Any industry can get so set in its ways that innovation passes us by. But as most of us know, or are learning, being different can be the difference-maker to your success. Dale Yahnke is no stranger to thinking outside of the box, spotting issues in the financial planning field early on. He followed his intuition, started his own wealth management firm, and now manages over $3billion as the largest fee-only Registered Investment Advisor headquartered in San Diego.
Dale has a background in economics and financial analysis and is the CEO and founder of Dowling and Yahnke Wealth Management. It’s easy to see how passionate he is about his business model and helping people manage their funds in a clear-cut and intelligent way.
In this episode, Dale shares with us what has made his firm successful over the years. From the very intentional way he built his business to how he acquired clients, he explains the how and why behind everything he did. He even gives detailed information on what services they provide to clients and advice for those who want to get into the wealth management field.
What You’ll Learn:
- Why the independent, fee-only/fiduciary model works so well.
- How Dale’s business grew to manage $200 million within 7 years of opening the doors.
- How to get clients without making cold calls.
- How Dale and his firm keep their billing methods simple and easy to understand.
- Why being selective with your clients will pay off big time in the long run.
- How to get into the wealth management field.
- Dale’s best tips for building and preserving wealth.
Resources for this Episode:
- Dale Yahnke: Twitter | LinkedIn | Bio
- Dowling & Yahnke
- Vanguard: Markets are Unpredictable
- Dissecting Anomalies with a Five-Factor Model
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Full Transcript: Dale Yahnke – Dowling & Yahnke – Building a Business and Creating Wealth That Lasts
Taylor: Welcome to the “Stay Wealthy San Diego” podcast. My guest on today’s show is Dale Yahnke. Dale is the CEO and Founding Partner at Dowling & Yahnke. Dowling & Yahnke is the largest fee-only wealth management firm headquartered here in San Diego managing over $3 billion for individuals, families, endowments, and foundations. Fun fact, this was Dale’s first ever podcast, and I was really excited that he agreed to come on the show. I actually hadn’t met Dale in person until just a few weeks ago. But like many in this profession, I’ve admired him and his firm for years.
Back in 1991, when most financial advisors were working for the big Wall Street firms, selling investment products for commissions, Dale noticed that this industry was just riddled with conflicts. And he was one of the early ones who saw an opportunity to start an independent fee-only firm where consumers could actually receive objective financial advice. Dale is a wealth of knowledge and he opens up in this episode about how he got into the business, how he and his partner built the firm from scratch, and then surprisingly, how they still managed to grow by over 80% when the market crashed in the early 2000s after the tech bubble burst. I truly enjoyed our conversation and I hope you do as well. With that introduction, here is my conversation with Dale Yahnke. Welcome, Dale Yahnke, to the “Stay Wealthy San Diego” podcast. Thank you for joining me.
Dale: Thank you, Taylor. It’s a pleasure to be with you.
Taylor: So, you and I just met in person for the first time a few weeks ago but I’ve been watching your firm for years. And I have to tell you this, and this is true, whenever I’m asked by someone what my goals are for my business, or where I want us to be in 10 or 20 years, my response has always been, “We’re gonna be the next Dowling & Yahnke in San Diego.”
Dale: Well, I’m honored, you know, and thanks for flattering me. It also makes me feel a little bit old when you say that. But, it’s also funny to say that we started the firm in 1991 and at the time, I had left a law firm. I had worked for a law firm as a financial analyst for six years and I thought there was a better way to give what I thought was more ethical financial advice in the industry. And, so we started our firm. Well, the biggest firm at the time in San Diego was a firm named Rice Hall James and they’re still around in some format. And remember, I’m competitive by nature and I put an RHJ on a piece of paper and put red concentric circles around it and said, I looked at my two partners at the time and I said, “This is what our goal ought to be, is to beat these guys. This is the biggest firm in San Diego. If we do a great job, that’s where we’ll be.” So, I’m glad you set your sights high and my hope is someday you’re successful and maybe you can kick our fanny in the future.
Taylor: Well, I should clarify, it is definitely not my goal to put you guys out of business and it has nothing to do with, you know, you guys being the largest fee-only wealth management firm here in town. But really because, I mean, I’ve always admired and continue to admire how you guys structure and run your business. You do things the right way. You don’t sell products. You know, you take the right approach to investing, and you’ve really equipped your firm with a really talented group of financial professionals. So, you know, it’s hard not to look up to you guys. I’m really excited to dive into your firm and share with everyone what you guys do and how you do it. So, let’s start at the beginning. So, you kinda mentioned, you didn’t start in financial services. You actually started in kinda the accounting and legal field as well. Is that correct?
Dale: That’s correct. My undergraduate degree was from Claremont McKenna College up in LA was in economics major, got my master’s in finance at San Diego State. The six years prior to starting the firm, I worked as a financial analyst at a law firm here in San Diego. At the time, its name was Gray Cary Ames & Frye. It’s now DLA Piper. And I was an oddball. I was an attorney professional at a law firm. I would build my time and work on cases. I was the kind of the financial go-to guy on big lawsuits and it just so turns out that the firm represented a couple of the major wirehouses.
