244: Why Outdated Financial Advice Is Failing Dental Practice Owners

The underlying philosophy behind the 6040 portfolio goes back to 1952, almost 75 years ago. Imagine if you were basing your dental practice on all the things that you did on 75 year old technology or science.

Hi, I'm Emmett Scott and just like you, I've had my ups and downs in the dental industry. But times are changing. The DEO has built a map of how to succeed in one of the most challenging industries to navigate. On this show we talk to dental industry leaders, solve problems and get you the answers you need to face these challenging and thrive. Welcome to DEO's Growth Secrets podcast for dental organizations. Now let's get started.

Hello everyone and welcome back to the DEO podcast. We're your go to place for your business side of dentistry. I am your host, Jordan McIntyre and today I'm very pleased to introduce you to Richard Del Monte. He is a partner with Allworth Financial. So tons of experience and wealth coming your way. With more than 35 years as an investment advisory experience, certified financial planner, Richard is an outspoken advocate of a lifelong learning and growth. Also fun fact, he's possessing a law degree, a Master of Business administration and a degree in business administration. So tons of knowledge coming our way. He's helped small business owners, particularly dental practitioners, in all matters related to their wealth and their success in their business. So welcome Richard to the show. We're really excited to have you here as an expert.

Thanks Jordan. It's great to be here. Appreciate it.

Yeah. So Richard, I'm just gonna jump right in here. So I'm, I'm pretty curious, you know, I've read a little bit of your bio. Tons of experience in investing, financial advising. I'm curious to hear what is, what is one of your successes that you appeared and that you're, you're pretty proud of?

My successes? Well, my, I guess my law degree is one of my biggest ones. I got that, I only got that like two years ago, believe it or not. And it was kind of a bucket list thing that I wanted to do my whole life. I don't want to be a lawyer or practicing attorney, but I really wanted to learn the law and I was really thrilled that I could actually pull it off, you know, at a, at an older age. And so I'm really proud of that.

I love it. I also noticed that you appeared in Fox Business News as well as the Wall Street Journal.

I did. And I've done a lot of local, you know, television and even have my own little radio show 20 years ago about finance, personal finance. So yeah, I've had a lot of media experience.

Wow, that's amazing. Well, nice job with your success. Also love seeing that your sounds like your hobbies, traveling with your wife, five children and their family. So.

Yeah. Yeah.

Awesome. So, you know, I am curious, Richard, with your kind of success and where you've been for decades. Dennis have been told that the key to their financial success was simple, right? Invest it, put it into index funds, the 60:40 rule, to pick up a lifestyle that they're, they're comfortable with. Kind of elaborate on that. What are, what are your thoughts with that 6040 rule?

Well, it kind of, you know, the vast majority of investors really believe that to be successful as an investor you have to do basically two things. One, you just have to own the lowest cost Vanguard funds you could ever find and also be in a 6040 mix or even better, own one of those target date funds and you're going to be good. You're, you're fine. That's all you need to do. And, but the underlying philosophy behind the 60:40 portfolio goes back to Harry Markowitz, who came up with modern portfolio theory in 1952. So the 6040 portfolio idea came out of that technology that he came up with almost 75 years ago. And so there's just been a ton of innovations since then that kind of make the 6040 portfolio really obsolete. It's not that you have to throw it out the window, but there's things that you can do to enhance it and make it better. And I, the likening I give to most dentists that I talk to is, you know, imagine if you were basing your, your dental practice on all the things that you did on 75 year old technology or science. You know what I mean? I, I shudder to think about what, what the experience would be for the, for the patients, you know, and so it's really the same thing. Why rely on technology that's that old and you're just not, we're just not getting the information from the press and the media about what, what's changed and the new development. Wow.

Yeah. So what I'm hearing you say, in other words, is that this is pretty much that playbook is now obsolete. So yeah, it's.

Well, I just said it's suboptimal, let's put it that way.

Okay.

Yeah.

Cool. Well, in this episode, you guys, what we're going to focus on today is we're going to reveal to you why those old strategies are failing our high income professionals and what today's smartest dentists are going to be doing instead. So from private assets that we're going to be kind of talking through today and really how to deliver that diversification that we're all looking for, unique, advanced strategies that are now on the market that are dramatically reducing taxes. And I don't know anyone that doesn't want that for their life. So Richard, we're really excited to have you share your tools. And honestly, just kind of looking through it, in my eyes, it's really too good to be true. So let's, let's kind of get started. So I'm curious to hear with the listeners and I'm sure a few of them on this call or on this podcast are going to be asking, so you say that private assets are really no longer optional. So what do they do? What do they add to their portfolio to get them, to get them what they're looking for?

