN D. TOMS B.Sc. (Hons) www. iantoms.com
Professional Advisory issues very carefully. Every issue provides you with advice from eight professionals covering the basics of running the business of your practice. These issues are not free, we pay for them. We do not accept advertisements or sponsorships. Each of us has a message we feel is important to share with you in each issue. You need to read and pay attention to each author. Be prepared.
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At 1:49 pm, October 10, 2011 I was crushed by the maple tree I was cutting for fire wood. The tree spun on the stump, falling in an unpredicted direction. As I ran, a limb caught me across the back of my left shoulder, knocking me down, scraping the skin off my back, and breaking my ribs. The trunk crushed my right leg, causing an open compound fracture of both tibia and fibula. Like most events in life I did not expect this to happen to me, but it did. I was not killed, but this time it was really close. This event has taught me many things about life. And I am healing Oh so very quickly. I was prepared, not for this specific event but in general, for what life brings. In life, those who fail to prepare, prepare to fail. How did I prepare for this event? Every day I spend an hour or more swimming, riding my triathlon or mountain bike, or teaching fitness at my beloved YMCA. I am in good shape, which is probably why my back was not broken, my lungs were not punctured, and there was no internal bleeding. If my reflexes were not so quick, the trunk would have crushed both of my legs, or my back, or my head. I am mindful. My mind was still and clear. I watched and learned. I was prepared. Dear reader, my cheek is still warm from the breath of the Almighty as He yelled His message my ear. I’ll repeat the message to you. Prepare for life’s eventualities. None of us has a clue what lies ahead, even moments from now. Don’t wait until you find yourself between a tree and a hard place to find out you are not prepared! In your professional life, prepare by reading these
Like most events in life I
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did not expect this to happen to me, but it did. I was not killed, but this time it was really close.
Prepare your lease. Your lease controls the space you practice in. The space you spend the most waking hours of your life. The space where you earn your living. The space where you save for retirement. Yet many tenants are unprepared. 1. Know where your lease is. I’ll bet at least 20 per cent of our readers do not know exactly where their lease is. Put this article down, and go and find your lease. 2. Know what your lease means. All of it. Sit down with a competent person to read and understand your lease. You will be shocked by what it really says. Ignorance is bliss, until that tree falls. Be prepared. 3. Do not let your lease term or renewal option expire. An expired term or option means that you gave the landlord all of the control of your tenancy. The landlord is now prepared - at your expense. You prepared to not be prepared. 4 2
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4. Do not negotiate your own lease. I promise not to treat your oral health if you agree not to negotiate your own lease. Deal? I constantly review horrifically impaired leases “negotiated” by tenants who were duped into thinking that since they “negotiated” a base rent reduction they “got a good deal”. What really happened was that either they negotiated from an inflated starting place back to typical rent, or while they were fixated on base rent, the landlord quietly took the same value and more back in additional rent - and tenant agreed to many other issues they weren’t even aware of. Penny wise and pound poor.
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5. Do not sign a lease that prohibits transfers. Transfers include assignment, sharing, subleasing, and using your premises assets as collateral for financing. What will you do if you cannot assign the lease to a buyer because the landlord terminates the lease instead? Or your buyer can’t finance against what they are buying? 6. Prepare for death or disability. Things happen. Trees fall. If you can’t practice, will your spouse become responsible for all lease obligations? Will insurance payments be taken from your estate? I was prepared. I will make a full recovery and be wiser for this experience. When that tree falls, how will you make out? Pa
Mr. Toms has been creating and preserving realty leasehold value since 1986 and can be reached at (705) 743-1220, by e-mail at iantoms@pipcom.com, or through his web site at: www.iantoms.com.
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Rational Approach to Purchasing and Selling Functioning Practices DR. RON WEINTRAUB www.innovativepracticesolutions.ca
Purchasing and selling functioning practices in an overheated market reflects circumstances today. Two separate but related experiences have motivated me to comment on an issue that is causing considerable concern. I participated in a seminar offered by my Professional Advisory colleagues to potential purchasers and sellers. Unlike the marketplace, most of the sixty practitioners, predominately from the Greater Toronto Area, were contemplating transitioning their practices in the foreseeable future. The fact that so many were considering selling in the near future gave credence to one panelist’s statement that one should not be rushed into putting practices on the market now for fear of missing out on a marvelous opportunity. He felt that there will be a significant selling opportunity for at least the next three to five years. This is good advice. Environmental Influences on Practice Purchases Within the same week, two active clients of Innovative Practice Solutions contacted me. One of the clients has an existing practice; the other is an experienced, mature practitioner who wants to purchase his first practice in Canada. The only problem I had in giving advice and supporting their endeavors was that they were both “bidding” on the same practice. I use the term “bidding” advisedly. This was a good practice in the GTA with a large patient count. Not too many of this type of practice make it to the market. The office was responsibly appraised by a knowledgeable, ethical practice sales organization, and they determined a MARKET VALUE.
