About David Mandell

David B. Mandell, JD, MBA, is an attorney and author of over ten books for attorneys, physicians and business owners including Fortune Building for Business Owners and Entrepreneurs. He is a principal of the financial consulting firm OJM Group www.ojmgroup.com, where Carole C. Foos, CPA is a principal and lead tax consultant. They can be reached at 877-656-4362 or mandell@ojmgroup.com.

The Nine Reasons Investors Underperform Without Professional Management


money-down-the-drainBy David B. Mandell, JD, MBA and 
Robert G. Peelman, CFP ®

There are multiple layers to the question: do I really need an investment advisor? Although there are no easy answers for everyone and every situation, data shows that the vast majority of retail investors, including attorneys, are better off utilizing the services of an investment advisor as opposed to managing their investments on their own.

Why/how do investment advisors make a difference? Theoretically, no one has a greater interest than you in protecting and looking after your investments.  However, your personal interest in protecting and looking after your investments may be the single greatest factor working against your investment performance.  Most investors are risk-averse, biased creatures prone to putting too much credence into noise, trends and herd mentality.

Why do investors do so poorly?  You have likely heard of the impact of the basic human emotions of greed and fear on investing—getting overly optimistic when the market goes up, assuming it will continue to do so, and wanting in on the action (GREED) and becoming extremely pessimistic during downturns and wanting out before losing everything (FEAR).

In 2010, the Securities and Exchange Commission Office of Investor Education and Advocacy requested that The United States Library of Congress Federal Research Division prepare a report on the behavioral traits of U.S. retail investors. The report identifies nine common investing mistakes that affect investment performance. These traits are common behavioral characteristics that work against your investment returns, usually because you are too emotionally involved in the decision-making process.

The nine most common mistakes

Active Trading is the practice of engaging in regular, ongoing buying and selling of investments while monitoring the pricing in hopes of timing the activity to take advantage of market conditions.  Active traders underperform the market.  For the average retail investor, constant activity and speculative behavior are detrimental to long-term portfolio performance.  A good advisor should assist you in creating a long-term strategic plan that does not involve churning or activity for the sake of activity.

Disposition effect is the tendency of retail investors to hold losing investments too long and subsequently sell winning investments too soon.  Most people are risk-averse—even more so when handling their own investments.  Loss-averse investors tend to sell high performing investments in hopes of offsetting losses from losing investments.

Paying More Attention to the Past Returns of Mutual Funds than to Fees. Many investors pay too much credence to the past performance of mutual funds while virtually ignoring the funds’ transactional costs, expense ratios and fees.  These types of fees can have a significant drag on the performance of your portfolio if they are not considered. Your advisor should account for fees in any analysis of your holdings. Remember, it is not only the performance of the fund that matters, but ultimately the value you get out of it.

Familiarity bias is the tendency of many investors to gravitate towards investment opportunities that are familiar to them. This bias leads to investing in glamor stocks or glamor companies, investing too heavily in a local stock, or employees investing too heavily in their employer’s stock.  A good advisor will work to ensure you are aware of being overly concentrated in certain areas and will seek to keep your portfolio properly diversified to limit exposure.

Mania/Panic. Mania is the sudden increase in value of a “hot” investment, wherein the masses rush to get in on the action.  Panic is the inverse, where everyone tries to abandon a sinking ship. What is the next “bubble”? When will there be another “crash”?  With the advent of 24-hour financial news channels, social media and other concentrations of constant financial information, investors are now, more than ever, susceptible to mania and panic. All the noise leads to the next common factor…

Noise Trading often takes place when the investor decides to take action without engaging in fundamental analysis.  When investors too closely follow the daily headlines, false signals and short-term volatility, their portfolios suffer.  Long-term plans require picking investments via economic, financial and other qualitative and quantitative analyses.  Advisors take emotion out of the equation and seek to build your plan to weather manias and panics and keep you from following the herd fueled by the noise of the day’s leading story.

Momentum Investing is the practice of buying securities with recent high returns and selling securities with low recent returns assuming past trends and performance will continue.  Chasing momentum leads to speculative bubbles with the masses inflating prices. Similar to manias and panics, retail investors are often the last ones to know either way, causing them to often jump on a security experiencing momentum at the wrong time, usually buying high and selling low—with obvious detrimental effects on their portfolios.

Under-diversification happens when the investor becomes too heavily concentrated in a specific type of investment. This increases their exposure by having too many eggs in one basket. It goes without saying that any long-term investment plan requires diversification. However, investors generally need the assistance of an advisor to diversify correctly. Otherwise, they may be susceptible to the next common error.

Naïve Diversification is the practice of an investor deciding to diversify between a number of investments in equal proportions rather than strategic proportions.  Proper diversification in the investment arena is not simply putting X asset classes in X equal percentages.  Rather, a proper allocation strategy should weight your differing investments in a manner aligned with your personal risk tolerance to build value over the long term.