Yeah, great question. Okay, so private assets, basically public assets are things that you can buy in the stock exchanges. Basically stocks, bonds, et cetera. They trade on the markets every day. Those are what are considered public markets. But the public markets only represent like about 14% of the total amount of companies that are out there. The vast majority, like 85, 86% are privately held companies. They don't trade on the stock markets. And so you know who, the people that have access to those things over the last, you know, dozen years have been basically institutions, you know, the, the pension funds, the, the Harvard endowment, you know, Jeff Bezos's private family office, those kind of folks. But it hasn't really been available to individual investors. But now those assets are. And so the advantage, yeah, so the advantage of those are, um, they are much more stable. They don't go. They don't, they don't. Because they don't trade on the stock exchanges. You don't get all the day to day gyrations and the valuations, they're only valued like once a month. And so they avoid, they sidestep all that, the fear and loathing that goes on, you know, and when people are panicking, they also avoid. On the, on the flip side, they avoid the, the ex. The markets when people are really exultant and driving prices way up. So you miss the kind of, the fr. The, the highs and lows and you just kind of keep getting base hits. And the returns of private equity in particular have been like going back to 2007, right before the big 50% decline they had in the Great Recession, they've been like 12% versus public equity has only been 7%, they have way lower risk and you know, it's kind of like kind of a no brainer. Why wouldn't you want to have this in there?

Wow, okay, yeah. Then the question that would be with them adding this to their portfolio. I know you said that it's less of a risk here. I'm kind of curious for the listeners that are listening, like, wow, that's not what I've heard. Right. Go into the public market. Now you're saying actually, hey, let's go after the, the private assets, right? Like that's your low hanging fruit. If I have a, you know, provider that I work with and they're saying, okay, that sounds great, but where do I start? Where do they start with this?

Sure. I mean the best place to go is a financial advisor, but that's going to sound self serving coming from me, but someone that can actually vet these things because there are, you know, just like in anything else, there's junky investments and there's really good quality ones, you know, and so you have to be able to look and, and figure out which ones are the good ones. We tend to go into companies that are fully established rather than startups and things like that, which can, you know, strike out really easily. And small companies that can go broke. We like to go with big companies that are already, you know, in existence. They have like $250 million of revenue or earnings every year, you know, and those are big ones. Privately held, the biggest thing, that's where you want to start. But the biggest thing that you have, the downside of private equity and private credit and things these other private assets is they're ill, they're considered illiquid. And so basically because they don't trade in the markets, you can't get out very easily once you get in. So you want to limit how much you put in these things first of all. And like at our firm, we only allow people to put it like 25% of their equity investments or their portfolio into private assets because we don't want them to be all tied up in things that are illiquid in most of these funds. Now the modern funds, they're perpetual funds so they, they kind of keep going forever. They do let you get out once a quarter. So it's not like you're stuck in there for years. You can get out once a quarter, but they limit the amount that can come out to like 5% of the total investment in the fund. So like there's a fund that has that, I know that we use has $70 billion in it every quarter. They let three and a half billion come out if people want to cash out so you can get out, you know, and that's, so it's not as liquid as you might think. So that's, but that's the downside of being in private assets. And also the fees are really high in private assets. However, the returns that I was telling you are net of fees. You still, if you make more money even though the fees are higher, you know, I really don't care. I'm not trying to minimize it, but who cares if your fees are higher if you're making more money?

Absolutely. Okay. Yeah, I kind of right into the next question where we started off with, hey, there's investments that you claim that really can provide significant tax, tax losses. I'm curious about that. What are those? How those work? Yeah, tell me a little bit about that.