The owner, as was his absolute right, decided to add a significant premium to the clearly articulated appraisal value according to the following formula: Appraised value + Premium = ASKING PRICE The response to the offering was so robust that the listing broker had to schedule appointments of approximately forty-five minutes for prospective buyers to inspect the opportunity. The ensuing “feeding frenzy” had more than forty dentists attend and those who wanted to proceed did so by a Letter Of Intent (L.O.I) with specified conditions in order to be considered as a potential purchaser. Many L.O.Is were tendered. Although they were not binding, they certainly locked in the price with some 100-150K above the appraised price and significantly above the asking price. Factors Fuelling the Frenzy What are the factors causing this overheated purchaser demand and the attendant increase in prices? First, a significant imbalance in the number of practices being offered for transition and the huge number of potential purchasers exist. Another major reason is the relatively new categories of purchasers actively engaged in practice acquisitions. Among them are the Investor Dentists who seek to acquire a number of sites to staff with associates. International Dentists settling in the GTA comprise another category; many are veteran practitioners owning practices in their country of origin and are now licensed in Ontario. They don’t look to associateships as a means of gaining clinical experience. They are, however, ready and eager to operate their own practices. They bring a significant benefit to dentistry in Ontario, albeit at the expense of their home country. They gravitate almost exclusively to the GTA putting significant pressure on “practice demand” in this region and ignoring the large, cost-effective opportunity in the rest of Ontario. The “demand side” is somewhat ameliorated 4 4
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by a significant number of practitioners who do not see ownership as a necessary goal of their careers. Nevertheless, associates who have spent a number of postgraduate years gaining practical experience are now ready to take on the burden and benefits of ownership. As a result, we face the classic >Demand + <Supply = Price Inflation Factors Negatively Affecting Supply of Purchasing Opportunities Contributing to the dearth of purchasing opportunities is the reality that dentists are retiring later. Some dentists realize their investment returns derived from the proceeds of a sale would be low in the current environment. Many believe they would be financially better off continuing to practice at a slower pace and perhaps gain the assistance of an associate. Other reasons include the facts that there are very few “location opportunities” for starting new practices, and candidates already associating in practices are not optimally using the Sequential Buy-In option. For
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many dentists, continued ownership is an outstanding economic opportunity, something their financial advisors point out; consequently, they are loath to give it up. On the other hand, under knowledgeable dental accountants and advisors, proceeds can be structured using a strategy enabling the vendor to enjoy proceeds that today are virtually tax-free. It seems prudent to avoid getting caught up in the distorted, overheated GTA marketplace by adhering to sound criteria. The appraised price is what, rationally, should be paid. Therefore, looking for offices with hidden potential that may not be accounted for in the appraised value and for growth opportunities in offices in the rest of the province offering large patient rosters with much lower purchasing prices have merit. Opportunities will present themselves over the next couple of years - we don’t need to be stampeded into rash action because of fearful thinking: “If I don’t overpay, I won’t ever own a practice.” Pa
Ron Weintraub is a founding partner with the Bayview Village & Downtown Dental Associates and brings over thirty-five years of knowledge and experience in the practice of general dentistry to the Professional Advisory. Large companies such as Patterson Dental, Ash Temple Ltd, Henry Schein Arcona, & the former Canadian Dental Co. have benefited from his insight. As owner of Innovative Practice Solutions, Ron advises dentists on practice enhancement, practice purchases, sales, location evaluations, associate buy-ins, and business mergers. Dr.Weintraub can be contacted at (905) 470-6222 Ext. 221 or drronips@rogers.com.