By the Numbers

Historical data shows that retail investors, including attorneys, make the same Greed and Fear mistakes time and time again; buying investments when prices are high and selling once they have fallen. According to the 2016 release of Dalbar’s Quantitative Analysis of Investor Behavior, the average investor in a blend of equities and fixed-income mutual funds garnered only a 1.89 percent net annualized rate of return for the 10-year time period ending Dec. 31, 2015. During the same period, the S&P 500 returned 7.31 percent—a clear underperformance by orders of magnitude against the index.  The same average investor hasn’t fared any better over longer time frames.  The 20-year annualized return comes in at 2.11 percent, while the 30-year annualized rate is just 1.65 percent vs. 8.19 percent and 10.35 percent in the S&P 500 respectively.

Advisors don’t exist strictly to pick the best stock, mutual fund or ETF or to simply forecast economic conditions and make tactical decisions in a portfolio. While those are important components, an advisor should act as a buffer who puts space between you and your investments to take some of the emotion out of the decisions. The bottom line: the emotional connection between you and your money affects your decisions. Your savings represents security, stability and your goals.  It’s more than wealth—it’s your future.  With all of this on the line, it is virtually impossible for you to make consistently rational investment decisions over the course of your investing life.

The best advisors work with their clients to create strategic, properly-diversified, long-term investment plans.  The plans must be tailored to the client’s personal risk tolerance and goals, while attempting to minimize fees and costs, as well as tax drag.

Utilizing the assistance of an investment advisor will not alleviate all the risk associated with investing in securities markets. Nothing can take all the risk out of investing. However, a strong advisor can protect you against emotions, myopia and fixation on short-term results.

SPECIAL OFFERS:  To receive a free hardcopy of Fortune Building for Business Owners and Entrepreneurs please call 877-656-4362. Visit www.ojmbookstore.com and enter promotional code NTL11 for a free ebook download of Fortune Building for your Kindle or iPad.


David B. Mandell, JD, MBA, is an attorney and author of more than a dozen books including, Fortune Building for Business Owners and Entrepreneurs. He is a principal of the financial consulting firm OJM Group www.ojmgroup.com, where Robert G. Peelman, CFP ® is Director of Wealth Management. They can be reached at 877-656-4362 or mandell@ojmgroup.com.

Keep the Insurance Profit, Protect Assets and Reduce Taxes with Your Own Insurance Company

David Mandell, JD, MBA

David Mandell, JD, MBA

By David B. Mandell, JD, MBA and Carole C. Foos, CPA

Attorneys and law practice executives are often looking for ways to protect the practice from potential claims, reduce risks, and pay less in taxes. If your practice currently generates over $3,000,000 of revenues and you would like to take advantage of opportunities to improve and protect the financial success you realize from your hard work, then this article may prove to be valuable information for you.

Small Insurance Companies (or “SMICs”) are often referred to as captives, closely-held insurance companies, or a number of other names.  Like any corporate structure, SMICs can be ideal tools if they are created for the right type of practice and the corporate formalities are maintained properly in a legitimate jurisdiction.  The purpose of this article is to briefly describe appropriate uses, potential benefits, and approximate costs of SMICs.  To better illustrate potential benefits, we offer a case study where the use of an SMIC significantly enhanced many areas of the client’s comprehensive financial planning.

What is a Small Insurance Company (SMIC)?

The SMIC we will discuss here is a properly-licensed, U.S.-based insurance company, domiciled in one of the states that have special legislation for small insurance companies.  While some advisors promote insurance arrangements in small international jurisdictions to take advantage of lower creation and maintenance costs, we think it is advisable to domicile SMICs in the U.S.  As a number of states’ recent captive insurance statutes allow formation for reasonable costs, we find domestic options to be financially feasible like never before.

Further, President Obama recently signed into law new legislation that significantly impacts SMICs. Under the new law, the annual premium limitations were raised by nearly 100%, after being stagnant for thirty years, while new restrictions on ownership were also enacted.  Thus, if you haven’t looked at a SMIC lately – or if you have one and are unsure how the new law impacts you – now may be the time to review the SMIC again.

SMIC as a Risk Management Tool

The SMIC must always be established with a real insurance purpose.  Insurance companies have been well defined in the vast array of tax laws, revenue rulings, private letter rulings, and case law.  There are requirements for an insurance company to be a facility for transferring risk and protecting assets.  Practitioners who specialize in this area have found ways to manage risk to maximize long term profit while reducing unnecessary risk within the insurance statutes.  How risk is managed and how much risk can be insured in a captive will be answered based on your particular situation. The nice thing is that there is a great deal of flexibility in how the SMIC can benefit a client.

One specific way clients can use the SMIC is to supplement their existing insurance policies.  The SMIC can insure deductibles, copayments, and excluded risks.  Such “excess” protection gives the client the security of knowing that the company and its owners will not be wiped out by a lawsuit award in excess of traditional coverage limits.  In this case, you could think of the SMIC as a tax-efficient, asset protected war chest to cover potential future losses.