Well, I'll start kind of on the low, the low end. There's something called direct indexing, which your listener may have heard of before your viewers. But basically instead of individual, like ETFs, exchange trader, you actually buy whatever individual stock was down. You could sell it and buy something. So you're constantly harvesting those losses. So you're getting the same return as a mutual fund would get you, but you also are building up a bank of stored losses and you can use those to offset your gains in the future. That's a big difference. That works in taxable accounts. Nobody should be in a, in an ETF or mutual fund in a taxable account when they can because they don't get those benefits. They, they should actually do direct indexing instead. So that's one. But the, the things that make a big difference are the, there's some strategies that, for example, when I sold my business, I, I, I'm a recent partner at Allworth. I sold my own private business that I ran for many years to Allworthy, and I'm getting payouts from them, you know, over, over a period of time. I'm actually protecting those payouts from capital gains taxation using the strategy that I'm going to tell you about. And so, you know, you can save millions of dollars of tax. Like a dental professional was selling a big practice. They don't have to pay capital gains tax when they sell their practice or they sell a rental home or sell their Nvidia. That's gone up 90% avoidable. Now with, with the strategy that I'm going to tell you about, and that is there's a company called aqr and I can't, don't ask me what the stands for, but they're out there and they have a, they have a product called Flex 250. It's a separately managed account. And basically if you put money in, they will, they will get you a return that matches an index of your selection. Like it could be the Russell 1000, it could be the Russell 3000, it could be an international index or global index, and they'll shoot to make about a 3% return higher than the index. So that in itself is really great. Imagine compounding money at 3% in the index over 15, 20, 30 years. It comes astronomical. And so that's really good. But the real sizzle is they're going to generate in the first year about 70% of tax losses of what you put into the fund. So if you put in $3 million, they're going to generate 70% of that, or whatever it is, two and a half million, 2.2 million, something like that of losses in the first year. And you can use those losses to offset the gain on whatever else, what it is that you just sold like your practice or, you know, or whatever. So, and then, and then as it goes on over 10 years, that, that, that structure is going to generate about five times the amount of the original investment in tax losses. So if you put in 3 million, it's going to generate like 15 million of losses over 10 years. I know it sounds like I'm smoking crack here and it's too much.

Does sound like unreal.

I know, but it's absolutely true. Your listeners can go on and just go to ChatGPT and say, does you know AQR's Flex 250 product portfolio actually work? Wow. You'll find out that it does work the way. You want to know how they make it work?

Yeah. Give us a secret because it sounds unreal.

So I'm, I know it does.

I know we gotta fact check you after this, so I hope we do.

I hope you do. Anybody can do it. Absolutely. So the fact check is, the way it works is you give them some cash and they will buy, they'll basically buy the index. The individual stocks that make up an index, you can also give them your appreciated stock like you give them your Nvidia stock that you made, you know, that you made a bunch of money on and they will use that and slowly winnow you out and get you out of it with this, a year or so tax free, if you can believe that, by generating losses. So, but what they're doing is they take, they, they buy the index and then they buy, they do what's called a long short strategy. So they're going to buy more stock on margin on top of the stock, and then they're going to sell a bunch of stock short on the bottom. So they create like a sandwich around this portfolio of your original, your index and those extra long and short positions, they negate each other in terms of risk. So you still only have the risk of the, of your index fund. But those, those long and short positions, they have lots of opportunities to sell losses no matter which way the markets go. And they just keep doing that and doing that and doing that. And they only recognize the losses. They don't recognize the gains because they don't, they don't sell them. And so they just build up these losses over time and you can use them for all kinds of different things to be able to sell, sell appreciated securities. It's, I mean, it's, it's so unique and it really does work. And again, I challenge anybody to Google it or not. Maybe not Google it, but you know, chat, GPT or something. You know, look, look at AI and ask if it works and they'll find out that it does. It's a growth strategy.

Is this the one big investment that you mentioned? Is it?

That's one of them. Okay, that's, that's one of them. Yeah, yeah, that's one of them. The other one. You want the other one?

Let's hear it.

Yeah, the other one is another one by aqr. These guys are very innovative. And what it does is it will generate. It's kind of like a hedge fund. They use some long short strategies as well, but they're trying to get a return of about 13% per year. And it's got about half the risk of the stock market. So you can kind of get, figure that in. You can get a return that's about, it's higher than the stock market returns over the long run by a couple of percentage points because the stock market does 10 or 11%. So this is, they're trying to make 13 with half, you know, 60% of the risk of the market. So you can think about that just in itself. That is a really good, really good investment. But what they're doing is they, because they're, it's complicated, but because their business is trading and generating capital gains and losses, they're able to make the gains and losses that they make ordinary income instead of capital gains and losses. What that does for the investor is it says if we lose money on here, we get some capital losses. Those are going to be ordinary losses that you as the investor and deduct against your wages, your business income, your, your, your Social Security income, your dividends and interest, your rental income. Ordinary income, not just capital. So, and they're generating somewhere between, on average somewhere between 8 and 10% per year, you know, of ordinary losses, net ordinary losses. So let's just give you, let's put this in, let's quantify it. The minimum you can put into this thing, the strategy which is called aqr, Delphi strategy. And again you can Google that or, and see if it's legitimate because I know it sounds too good to be true, but, but, but if you put in like 500,000 which is the minimum, they're going to generate somewhere between 40,000 and 60,000 a year in actual tax reduction, not losses that you can deduct actual tax reduction. So if you owed, if your CPA said you owed 40,000 this year in tax and you had this aqr to generate 40,000 of tax reduction, your tax now went from 40,000 to zero. That's what it does on top of getting a 13% return with about 60% of the risk of the market. So I know that these things don't sound, but this, this, you know, this is kind of the state of the art where of the things that you can do as an investor and again you need the guy. I mean you need the guidance of a good, of a good advisor who, who knows about these things and can guide you and decide whether it's right for you. It's hard for someone to decide. I wouldn't want to figure out how I was going to fill a cavity myself. I need to, I need to, you know, or do my own heart surgery. You need to have a really good advisor to help you decide. Is this a good strategy for you? But you know, that is something that, that people, everybody should be looking at. You know, if, if they're, if they have enough money to invest like this.