And I had always been financed with personal finance investment field and so they asked me to set up the retirement account. They asked me to work on some of these wirehouse arbitration cases. I gave seminars to the attorneys on how to invest money, and, at the time, I was gonna…was hoping that I would end up in this field and that kinda gave me a path to get into the business of offering financial advice way back in the late 80s, early 90s. And the six years I spent at the law firm were hugely helpful in the start of my own business because, as you mentioned, I didn’t come from the brokerage industry. We didn’t have any assets when we started the firm. So, those are good news. Bad news thing, the bad news is we had no income when we started Mark Dowling, and me.
But the advantage was that, it was kind of a clean pallet and we could paint any picture we wanted and how we were gonna build the firm. And we didn’t come in with that bias from having worked in the wirehouse industry. And so, I think it gave us the freedom a little bit to create what we thought would be a great long term firm. And, you know, I’m sure we messed some things up. For the most part, I think we got it right and that’s what kinda led to our success.
Taylor: What were some of the major conflicts that you noticed in working for that law firm and representing these wirehouses, these big brokerage firms?
Dale: Well, I mean, I think people like to criticize brokers, you know, and I probably was the same way because I think a lot of people in the industry, you know, they would hire people who are really good at sales. And I think I resented the fact that this is a technical industry and you have a huge responsibility to take people’s life savings. But, what the firms really did was that, you know, in a really simple way is the wirehouse firms were primarily in the business of creating products and it made a lot of sense. They just hired really good sales people to sell those products. They weren’t necessarily looking for the best financial people, they were looking for the best sales people.
So, you know, I got off the fact that, you know, I shouldn’t really blame the brokers for doing what they were incented to do. You had to blame the wirehouses for creating incentives that weren’t necessarily in the client’s best interest. And, when you saw that kinda obvious conflict of interest, you know, and you could always have a broker say, “Well, it didn’t affect me but if you had different compensation systems where one product might generate an 8% commission at the time or one that might generate a 1% commission, you could always rationalize why the 8% one was better for the client.” But, it was just a huge conflict and it was not…people couldn’t act, I think, in an objective way to give advice under those circumstances.
So, you know, people would give me credit for being an entrepreneur. It was pretty obvious, in my mind, that it was just a better more ethical honorable model than what was out there and it was an opportunity, I think, it was big enough to drive a truck through. So, I don’t think I was any special entrepreneur. It was just pretty obvious. There was a better model and, you know, whereas people are kinda being forced to be fiduciaries now in this department of labor, I thought it was a competitive advantage 26 years ago to set a firm up as a fiduciary. And if I couldn’t explain that to clients and why I was better, I weren’t very smart.
Taylor: Well, it does kinda seem like you were a pioneer because, I mean, in 1991 when you guys launched, I mean, there weren’t a lot of fee-only registered investment advisors back then.
Dale: That’s correct. But, you know, given the alternative which is working for one of the big wirehouses where they would tell you what to do and what to sell and all those things, it was…there were enough independent firms out there. And frankly, not doing the things the way Mark and I wanted to do it, but the model was there for firms that were independent. They could give what I thought was maybe the wrong advice but at least it was objective and they weren’t selling stuff.
Taylor: So, let’s break that down a little bit because I think a lot of people that are listening to this maybe don’t understand the different ways that firms are structured. So, Dowling & Yahnke is a fee-only wealth management firm. You guys adhere to the fiduciary standard. You’re also known as a registered investment advisor. So, what do you guys do? How is that different than some of the bigger firms that exist and kind of expound on that.
Dale: Well, coming…you know, one advantage coming from kinda the accounting industry and the legal industry, what I liked about it was a lawyer would do work for a client and send the client a bill. And the client would get the bill and they could judge whether they liked the work or not, and they’d pay the bill or not pay the bill. But it was a pretty clean, you know, transparent transaction. And the industry, in my mind, hid a lot of the compensation that brokers got. So, when we started the firm, we wanted to be fee only. We sent our clients an invoice. That’s the only revenue that came into our firm, so we didn’t take soft dollars from brokerage houses, which are basically rebates on commissions and things like that. So, we wanted to keep it really clean and have people see what they are paying. And then we would offer investment management services. And Mark and I were both CFPs, was kind of an overlay of financial planning. We create an investment policy for clients. We would do retirement analysis for clients.
We didn’t do what I would call comprehensive planning at the time. We weren’t reviewing insurance policies although we could address those things, but it was more kind of retirement planning and investments. And given the fact that it was, you know, the two of us and it took us a couple of years before we hired a third that we were pretty…we were strapped to doing every administrative item we had to do was well work with clients, bring in clients an stuff. So we were pretty buried early on. And as we added people and stuff over the years, we’ve expanded some services and we’re all…we have probably 13 to 14 CFPs in the office but we have two fulltime financial planners that do nothing but financial planning. And so, over the years, we’ve expanded our services and I always made the comment that I try to hire people that were younger, smarter and better looking and frankly, it’s getting easier all the time to do that.
Taylor: So, in the beginning when you launched…I love the comparison to the legal field. You guys invoice your clients, you show them exactly what they were paying, and they could judge whether what they’re getting in return, you know, was valuable to them or not. And either continue to pay your fee or, you know, go somewhere else. So, obviously, you know, you guys grew pretty rapidly, so people had no problem paying your fee which meant they saw a ton of value in what you did. I think you guys started in ’91 with just a few million dollars under management and in, like, seven short years, you had already hit $200 million under management. And when I look at that number, I mean, there’s a lot of financial advisors that don’t ever manage $200 million in their entire career and you guys did it in seven years. So, what do you attribute to that rapid growth in such a short period of time?