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Tax Deferral + Time = Tax Savings DAVID CHONG YEN CFP, CA www. dcy.ca
Paying oneâ&#x20AC;&#x2122;s bill later never hurts when the people you owe do not charge any interest or penalties for doing so. How can you defer paying your taxes? Incorporating your dental practice (dental and/or hygiene/technical) or your associateship would be a way to defer your tax bill assuming you do not need all the cash. For example, Dr. David, a sole proprietor, earns an annual profit (revenues less expenses) of $300,000. His personal tax bill would be about $123,000 (including Canada Pension Plan premium and health
premium). If he incorporates his practice, and takes a salary of $130,000, his overall tax bill (i.e., personal and professional corporations) would be $71,000. A tax deferral (paying your taxes later) of $52,000 is obtained ($123,000 - 71,000). If one incorporates, one only has about $87,000 after paying personal taxes on the salary of $130,000. However, if this is all one needs personally, why should more taxes be paid than required? Using the same example, if Dr. David takes a dividend of $101,000, $87,000 is retained after paying personal taxes of $14,000. The total corporate taxes would be $46,500 on $300,000 profit. This way, one has deferred taxes of $62,500 ($123,000 - 46,500 - 14,000). The charts below (based on certain assumptions) summarize the tax savings from the tax deferred over a 10, 20 and 30 year period. Return is assumed at 3 per cent per annum. 4
Net Income before Salaries - $300,000 10 Years 20 Years 30 Years PC DDS/DMD
$122,959 107,804
$152,733 126,598
$187,680 148,668
Savings from Tax Deferral
$15,155
$26,135
$39,011
Net Income before Salaries - $500,000 10 Years 20 Years 30 Years PC DDS/DMD
$267,616 234,632
$332,418 275,537
$408,479 323,572
Savings from Tax Deferral
$32,984
$56,882
$84,907
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Hence, by deferring income taxes actually saves taxes of about $33,000, $57,000 and $85,000 in the above example assuming Dr. David gets a three per cent return on the savings deferred. You and your family members take sufficient salaries/ dividends to maintain your personal standard of living and leave the remaining corporate dollars inside the professional /hygiene/technical corporation. The dollars could be used to acquire a dental building or any other investments (e.g., GIC, mutual funds and stocks). The downside of accumulating too much cash, investments or other passive assets in your professional corporation include: • Capital gains exemption - One of the reasons to incorporate is the opportunity to utilize the $750,000 lifetime Capital Gains Exemption to shelter the profit from the sale of the PC shares. A PC which has accumulated cash/investments could disqualify the PC shares from being eligible for the Capital Gains Exemption. Plan ahead before your sale. Planning should be at least two and a half years prior to the target selling date. • Corporate tax rate - In general, a PC’s first $500,000 profit (revenues less expenses) is taxed at rate of 15.5%. The low tax rate of 15.5% only applies to profit generated from your dental business (i.e., it does not apply to the investment income - including interest - on your professional corporation’s GIC’s and term deposits). The investment income earned by your PC is subjected to a tax rate of close to 46.42%. Any capital gains realized on stock trading are taxed at 23.21% (i.e., 50% of 46.42%). • Dividends to yourself - If your spouse or children under 18 years old are shareholders of the PC, you may have to receive a minimum dividend in order to avoid any negative tax consequences. Tax drones call this “corporate attribution”.
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In addition to the tax deferral, you also enjoy some tax savings by setting up a PC even if you have to remove all funds for personal living expenses. Let us use the same example. If David sets up a PC and takes out $130,000 salary and the rest in dividends, his overall taxes (including corporate and personal) would be $117,000; hence an annual tax saving of $6,000. Your tax savings would be more ($12,905) if you take all as dividend. With the dividend only strategy, you would forego RRSP contributions and CPP retirement benefits. The salary and dividend mix depends on: • maximizing your RRSP contribution • contributing to the CPP • setting up a RCA/IPP • income splitting with your family members • deducting child care expenses if you are the lower income spouse Talk to your advisor on the mix that works best for you. Pa
David Chong Yen, CFP, CA of DCY Professional Corporation Chartered Accountants is a tax specialist and has been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail david@dcy.ca.This article is intended to present tax saving and planning ideas and is not intended to replace professional advice. 7
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Is Your Associate an Asset or a Liability? DAVID LIND www. ppsales.com
The question of how you can grow your practice often comes up when we are presenting our findings after completing a Comprehensive Dental Practice Valuation. Many of our clients are surprised to hear us report that an associate may not be the best way to achieve that goal. Their understanding was that in order to grow they need more hands to do the dentistry and therefore an associate will provide for that. Additionally, they will argue that in order to be able to take more time off they need an associate to be there to keep the practice open and the revenue coming in. If that is the case then an associate is one consideration but there are a few other possible solutions that warrant review first; • Consider an expanded duty hygienist. This has proven to be a very effective solution for many dentists. One of the additional benefits is it allows you to focus your efforts on some of the more comprehensive aspects of dentistry which many dentists find more challenging and rewarding. • Look critically at how your days are booked. Are you being as efficient with your time as possible? Many times if you adjust your scheduling you will find that you can be more productive without working more hours. If you are unsure of how to analyze this, consider hiring a consultant who is an expert in this area. The investment will be extremely valuable. • Consider referring out treatment to specialists. If you find yourself taking too long to complete the procedure or continually have to re-treat certain types of cases, a specialist may be a good solution. Alternatively, there are many specialists that will see your patients in your office which is another good option.