Yeah, I totally just went to chat GPT and looked this up by the way. So fact check is real. Yes. AQR strategies are intended to generate real returns. So there you go, you heard it from ChatGPT and they'll talk about the

strategy and that they do, they do generate these losses and things. So, so it is legitimate, you know, but it's just not, not well known. And, but again, if the stuff is out there and you're not taking advantage of it and you're running around paying taxes and doing everything that the, that your CPA tells you to do or you know, your, your broker that, that doesn't give you tax advice. You know, I mean, that's where, that's where the opportunities are.

Yeah. Now I'm curious because now an individual dentist can participate. Right. It's not just something for institutions only.

No, no, no. Individuals. Everything I'm saying is for individuals. Yeah.

Okay. Awesome. Okay. So kind of some takeaways from that. Just me like listening and I'm sure listeners here are kind of asking the same questions. We all want to know the risk, right? So what mistakes have you seen maybe that have been made when it comes to money? And then how can you, or how, what do they do to help alleviate those mistakes?

Yeah, the biggest mistakes people make are they just get complacent and they, and they, they, they just start telling themselves, they, they lose curiosity about what else is out there. It's the things you don't know that you don't know that really can make a big difference in your life. I think we all can agree to that. Right. And so the trick is trying to make sure you know about the things you don't know about. And that is you gotta have someone helping you to be able to go through this and, or you have to be curious enough to know where to look for some of these solutions like I've been talking about today. So they will get complacent, they will think they're diversified because they own S&P 500 index fund. They own Fidelity, you know, low cost stock. They own, you know, QQQ Triple Qs. And they think, oh, I'm diversified. But what's inside of all? Like if you did an X ray on all those funds, what's inside? They're all loaded with the same things. They all have about 40% in the Magnificent Seven. And so you're not diversified. You have 40% of your money in seven or 10 stocks. That's crazy. But that's what people are doing. And we're in a situation right now where the markets are at the highest price earnings ratio ever. Except for the dot com bust right before the dot com bust in 1999. So we're, we're right up in that situation. I'm not predicting a crash. I'm just saying it's going to be hard to make the same kind of money we've been making in the last 10 years when the markets are priced this high, you know, the price for perfection. So you really want to be looking around like, how can I diversify this intelligently? You know, that's where the things like private equity comes in, private credit, you know, private infrastructure, these other investments that can diversify you and still get you a double digit return potentially, but you just don't have the same risk, you know, so you have to be smart about this and stop swinging for the fences and stop thinking I'm covered. I got Vanguard. And I laugh because part of the orthodoxy that's in the mainstream is, you know, to be successful, low cost Vanguard funds. And whatever you do, don't pay an advisor, you know, because the advisors are never worth it. I'm just telling you, I could stipulate that many advisors are not worth it, but the great advisors are so worth it. The absolute, the cost of a good advisor is negative because whatever you pay them, you should be able to make four, three or four times that in higher returns, lower taxes, peace of mind, greater diversification, lower risk, all that stuff, you know, and so I think that people that think that they're all set because they're in the, you know, in a 60, 40 or 70, 30 portfolio and they're just done. You're, you're, we might be done. You might be toast actually, if, you know. But you have to really be smart. And I mean, it's just like you, you got, you guys have all these specialties. You know, the medical profession has specialties. In our business, there's a lot of different specialties where people can actually talk. Tax. Tax is the biggest way that people can save money and make additional returns is by not paying income tax. You know, if you save two basis points going to this fund versus that fund, big deal, whatever, that doesn't matter. It's really about, can I, how can I cut the tax man out of this, how can I reduce the risk? So I'm not going to have that much volatility like the dentist next door has, you know, that's, that's where the real value is.

Yeah. So I'm curious, and this is maybe a curveball of a question, but when you say like, hey, you know, they advise, like, hey, whatever you do, don't pay for an advisor. Yeah, I hear that a lot. So I guess I want to hear from you and your experience if you were to say, hey, Jordan, here's one of the top things you should look for when you're considering going with an advisor. What should I look for to either make the right decision or avoid that path?