Dale: That I picked my partner well and he is really smart and I have a big mouth. So, I joke a little bit but the…you know, I started the firm when I was 34 and my partner was 39. One, I think people have a hard time looking at a 22-year-old as smart as they may be and saying, “I trust you with my money.” Even at 34, people look and say, “You look kind of young. You know, what can you know?” The six years I spent at the law firm in hindsight were as good as six years that I spent in my business because even though I was raised in San Diego, I went to high school and college in LA and they brought me back into the community. I made great contacts. I had a lot of respect for lawyers at the law firm and it gave me an opportunity for six years to work really hard and impress them with what I knew and how hard I worked. And it would have been hard to replicate that by taking an attorney out to a lunch and trying to convince them we were the best.
So, these six years I spent at the law firm, and I’d like to think I was smart enough to know what I was doing, and maybe at the end I did. But the contacts I made at the law firm really paid off and it allowed me to grow rapidly early on because of those contacts and pretty much any professional services firm like a law firm or a big CPA firm. You know, they bring in 35 attorneys to start with, in five years, 80% of them would be off doing other things in the community. So, it was really, I kinda called it the dandelion marketing approach that these people would come in, choose a law firm, and then, poof, they were out in the wind. And a number of them stuck around in an industry in San Diego. And the contacts I made during those times really benefited me greatly early on in my career. And it really gave me a broad source of referrals that came in from a lot of different sources.
And to answer your question too, is there weren’t many people doing what we did. It’s much more competitive today and a lot of people are telling the same story. But 20 years ago, 25 years ago we were kind of the only ones that had the independent model and followed a more passive approach to managing money. And I was such a firm believer in it and, you know, blood vessels pop out of my forehead when I talk about it. So I think people realized I was passionate. And Mark and I both stressed education. So we both had CFPs. We both had CFAs. We both had master’s degrees. So if you compared credentials, if you looked at the transparency of the fee system, and frankly the growth rate we had and the success we were having, it kinda fed on itself. And, yeah, if you had told me when we started we’d have 200 million someday, I would have told you, you were crazy. So, the fact that it happened in six or seven short years was awesome, you know. And far beyond my wildest dreams when we started the business.
Taylor: Sure. And I like the story you shared with me the other day about how, you know, when you’d go in and meet prospective clients. I mean, you felt like….you would tell them that they needed you. I mean, you believed so much in the services that you were providing that, you know, it was almost like, you can’t afford not to hire me. And I think, you know, it really hit home for me because a lot of times, you know, I present something to a client, “Hey you can take it or leave it,” type thing, but I think that approach you took really says something about your success.
Dale: Well, I mean, it’s always, you know, and you and I talked about it, it’s always been kind of an educational thing. We’ve never…I never made a cold call. I was lucky, never had to make cold call. And, you know, I told somebody this morning in the office that I’ve only asked two people directly for their business. I won’t repeat who it is, who it was because they’re pretty big names but…and they were friends of mine. My job was really to convince people that there were a lot of people in this industry that were doing things that weren’t necessarily in the client’s best interest. And I felt passionate enough that a lot of people had been taken advantage of and I felt like we were the white knight a little bit. And people didn’t have to use us but at least they knew what they were getting. They were getting, you know, people that worked really hard to get the best credentials in the industry. They were gonna send you a bill, you were gonna be able to see that, and that was the only way we were gonna be compensated. And we were free to do whatever we thought was in our clients’ best interest, which I thought was so much better than what was in the market. You know, almost all the business we got in the first 5 to 10 years came from the wirehouses. Today much more of it is we’re competing against other, you know, better RIAs out there. But, at the time, I was so convinced that people were getting a raw deal that had made me passionate about going out and trying to, you know, it sounds corny, save the world. But clearly provide a better alternative in my mind by a large degree than what was out there in the marketplace at the time.
Taylor: Do you feel like there is still a big need for consumer education when you guys are meeting with prospective clients? Are you still spending the same amount of time educating them? Or are you finding that they are coming to you, you know, smarter than ever and already understanding the terms fiduciary and the term fee-only?
Dale: Well, it’s a spectrum. Clearly, I think people are better educated today than they were 25 years ago. I think there’s a long way to go. But, you know, I remember back in the day, you know, the only financial news program was really “Wall Street Week” and it came on Friday night, so I think it’s 6:00. And it was once a week and I was like, “Oh my God I wanna watch Louis Rukeyser on ‘Wall Street Week.'”
Today, there’s 24/7, you know, multiple financial stations and so people are better educated. Sometimes I think there’s too much information out there and that confuses people. But for the most part, people are smarter than they were 25 years ago. There’s more financial literacy out there but there’s still a long way to go and we still spend a lot of our time talking about the same concepts we did 25 years ago. Because to some extent, as much as information is out there there’s a percentage of prospects that just don’t like this stuff. Take my wife as an example. She’s an incredibly great emergency room nurse. She hates the stuff. Her job is a lot more important than mine but for people like that that need the help that don’t wanna do it themselves, that’s where we come in and I think really in an honorable way help those people.