Most attorneys are acutely aware of legal malpractice, but there are many other risks to lawyers as employers. The SMIC can be used to protect the attorney and practice from employment liability and a variety of other risks that will vary based on your practice size, revenue, number of employees.  This protection can be of significant value and potentially very profitable to the SMIC if you manage risk well.  In some instances, the SMIC may even allow the client to reduce existing insurance, as the SMIC policy will provide additional coverage.

Some attorneys choose to use an SMIC to provide flexibility in using customized policies not easily found in the commercial space.  For example, you may desire a liability policy that would pay your legal fees (and allow full choice of attorney) but would not provide any benefit to creditors or claimants (what we call “Shallow Pockets” policies).  This prevents the client from appearing as a “Deep Pocket” (a prime lawsuit target).

The SMIC has the flexibility to add coverage for liabilities excluded by traditional general liability policies, such as wrongful termination, harassment, or even ADA violations. Given that the awards in these areas can be over $1 million per case, the SMIC can provide valuable protection here. To illustrate how the SMIC can be used, let’s examine the case study of Justin and Harry.

Case Study:  Justin and Harry Use SMICs

Justin and Harry are attorneys who each own successful practices.  Justin feels like he is paying too much for his firm’s malpractice and commercial liability insurance policies.  After our firm introduced Justin to an attorney and actuary who specialize in SMICs, he created one to issue policies that cover the least significant, most common legal malpractice and commercial liability claims (under $100,000 per occurrence). This significantly reduced his existing insurance premiums because he then had much higher deductibles for his third party insurance policies.

Justin believed he could reduce his insurance premiums to commercial insurance companies, implement successful risk management programs, reduce the claims of the practice, and reduce his overall payments and costs.  Ultimately, he hoped that the SMIC would help him increase profits.  He was right.  While a significant portion of the $1.5 million in total payments was paid out to cover claims, there was still over $1 million in his SMIC reserves after five years.

Harry had a different approach.  He established an SMIC to insure lesser risks that were not covered under commercial insurance. After five years, Harry’s SMIC paid limited claims.  At this point, most of the premiums are still growing as asset-protected reserves of the SMIC to be used to pay future claims. If there are very few future claims, the SMIC may become a profitable investment for Harry and his family.

Harry was also considering bringing younger partners in to his practice. He plans on using the SMIC as part of an exit strategy for his practice as well, with each new partner responsible for paying some of his buyout –from both the practice and the SMIC.

SMIC Compared to Self-Insuring: Because our society has become so litigious, many attorneys have been “self-insuring” against potential losses like the ones named above.  These lawyers have simply saved funds on an after tax basis to pay any expenses that may arise if a risk comes to fruition.  This is the proverbial “rainy day fund.”  While a rainy day fund may prove wise, the client would be better off using an SMIC to insure against risks.  That is because the formal payment of premiums to the SMIC may be tax-deductible to the practice.  Those funds in reserve of the insurance company enjoy the highest levels of asset protection (+4/+5), can be structured to grow outside the taxable estate, can be structured to layer into a practice exit strategy, and can generate very significant long term tax advantages as well.  None of these benefits are found with the traditional “rainy day fund.”

Avoiding Land Mines: It cannot be overstated – the SMIC structure must be properly created and maintained by insurance experts.  If not, all risk management, asset protection and tax benefits may be lost. For these reasons, using professionals who have expertise in establishing SMICs for clients is critical – especially the attorneys, actuaries and insurance managers who need to be involved.  While using such experts and a real SMIC structure may be more expensive than some of the cheaper alternatives being touted on the internet or at fly-by-night seminars, this is one area where “doing it right” is the only way to enjoy the SMIC’s benefits and be 100 percent compliant.

Who Can Afford an SMIC? Setting up an SMIC requires particular expertise, as explained above.  Thus, as might be expected, the law firms most experienced in these matters charge significant fees for both the creation and maintenance of SMICs. Set-up costs are typically $75,000-plus and annual maintenance costs can be around $5,000 per month.  While these fees are significant, they can be shared among a number of SMIC owners.  The SMIC’s potential risk management, tax, practice, estate planning, and asset protection benefits often combine to make it a very attractive option for very successful attorneys.  There is no better way for successful law practice owners to leverage their advisors than to work with them to create such a flexible and efficient planning tool as a small insurance company.

SMICs Can Be Great Tools for Certain Attorneys

Because successful attorneys have significant risks, are interested in better management of these risks, desire asset protection, want to build tax-favored wealth over the long term, and might enjoy learning new ways to fund practice buy-out and estate planning opportunities, there is a good reason to spend a little time reviewing the benefits of the SMIC as an important planning tool.

Special offer: To receive a free hard copy of Fortune Building for Business Owners and Entrepreneurs, please call 877-656-4362. Visit www.ojmbookstore.com and enter promotional code NTL24 for a free ebook download of Fortune Building for your Kindle or iPad.