• Consider adding new technology or improving clinical skills. If you are too busy with your regular dental procedures, you can look at improving both your current clinical skill set, and the adoption of the new technologies that are now available. In most cases, this strategy can generate more profitable procedures, speed up the delivery of most procedures, improve the profile of your practice, and importantly, may give you a greater level of job satisfaction. If you determine that the only solution is to bring on an associate then consider the fact that you will be risking the single biggest asset you have in your practice, the Goodwill. I say “risking” because we have all heard the stories of the associate who has been with a practice for a few years and leaves to set up close by and many of the patients follow him or her. It does happen and it can have a devastating impact on your practice’s profit and value. You can try to limit the risk by having an enforceable agreement with your associate but even then, there is some risk. You can also limit the risk by ensuring that the patients are still your patients. You should still see all the new patients and try to limit the number of patients that are only seen by your associate. Perhaps you could let the associate do only certain types of treatment on your patients and you do the rest. Resist the temptation to allocate some patients to the associate and some patients to you. If you do have an associate, or are going to add one it is imperative that you engage an expert “dental lawyer” to prepare a reasonable associate agreement that is enforceable and assignable. You should also pay very close attention to the level of production that your associate contributes to your practice. When we are involved with the sale of a dental practice that has associates these contracts and the production become critical to the new owner. If for instance you have an associate who is responsible for 50 per cent of the professional billings (not including hygiene revenue) and you do not have an agreement with 4 8
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If you determine that the only solution is to bring on an associate then consider the fact that you will be risking the single biggest asset you have in your practice, the Goodwill... It does happen and it can have a devastating impact on your practice’s profit and value.
that person, I would suggest the goodwill value of your practice is severely at risk. Practice sales have fallen apart due to the high producing associate being informed of the sale just prior to closing, and being presented with an associate agreement for the first time and justifiably refusing to sign it. Why would he or she want to sign an agreement with someone they don’t know and may not have even met? They may demand a higher percentage
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or even worse, decide to leave and either set up or join a neighbouring dentist with “their” patients who are really your patients. This would come as a terrible shock to you as you are just preparing to enter your retirement years and now have to re-build your practice instead. In the end your involvement with your patients and a very good contract with the right person will determine if your associate is an asset or a liability. Pa
David Lind is a Principal in Professional Practice Sales Ltd. (www.ppsales.com), which specializes in the valuation and sale of dental practices. He can be reached at (905) 472-6000 or 1-888-777-8825 or e-mail at: david.lind@ppsales.com
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Non-Competition Agreements The amount of time the clause remains in effect is also important. In the case of new associates, they are very likely no threat at all if they leave within a trial period of three months, and generally only a minor threat if they leave within one year. Consider a â&#x20AC;&#x153;phased-inâ&#x20AC;? DAVID ROSENTHAL clause having no application for the first three months, BA., LL.B. one year if the departure occurs within one year, and two years thereafter. After a year or two away from the A non-competition agreement (Agreement) provides practice, a departing dentist will not likely be any real that the dentist shall not compete or practice threat to the principal. Therefore, a two year covenant dentistry for a certain time period within a certain in most cases is usually adequate. geographic area. Dentists often have to negotiate such an Agreement when purchasing or selling a practice, entering partnerships or