Taylor: So, talk to me a little bit more, again…some people listening might not quite understand what you guys do. So who do you guys target? Who do you work with? What do you guys do for these people, the services you offer?
Dale: We work with high net-worth individuals. We define that we have a minimum account size of a million dollars. We’ll make exceptions if it’s a young person who is a great saver or, you know, we’ve picked up a couple young ballplayers that got drafted in the last major league baseball draft. And our job is to kinda put together a plan for ’em. We create an investment policy. We’ll do retirement analysis, not necessarily for a 22-year-old draftee but, you know, for a lot of our clients in their 50s, 60s, put together a retirement analysis for ’em, kinda map it out, and tell people, “You’re on a good path to be able to retire someday or, you know, it doesn’t matter how good we can invest your money if we don’t save more.”
So we try to put ’em on a path that gives them some visibility. And a lot of times people just…you can see the tension leaves their shoulders when we work with them and say, “Here’s kind of a plan. Here’s what you need to do. Here’s how much you need to save. By the way, you have two college educations to pay for. You might wanna pay for a wedding. But with everything you’re saving at this rate, you should be in good shape.” And, so we kinda map out a plan. It’s a financial plan. We help people with sole security. We help people with Medicare. We’ll help ’em with insurance issues. We help them with state planning issues. So, we’re really trying to be the quarterback and provide kind of a comprehensive financial planning look and then invest their money in what we think is the most effective low cost tax efficient way possible.
Taylor: So, you basically, take all the heavy lifting off their shoulders in terms of everything financially related in their household?
Dale: Yeah. It sounds corny. You try to give them financial peace of mind. You know, it sounds like an elevator speed but it really is to kind of take the load off from a relatively complex subject that many people don’t have the aptitude or the time or the emotional stability to deal with.
Taylor: Well, and I think sometimes, and you’ve kind of alluded to this, sometimes it’s as simple as just providing some clarity and organization around their financial life, you know, along with their families and their jobs and everything else, it’s just overwhelming to them. So just shed in some light on that and just show them where they are at today and whether or not they’re on track and if not, how do you get there? So I think just organizations and clarity sometimes, you know, takes a lot of out off people’s shoulders.
Dale: Absolutely. I think sometimes you’d be surprised at how sometimes what you consider really sophisticated, smart, well-educated people that don’t have a good feel for this stuff. And I think sometimes we make the assumption that people know more or are aware more of what they’ve got. I mean, we had a client recently who’s got a very successful business. She’s got 20 million in assets. That doesn’t count. The real estate she has is probably worth another $15 to $20 million. And she was concerned whether or not she had enough to retire. And, we went through a pretty complicated process to show her where she was. And she gave our financial planner a big hug and you could just see how relieved she was. And it’s really that relief of stress and peace of mind, that’s why we do what do. It was one of the more rewarding meetings we’ve had. And if you would ask me, “Oh my god, she’s got enough money. She must know she’s totally set and doesn’t have to worry about it,” that was a bad assumption on my part. And so I think you gotta be careful. When you assume things sometimes you get yourself in trouble.
Taylor: Yeah. Sometimes they just need an objective third party to just, you know, give them the green light.
Dale: It’s a validation to, you know, maybe she already knew but it made her feel really good that she…I think provide her with flexibility to do some things that she might not have otherwise known she could have done.
Taylor: And I think another big part of it too, you know, like you said, a lot of people are really, really smart. It’s not that they don’t understand this stuff but a lot of these people too just don’t have the time. You know, it’s like I could go file and do my own taxes but I would, you know, my time is valuable. I’d rather pay someone to do that. And so I have to imagine a lot of your clients feel that way as well.
Dale: Yeah. And it kinda goes back to the business when you deal with clients, you know, and I’ve been doing this a long time, when someone comes in who I would label as a prospect that may or may not use our firm. One thing you kinda look for and you get a really pretty good feel for it, is this person a delegator? You know, and they have these different, you know, [inaudible 0:20:45] they put on people, “Is it a delegator or is it a validator?” Someone just who you might wanna say, “Yeah, you’re doing good job and keep doing it.” But a delegator is truly someone who says, “You know what, I don’t wanna do this. I need the help but I need to find somebody I think is smart, that I think I can trust, that is ethical, and will always do the right thing.” And it was important for me early on to kinda build that trust up but with individual clients but also with the community, that if someone knew they were gonna deal with us, we would always try to do what we thought what was best for clients. Gets into the fiduciary rule and there’s a lot of legal definition and stuff. Just at broadest scope, I wanted people to know they could trust us and that we would always do the right thing.
And, you know, we get a lot of compliments and stuff and when people say that, that makes me feel at best because there are people that don’t think maybe we’re smart or we always…you know, they may disagree with us from an investment philosophy or some other thing that has to do with specifics on investments or something like that. I hope nobody would ever say they don’t do what’s right or they don’t do what they think is in the best interest to a client because that’s kind of always been our driver is you always put clients first. You always try to do the right thing. And Mark Dowling and I, when we started the firm really felt the same way. And we made some mistakes on how you run the business and things like that but it was always like well, if [inaudible 0:22:01] came in and they didn’t have any help, how would we want them to be treated? And we figured if we were great at what we did, the rest of the business would figure itself out. The firm was gonna be whatever the firm was gonna be size-wise. I just figured if we were great at what we did, the rest would take care of itself.