All right, well, first of all, they should be Fiduciaries all the way. You shouldn't be working with commission people. I think most people know that already. But if you, if you go to an advisory firm and they say, we're going to manage your money, we're going to charge you, let's just say 1%. I don't. Just for conversation. And that's all you're going to do. Well, I have a tax question to ask you. Oh, you have to see your cpa. I have an estate planning question. Oh, go to, go see your attorney, you know, if that's the kind of advice you're getting. Because the really good advisors will do all that for you. That's wrapped in, you know, and I can even talk to people about legal things. You know, my, in my practice, because that's, I'm, I've trained, I'm not a lawyer, I don't practice law. So I can't, you know, give them my legal opinions, but I can tell them my personal opinion about things that I, that are legal, legally involved. And so you have to look for advisors that are going to give you holistic advice and not, not shy away from telling you, yes, this is what you should do. It's going to save you tax. I've calculated the tax you're going to save. It's going to be this much money, you know, and this is, if you don't do it, it's going to be this. And give you all the models and everything. That's the kind of advisor you want. That's an advisor. That's worth a fee.

Awesome. Okay, so if we have a dentist that's listening to this podcast and you wanted them to take one step tomorrow towards smarter investing, what, what would that be?

I would definitely look at the taxation that they're paying and I would look at how diversified they are and I would, I'm giving you more than one step. But, you know, they're all kind of equal in my mind. And I would get you diversified out of stuff that's trading in the markets, not 100, but you know, you can get, you can go 20, 25% into other things that don't trade, but that you can still get really good returns and without that kind of risk that you're taking with, of a crashing market, that could happen anytime. May not, but it, you know, it does happen with regularity. So, you know, you can eliminate some of that risk. That makes sense. Save more and just get your tax bill down. Yeah, those are, those are the things that you could, those are the biggest things you know, retirement plans, stuff like that. Everybody's, everybody's doing that. Retirement plans are basic, you know, you should be doing that as well. But I would rather have, you know, personally, you know, I've, when I'm one of my Fox Business News appearances, some guy was telling me something about, you know, how, how business owners should be way more generous to their employees. I'm like, hey, man, the guy's running a business, not a charity, you know, so, so, you know, it's all about the dentist first. That's, that's the world. He's, he's in business to make money for his family and himself. And I think that some of these strategies, like what I was telling you about in this, in this podcast, are way more effective potentially than doing a cash balance plan, for example, because cash balance, you got to cover employees and you get so much benefit. But look at the leverage you're getting with some of these AQR strategies. I mean, it's difference. Yeah. And that only benefits you. So if you want, if you're selfish, you know, which is, that's capitalism. Right. Nobody's selfish in capitalism. This, you're, you know, these are strategies that are all skewed to help you as the business owner.

Yeah. Wow. So, and I think what I'm hearing and from this, from you and I hope all the listeners are picking this up as well. Like your goal is to really help them protect their wealth. I'm going to help you protect your wealth. And we're going to cut that tax

bill and grow it. And grow it safely. More safely.

Yeah, yeah, yeah.

And not slower. Not slower. Maybe even faster, but more safely.

Yeah. In other words, they're going to help them keep their money. Like how. Help you, you know, and make more. What?

You're absolutely right.

So Richard, if our listeners wanted to connect with you or connect with all worth, what, what would they do? How would they find you?

My, my email address is richard.del monte@allworth financial.com We've got a whole dental practice. You can go to allworth financial.com forward/dental. We've got a bunch of advisors on there. Be happy to talk to them if they want to talk to somebody in their area of the country. We have, we have people all over the country. So, you know, we have, these people are all trained and they work specifically with Dennis. They understand your needs, your, your challenges and they have solutions that are, that are tailored for you. So we, we would, we would really welcome that opportunity.

Awesome. All right, well, thank you, Richard. So much. This has been amazing. All the listeners on the call, you know, you know how to reach them. Um, really, really appreciate you sharing all your wealth of knowledge with us.

So thanks, Jordan. It's been great being with you.

Absolutely. Until next time, you guys, keep smiling.

Thank you for listening to deo's Growth Secrets podcast for dental organizations. Continue the conversation on our Facebook group and meet other dental leaders. Get questions answered and the strategies you need to succeed. Plus, we have some free resources for you right there on the Facebook page. Remember, you're not alone. Let's do this together. Join DEO's Growth Secrets Group on Facebook. And until next time, keep smiling.