cost-sharing arrangements, and when entering associate agreements, whether as a principal or associate. This article will deal only with points to consider in the non-competition aspects and not with the non-solicitation of patients and staff. These comments are intended only for general practitioners since there are different rules that may apply for specialists. The public policy starting point is that such Agreements are considered a restraint on a personâ&#x20AC;&#x2122;s ability to earn a living within his or her chosen profession. On that basis such Agreements are considered undesirable in a free market system. Therefore courts of law do not like supporting such Agreements, unless the Agreement is reasonably necessary for the protection of the recipient in that particular fact situation. If the Agreement is determined to be not appropriate in the specific Many associate agreements that I review provide for circumstances, the courts could strike down the two, three or even five years of non-competition with Agreement and determine the Agreement to be a large geographic radius of non-competition, even if the associate leaves or is terminated shortly after invalid and unenforceable in law. An Agreement will only be enforced if it is reasonable starting. This may be considered unreasonable and both as to the area of non-competition and to the therefore unenforceable. amount of time the Agreement will be in force. As a rule The courts, logically enough, tend to permit a longer of thumb, I believe it is reasonable that the recipient period of time where the dentist giving the covenant of the covenant is entitled to protection in the area in has sold the practice for a substantial sum, and a which 80 per cent of the patients reside. That area may shorter period where the dentist was solely an associate. be only a few kilometres in a densely urban practice or Typically five years is the maximum time, but only to be used in cases where the dentist is selling the practice. 4 15 kilometres or more in a rural setting. 10
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If the Agreement is determined to be not appropriate in the specific circumstances, the courts could strike down the Agreement and determine the Agreement to be invalid and unenforceable in law.
The most valuable asset a dentist has is goodwill, being the intangible value of a dental practice which includes the patient list and files. In almost every purchase and sale transaction for a dental practice, the value of goodwill exceeds the combined value of all other practice assets. Imagine the scenario where a dentist purchases a large dental practice for say, one million dollars, and goodwill is valued at 75 per cent of such purchase price. As part of the typical transaction, the vendor dentist signs an Agreement not to compete. A dispute arises, the vendor challenges the validity of the Agreement and to the dismay of the purchaser, a court finds the Agreement against the vendor dentist invalid and unenforceable in law. In such situation there is nothing to prevent the vendor dentist from opening up a new dental practice right beside the practice just sold. If the sold practice has been established for many years and patients are loyal to the vendor dentist, patients may very well
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gravitate back to the vendor dentist at his newly established practice next door. The result is the value of the goodwill just purchased for $750,000 by the purchaser diminishes rapidly. Unfortunately a common situation, which occurs time and time again, is a principal dentist hires an associate but has no written associate agreement, which would include a non-competition covenant. The associate works at the practice for years, develops loyalty of patients, and then departs to work at another nearby dental practice. Naturally such loyal patients leave the practice and follow the associate to his new practice. A properly drafted agreement could prevent such situation and protect the principal dentist’s goodwill.
The Agreement, whether a stand-alone agreement, or as part of an associate or other agreement, will be enforceable if it is reasonable in the particular circumstances. Consult your lawyer to ensure the Agreement is drafted properly and reasonably! Pa
David Rosenthal is a senior lawyer with Spiegel Rosenthal Professional Corporation whose practice is devoted to corporate, commercial and business law, with special emphasis on advising dentists. He can be reached at (416) 865-0736 or e-mail to david@drlaw.ca.