Taylor: What are some of the mistakes that you guys made early on and how did you overcome those and how did you pivot?
Dale: You know, I think early on, you know, from a fee schedule point of view, we had a bunch of breakpoints. And we didn’t think it through all that smart. We tried to simplify things later on, see other mistakes we might have made. You know, I think one mistake we didn’t make that would have been easy to make was when we first started the firm, we had very little revenue coming in. And Mark and I both lived well within our means and we had wives that worked so that gave us a little bit of flexibility. I think, one of the worst things you can do is take a client that you think may not be a good fit. The worst thing in the world, the one thing that makes this job not very fun is to have a client that you don’t fit with very well that causes problems.
So I think early on, if we did one thing right is we didn’t try to talk clients into using us that we didn’t think would be good clients. We were pretty selective. And if I think there was one great thing we did that was it. And I think that was a function of living well within our means and having some good savings, that we didn’t have to do that. So, not taking bad clients was one of the smartest things we did.
The fee schedule was kind of goofy. You know, we probably could have invested in some software earlier and we were too cheap. And then we didn’t get enough office space when we grew and in our second office, we just got marginally more space and we were all nervous about, you know, what if the market goes down? When are we getting new clients and stuff? So we rent our second office for two years, we outgrew it, and we scrambled to find new office space.
But I think the other thing we did right was we hired really, really good smart people. And when you are a relatively small firm and you hire somebody, you take a pretty big hit on income. But I never, you know, one thing I never viewed as, I never viewed hiring somebody as an increase in expense. I viewed it as an investment. And psychologically if you view it as an investment, you expect to get a rate of return on investment. And if we hired somebody really great, we knew that down the road at some point that person will pay off and it will allow us to do better and frankly be more profitable in the future.
Taylor: I think that’s a really good way to look at it. There’s too many people, too many firms in our industry that look at hiring financial advisors as people who are disposable. I know when I went through my first training program with a big wirehouse, I must have seen, I don’t know, 30, 40, 50 people, you know, come and go during my short time there. So it is nice to see you making that investment in this people and helping them grow within the firm.
Dale: Yeah. And it’s selfish on my part, you know, you wanna have a great firm and it’s hard when you are a big wirehouse and you kinda have these training programs. You can see a lot people go in and out of the company. It’s painful for us. You know, we grow attached to people. We wanna hire great people and there’s nothing you can patent or copyright in this business that gives you a competitive advantage. You just have to have better people.
And, you know, it kinda goes back to my sports days. I played small college basketball and, you know, one of my friend accused me of being a better recruiter than player and at first I was offended and frankly I was too stupid to realize that was a complement. And over the years I have really, you know, I love going out and finding what I think are really talented sharp people. The conversation you and I had last week, I love doing that. I love meeting young people who have the same passion I had and still have. And that’s what will make you great. And so as competitive as this business is, the cream will rise to the top. And if you’re really good at this, this is a great career, it’s a great profession, it’s competitive but there is plenty of room for great people.
Taylor: It really is. It’s an extremely rewarding profession, that’s for sure. So let’s dive into your investment philosophy a little bit. It’s definitely more popular these days and it probably was when you guys launched but talk to me a little bit about how Dowling & Yahnke manages investment portfolios for clients.
Dale: Yeah. I mean, this goes back to our philosophy, you know, when I was back at the law firm and this was probably 1985, 1986. So a little over 30 years ago, I was asked to set up the 401K Plan and I’d always been a big Jack Bogle fan, the Founder of Vanguard who…this sounds funny. He’s been around forever but in about 1986, he’d been around at Vanguard. It was about 12 years old at the time. But I had done enough study in market efficiency and if you look at the statistical bell curve on money managers, and I think one great thing is the mutual funds have to publish their performance. When you really studied the money management universe and aggregate, it sure looked like a kind of a normalized bell curve which looks a lot like if a monkey were picking socks. And so I was kind of intrigued by that and I did a lot of studying. And I kinda came to the conclusion that statistically it’s very hard to tell if somebody is skillful or lucky when they invest money.
But I did know that investing in the stock market had certain, you know, pros and cons. There was risk involved in it and there was the long term rates of return that would reward people for taking that risk. And so I determined pretty early on that I think the value we were gonna add to our clients was really more from a financial planning perspective on how to manage money and use our sale location to benefit them. You know, our goal is to keep fees well below 1% if we could do that and then keep transaction cost low, have low expenses on the type of the securities we use. And so we bought early on…we would build an individual stock, large cap portfolio that was set to neutral. So more of an index type approach on individual large cap stocks.
And then we were one of the first firms in the country to use Dimensional Fund Advisors and we had already started using Vanguard Funds. So DFA is a kissing cousin in my opinion to Vanguard. It’s passive. It’s low turnover. It’s tax managed. They just do some things called, you know, with factor investing that’s a little bit different than Vanguard but we think probably adds a little bit of value. But it was, again, a very much of a low turnover more passive type approach at a time when nobody was doing that. I mean, we were the only firm I think south of Los Angeles using DFA at the time. There were very few people using Vanguard at the time. So I think our clients got the benefit early on that had been with us for 25, 26, years of having really good performance.
And so we were oddballs. Almost all the firms out there were actively managing money and their value proposition to their clients was, “We can add value by picking stocks or picking funds,” and we didn’t think that was the case. So we, I think determined early on, I think one of our competitive advantage is Mark and I realized early on that this was a relationship business and not really a performance business. And that if we provided people market type returns in a really tax efficient way at low cost, we were gonna beat the vast majority of people out there doing active management and we could focus on doing those other things for clients that truly added value in the financial planning in the kind of peace of mind arena.
So early on there were really nobody managed the money the way we did that we knew of. Today it’s become very popular and there’s a lot of people using DFA, using Vanguard. And I think it’s a, you know, it’s a pat on the back a little bit that we were right 25 years ago. And I think our long-term clients did better than our competition but now there’s a lot people saying the same thing, investing money in a much what I think is a smarter way. So we have to continually do things to differentiate ourselves and show that we add value above and beyond what our competitors are doing, but it’s…they’re more nuanced now. Before it was very easy to explain the fiduciary in a passive model and why we thought it was better but now there’s, you know, there’s no shortage of RAs out there using similar strategies because, frankly, it works. And it’s a better ways to make money. So it’s kinda come full circle in the last 26 years.
Taylor: Sure. I mean, we’re one of the firms that also uses Dimensional Funds and I love what they do. You know, their strategies are backed by decades and decades of academic research by really, really smart people.
Can you give just kind of a basic example for everyone about what Dimensional Funds does? It’s a little bit different than Vanguard, maybe talk about how they kinda, you know, maybe try and capture premium in the market but doing so in a passive way.
Dale: Yeah, and so a lot of times, again, it’s nuanced a little bit passive versus indexing. So, in a lot of ways, you know, DFA is frankly an active managed fund because they’re not a pure index. But on the small cap side, for example, when a stock goes into the index many times, if it goes into Russell 2000 and Vanguard has a small cap fund that owns all 2,000 stocks, they have to own it when it goes in, they have to sell it when it goes out.
DFA isn’t slave to the index. They don’t necessarily have to buy it right when it goes in. They don’t have to sell it right when it goes out because prices get manipulated and tweaked a little bit on that. So they don’t follow these rigid rules. They’ll also do statistical sampling so they don’t have to own all 2,000 of the Russell 2,000. So by their own statistical sampling, they can buy when they feel it’s opportunistic. I had a client that was one of the larger shareholders at a time of WD40 and when the client passed away, they had a big block to sell, and that big block, if it sold on the open market in a relatively illiquid market, would have really cratered the price to sell a big block of it. And I talked to DFA and they said they were interested. It kinda fit in the matrix of what they were buying in the small cap arena. And they would buy it and they would buy it, you know, and they’d offer us a 5% discount to the current market price.
My client was kind of upset, why would we take a discount? And the answer was because we sold this in the big block, it would crater the price much more than 5%. And so DFA can show how much money they’ve saved investors by buying big blocks. And they’ve also done studies as you referenced, you know, going back a long time ago. So, you know, value stocks over the long won’t provide maybe a higher rate of return than gross stocks. Small cap provides a higher rate of return than large cap.
Stocks that have earnings momentum typically carry that momentum going forward and do a little bit better than stocks that don’t have that earnings momentum. So it’s called factor investing and other factors that have persisted over a long period of time. If they do turns of research, they’re very academically based. It basically, came from the research that Fama and French did out of University of Chicago, French at Dartmouth. And the And the research they did showed that there were some factors out there that might add a little bit more value above and beyond just the pure index.
And so the returns have been very similar to Vanguard’s, we think slightly better on an after-fee basis. And their fee structure, although slightly higher than Vanguard’s, just went the lowest in the industry. So both Vanguard and DFA have lower friction on the portfolio. So DFA has been very innovative. Like you said, they’re exceptionally a bright group of people and you kind of walk away scratching your head hoping you understood, you know, half of what they talked about. But there’s mountains of research behind what they’ve done. But again, it’s a similar philosophy to a pure index, just some things that we think have added a little bit of value over time.
Taylor: One thing I’ll add too, and that was a really good summary of what they do, DFA funds are not available to the general public, right? And we all know that retail investors can be quite emotional about their money. They often buy high and sell low. And so dimensional funds, in order to purchase a dimensional mutual fund, you have to go through an approved advisor. Dowling & Yahnke is an approved advisor, and really your job is to kinda hold your client’s hand and make sure that they don’t make those emotional decisions with their investments and they hang tight through tough times. When the general public gets their hands on mutual funds and they liquidate things, they sell their mutual funds as the market is going down, that can hurt other people in the mutual fund and hinder performance. Would you agree with that?