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Tips for Managing Your Retirement Portfolio market does go into a dive as you’re about to retire, the market decline will have no immediate impact on your retirement plan. STRATEGY #3: MARK McNULTY Follow a Liability Driven Investment model - then BA, CFP, CIM stick to the model. www.yournumber.ca Do not get tempted to chase returns. When most people retire, they lose the ability to add additional As I write this article (mid-December 2011), the savings to their portfolio to make up for losses. Larger Toronto Stock Market is about to end another year than expected losses, especially in the early years, can in the red, down 14.3 per cent. As I’m sure you are result in your portfolio generating significantly reduced aware, this is just a short two years after a drop of retirement income for the remainder of your retirement. 33 per cent. This has left many dentists concerned about their retirement. I felt that now would be an appropriate time to review our tips for managing your portfolio towards and through retirement - in any market. I will not be attempting any economic forecasts in this article. In the words of John Kenneth Galbraith, “The only function of economic forecasting is to make astrology look respectable”. STRATEGY #1: The earlier you start planning for your retirement, the better. Even though you may have done a great job putting away money for retirement, once you’re retired it’s too late to put in place many of the tax strategies and income splitting techniques that would have saved you significant tax during retirement. In many cases, STRATEGY #4: it can take years to structure your holdings to get the The saying ‘location, location, location’ is to real best after-tax bang for your buck in retirement. estate as ‘review and update, review and update, review STRATEGY #2: and update’ is to retirement income management. Start converting from your pre-retirement growth If you are not constantly reviewing and updating your oriented capital accumulation portfolio to a financial plan at least annually, its probability of failure retirement income generating portfolio well before goes way up. If you review and update your plan every you plan to retire. six months, you’ll know early if the plan is headed This is important because you never want to be forced off track, and it will be easier to make the necessary to sell equities to fund your retirement. The markets adjustments. If your plan is headed off course and are just too volatile and you don’t want to have to you don’t find out for a number of years, it could be lock in significant losses to fund your retirement. painful to get it headed back in the right direction. As a general rule, I like to keep three to four years Worse still, if you don’t find out there are problems of retirement income available in cash and short term until after you retire it may be too late to make the fixed income instruments. That way, even if the stock necessary changes. 4 12
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STRATEGY #5: Factor in encroachment on capital. Virtually every client who hires my firm to develop a financial independence plan overestimates the amount of capital they need to fund their retirement. The reason for this is simple: they don’t factor in capital encroachment. They simply figure that if their portfolio can earn a five per cent return and they want to be able to spend $100,000 a year in retirement, they need a $2,000,000 portfolio to retire (since five per cent of $2 million is $100,000). However, they will actually be making use of capital encroachment and not just the portfolio’s growth, so they’ll need considerably less than $2,000,000. Needless to say, the tradeoff is a much smaller estate. STRATEGY #6: Set realistic investment return expectations. If you have unrealistic investment return expectations, the best laid out retirement income management plans are doomed to fail. Just what are realistic return expectations? Well, that depends largely on one’s risk tolerance. I have heard various investment experts give forecasts on how they feel equity markets will perform over the long term. Many of these numbers seem unrealistic if you look at what they’re explicitly implying for the Dow Jones Industrial Average or the S&P/TSX Composite Index over the long term. The Dow Jones Industrial Average and the S&P/TSX Composite Index closed at 11,497.12 and 8,413.75 respectively on December 31, 1999. If you are assuming an eight per cent return over the long haul, you can expect around two per cent of that to come in the form of dividends, which means the indexes themselves will have to grow at an average annual rate of six per cent. That means the Dow will have to close at 211,778 by 2050 and 3,900,966 by the end of the century, and the S&P/TSX will have to close at 154,982 by 2050 and 2,854,802 by the end of the century. If we look back over the first decade of this century, you will find that both indexes are already significantly off pace.
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STRATEGY #7: Understand that the best investment you will ever make is in your dental practice. The most successful transition strategies build on this fact by emphasizing preservation of capital as a primary objective for their passive investments and concentrating on generating wealth in the practice. In other words, when it takes so much effort and energy to make the money intended to pay for your financial security and future financial freedom, don’t risk it.
Finally remember: If you can’t invest for the long term, only put your money into something safe and sure. Consider for example T-bills, GICs, or government bonds with a weighted maturity under five years. Otherwise, you may find that you need to cash in investments that are volatile in nature at the wrong time, when things are down. It’s a proven fact that time horizon plays a critical role in investment success. Pa
Mr. Mark McNulty BA, CFP, CIM, is a financial advisor with Raymond James Ltd., Independent Financial Services - Member Canadian Investor Protection Fund. This article is for information only. Its opinions are those of the author, not necessarily those of Raymond James Ltd. He may be contacted at 905-470-6222ext 209 or mark.mcnulty@raymondjames.ca.