Dale: Yeah, absolutely. And, you know, if you track the individual investors, you know, there’s kind of a thought that individual investors react emotionally to markets. And they generally don’t make good investors because they tend to buy high and sell when things go bad. So a prime example, you don’t have to go that far back to 2008 when you look at what happened to the markets. And SMP was down 37% in 2008 and it was down probably another 15% the first 10 weeks of 2009. So when you look at the vast majority of fund flows in the industry, flows were going out of stock funds and into bond funds. And DFA representatives were in our office and we asked them to put together a Whittle analysis. “You know, what were your cash flows during the latter part of 2008 and the early part of 2009?” And they came back and if you look at the flows in the DFA funds, they were exact opposite of what was in the industry. And what that means is money was flowing in the stock funds at the end of ’08 and ’09, and at the bond funds as advisors as you mentioned it, you know, clients can only invest through advisors, it was the exact opposite of what you would expect. So I would say there is a lot of financial advisors that frankly weren’t a lot smarter or did things any differently than the common retail investor.
But if you look at DFA advisors, DFA advisors were doing exactly the opposite and doing in hindsight what we think is right which was buying when things were down. And selling as things go up. So the DFA flow of funds was the exact opposite of what was in the industry at the time, which I think is a testament to having the retail clients that would hire advisors that used DFA funds. I think, in general, they got better advice than the typical advisor or the typical retail investor when you look at those flow of funds. It was very interesting. But DFA had inflows in 2008 and 2009 into stock funds, which I don’t think anybody else in the industry had, even Vanguard, because Vanguard deals directly with retail investors. I think the general retail investor of vanguard is probably smarter than the average retail investor out there. But DFA had great flow data which showed, I think, the value of the DFA advisors.
Taylor: Well, we better get off this DFA topic because we’re starting to validate the cold stereotype that many DFA advisors end up getting because we believe in it so much. But I think to really summarize you guys as investment strategy and the right way to invest, I mean, fees matter, right? Vanguard did a study that said, “Fees within a portfolio are the best predictor of future returns.” If you did nothing else but pick low cost funds, you’re gonna do better than, you know, buying a high cost fund. And I think, you know, that’s where the best, you know, decisions that you can make on building a portfolio and something that you guys have adopted for a really long now.
Dale: Yeah, we think so. I mean, and again, you have to be careful. It’s not just the expense ratio of the funds, there’s trading cost and spreads. And so when you look at it, we’re firm believers in low cost, low turnover, tax efficiency because those are things that we can control. We’re not good at predicting which way the market is gonna go. And I have to give a plug for my partner, Mark Dowling. We got a letter from David Booth, who’s one of the founders of DFA. Mark is the one who did the research and found those guys way back when we started our firm and Mark had already developed a relationship. So we were one of the very early adopters of it and I give my partner credit for that.
And I think part of that testament is the fact that we worked really hard to be good at what we do. And so, you know, people look at a CFA designation, they have no idea what it means and stuff. We had a commitment to our clients that if we were gonna do this and if we were gonna charge them what we were gonna charge them, we better be damn good at what we’re doing. And so I give my partner full credit for doing the research and really always being out in the market place center. And their new innovative ideas that we think makes sense. And we kissed a lot of frogs to find a prince. And so it requires a lot of work and you constantly stay curious and ask what’s going on.
Taylor: Is it safe to say that if a potential client came to you, guys, and wanted to hire you to build a portfolio to beat the market that that would not be a good fit for you?
Dale: That would be accurate. You know, and including, you know, I tell the story. I had a client that came and they had $5 million and we were chatting a little bit. And he was in his early 70s and his primary purpose was money as he liked to play the ponies at Del Mar. And so he was a very gregarious funny guy. And we chat a little bit. And I like to ask probing questions and so one of my questions was what did you do in 2008? Because he was kind of emotional, I could tell. You know, and that’s always a little bit of a warning sign if you’re an emotional investor. It doesn’t always board well and he kinda looked at me. He goes, “Well, I fired my advisor.” And I said, “Why did you fire him?” And he goes, “Because he didn’t get me out of the market.” And I said, “Well, I not only would have not got you out of the market, I would have been buying stocks during that downturn. So if you fired your advisor, you probably would have fired me so this probably isn’t a good fit.”
And I got the nicest letter from him about five days later saying, “I’m gonna continue to manage my own money but I really appreciated your honesty.” It gets back to he would have been a really bad client and as nice a person as he was, it wouldn’t have been a good fit. So for people that are looking for someone who can possibly time the market or beat the market consistently over time, it’s not gonna be a good fit because we don’t think people…you’re not gonna find people who can do that. And if that’s your goal, then I think it’s probably gonna be a futile search. But, you know, some people think they can do it, and God bless them. I hope they can, but that’s not what we’re in the market for.
Taylor: So some people might say that, and maybe I think you would agree that your portfolios are kinda boring, right? I mean, you’re trying to get, you know, market returns. What do you say to clients when they want something a little bit more exciting? They’re interested in the hedge fund or private equity or, you know, picking some individual stocks. What do you say to clients when they come to you with things like that?
Dale: I mean, first I try to explain why we do what we do. And I’ve called ourselves boring on many occasions but it’s very much of a tortoise versus hare type approach. And the people who at least over the long period of time including Warren Buffet is more of a buying and hold type person, that the best investors are ones that are more patient. I hate to sound sexist but a lot of times women make better investors than men because they tend to be more patient. So I explain why we do what we do and why I’m not a fan of most alternative investments because of high fee schedules and high turnover and tax inefficiency. I have those kind of conversations and if people still wanna do that at the end, I wish them the best of luck and just tell them, you know, “We’re not the best ones to do that and I can’t refer you to anybody who does do it because it’s not what I believe in.”