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The Professional Advisory
Vo l. 53 : Februa ry 2012
Building the Perfect Claim: You Deserve Nothing Less! DR. IAN WEXLER www.protect-ins.com
Over the past fifteen years, I have handled dozens of successful claims on behalf of my clients. Currently, my firm Protect Insurance has over twenty clients on claim or in the process of submitting claims…a staggering number. Throughout my career as an insurance advisor, I have always considered, getting my clients paid at claim time to be one of my most important priorities. Well known insurance industry realities ✓ Most insurance advisors sell only a few disability plans a year ✓ Most insurance advisors have never managed a disability claim ✓ Of those advisors who have a claim situation, the overwhelming majority simply provide the claim forms. ✓ Of those who provide the claim forms, less than a handful of advisors in Ontario actually assist with the management of the claim. Based upon these realities, I have always believed that “who you choose as your insurance advisor can likely be more important than your actual disability contract in determining the actual outcome of your claim!” Promising you the world Every dentist has heard a sales pitch from an insurance advisor trying to secure their business. Some incredible ones that I have heard are: • “Become my client and I will fight for you at claim time!” One even refers to themselves as a “leg biter” at claim time. The reality in having managed dozens of claims is that this approach is essentially the opposite of what should be done! Insurance claim administrators prefer to communicate with an advisor who will facilitate, clarify and ensure the claim is complete…not
someone who is confrontational. • “I guarantee to go to the hospital immediately to help you with the claim.” In reality, this comment and action makes little sense. It takes time to compile, review and submit all the necessary financial and medical documentation. Rushing any claim, which unfortunately happens too frequently, will doom a claim to unnecessary delays or failure. If you think you can manage the claim on your own, think again! As with every patient and every oral cavity, no two claims are the same. Each claim needs to be assessed, designed and managed differently. Contrary to popular belief, the claim process is almost never black and white but instead fifty shades of grey. Many dentists who hear horror stories of claim denial are unaware of this important fact. Couple this with the fact that many who become sick or injured, may not be thinking clearly or rationally when submitting a claim on their own. For many, there is an inherent sense of entitlement since, “I have been paying premiums all of these years, the insurance company better pay me!” The tendency is to rush to complete and submit the ambiguous and complicated claim forms, only to have them returned due to a lack of or incomplete information. In all my years, I have never seen one claim form properly completed and submitted by the claimant. In addition, the majority of physician’s claim reports that I have reviewed have also been incomplete! Finally, proper claim design, submission and management can be incredibly complicated. Often, important claim decisions which can ultimately determine payment or non-payment of benefits need to be made “with the assistance of your advisor”. This includes partial versus residual disability and defining your actual limitations as a dentist that coincides with all medical reports and tests. Services every insurance advisor SHOULD provide When an insurance advisor sells you a disability 4 14
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The Professional Advisory
Vo l. 53 : Februa ry 2012
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Throughout my career as an insurance advisor, I have always considered, getting my clients paid at claim time to be one of my most important priorities.
plan whether long term disability, business overhead expense, critical illness or any other type, it should be the beginning of their service cycle and relationship with you. Instead, it is often the end. If you truly want the highest chance of getting paid benefits at claim time, it is imperative that you have an advisor who has handled many successful claims for dentists, understands implicitly what you do as a dentist and even has a dedicated claim administrator at the company(s) they represent. Additionally, ensure that they offer the following: • One on one claim form review/analysis, assistance and completion • A complete analysis of how your plans pay benefits at claim time • Attending physician’s report analysis • Assists with claim design and management • Insurance company intervention and communication, as required • Consultation and assistance with compiling and submitting financial data • Consultation pertaining to medical data collection and documentation • Assistance with claim timelines and follow up Additional services that can be crucial at claim time There are a number of additional issues that neither
you, your spouse nor your practice staff may be qualified or prepared to deal with during a claim. Examples of ones that my firm routinely provide include consultations on: • The financial impact of the claim on family, the practice and your retirement planning • Future career planning issues • Keys to helping you and your family “deal with a disability” • Maintaining practice goodwill • Partnership/shareholder issues • Staff communications • Associate and locum placement assistance • Patient communications • Appraisal arrangement • Sale arrangement • Transitions consultation Don’t wait until you have a claim! It would be prudent for you to speak with your insurance advisor, and to even get in writing, exactly what services they will provide for you at claim time. Ask them how many successful claims they have managed, specifically for dentist clients. If you have an association plan, call the provider and inquire into exactly what their process is at claim time. What you hear may surprise you! Pa
Dr. Ian Wexler is a leading authority on insurance issues for dentists. He is the founder and President of Protect Insurance Agencies Inc. in Toronto which provides specialized expertise in life, disability, critical illness, long term care, and other insurance products and services to over 800 dentists across Ontario for the past 17 years. He can be reached for questions or other enquiries at (416) 3913764 or drwex@protect-ins.com. The views expressed in any article are those of the author alone. They should not be acted upon without the advice of your “professional advisors”.