But there are plenty of people offering those services out there and if people wanna search that out, there’s no shortage of people. Go and Google hedge funds or private equity or high turnover and you’ll find people that say that they can do it. You know, if they could, I think they’d be a lot more famous than, you know, Warren Buffet or somebody else. And so it’s one of those things, we don’t seek out clients like that. And if I meet someone who’s like that, I’ll try to talk him out of it because I think they’re wrong. But, you know, if everybody thought like I did, it’d be a pretty boring world.
Taylor: Yeah, and it can be challenging to change someone, behavior and approach to investing sometimes too. That could be a losing battle. So there’s been a lot of talk in the last few years about Robo-advisors, and for those that aren’t familiar with the term Robo-advisors are essentially an online financial advisor that charge a relatively low fee to manage your investments. But instead of a human being driving the investment decisions, your portfolio is managed by a computer, an algorithm. So if you have a question about your account, you know, you’re calling an 800 number instead of a dedicated financial professional who knows and understands your situation. Anyhow, we’ve seen a significant, you know, amount of attention recently. What’s your take on Robo-advisors? Do you have people asking you about them? Do you see them as a threat? Do they help fill a gap in the industry?
Dale: I view them kind of as a technology play. You know, I think, you know, in theory, what they’re trying to do is not bad. I’ve had a feeling, you know, since we started out firm that this is a relationship business. And if we can’t have a better relationship than a computer, you’ve got something wrong with your relationship business. I think, fundamentally, the way that you invest money, is a smarter way, it’s more of an index type approach that I’ve always been a fan of. But I think, again, a lot of it is really good technology. It gives, frankly, younger people that want more, may be hands-on or be able to see things. It’s been a very good kind of a technology approach.
But, you know, from a pure investment perspective, it’s not a whole lot different than going to Vanguard and buying a life strategy fund where they automatically balance. So it’s an old technology play that they will rebalance and create a good portfolio for you. But it’s kind of a…it’s more wrote. It’s not someone to hold your hand. And a lot of people, frankly, need some hand holding and some planning. And that’s difficult to get from a computer. So I don’t view Robo-advisor as particularly great competition when it comes to relationship business because that’s what we thrive on and that’s where our value add is. But I do think it forces us to upgrade our technology because if we’re way behind from a technology point of view based on what a lot of millennials can get from Robo-advisor, there’s gonna be appeal and they’re gonna take part of the market away. And they will continue to have some level of the market.
But I think that’s maybe some clients that we probably would have been interested in the first place. There will be enough people that want the handholding or the face-to-face meetings or at least on Skype or some other type of technology platform where there’s actually a human being behind that can give them advice. And listen to some of their problems. And you know, I’ve got a gentleman in my office who has his master’s degree from Harvard. And one day, he said, “I’d be better off getting my degree in psychology.” So, you’re not gonna get that from Robo-advisor and hopefully we have the empathy to listen to clients and kind of read through some of what they’re saying. And maybe, you know, are able to handle their portfolio and their financial lives better because we listen and understand what they’re really asking for.
Taylor: Yeah, that’d be really interesting to see, you know. These Robo-advisors have really gained popularity during a strong bull market. It’ll be really interesting to see how their investors behave if and when, you know, we see a market correction or, you know, a very large downturn in the market. If they’re able to hold those portfolios without somebody guiding them.
Dale: Some will, some won’t. I mean, you have those people that’ll see it and, you know, whenever we have a down market, I love it when people say, “What’s different this time?” It’s always different. There’s always a different reason why you have these market corrections. They can be a tech bubble. It can be 9/11. It can be a financial crisis. It can be a flash crash. But, you know, there are some people that’ll say it’s different. They’ll panic and they’ll get out of the market and that’s when an advisor comes in trying to keep people, you know, stick with it.
And we had a couple of clients back in 2008, early 2009. They ended up bailing on the market. Now, it was a very small percentage. We had some clients call and say, “Can you reduce my equity exposure?” And I said, “Yes, but when the market turns around, I don’t want you going back up because, you know, pick your poise and pick the risk profile and stick with it.”
So, yeah, I think if we really earned our money, it was back in 2008 or back in 1999 when you had the tech bubble. I always tell people we got fired more times in 1999 because we had that boring approach. We didn’t jump on a tech bandwagon. And that bull market lasted from ’95 to ’99, way longer than it was flat. But when it did turn, it was kinda ugly and people that loaded up on tech stocks, you know, paid the price for it. And we didn’t let people do that. And for people that wanted to leave, we helped them move their money because we didn’t believe that was the right way to do things. But back in ’99, I got called grandma a few times for being boring and conservative. And you know, if that’s the case, then so be it. I think it was the right thing to do and we weren’t gonna pander or change what we did to accommodate people that wanted to jump on that bandwagon.
Taylor: And correct me if I’m wrong, but you guys grew pretty substantially through that bear market. I think you grew north of 70% during that time period.
Dale: Yeah, we grew upwards 80% during that time period. And if I look back in a 26-year career, those are probably three of my best years, 2000 to 2002. The SMP was down 9/11 and 22 those three years and we grew 80%. And I chuckled and laughed at, you know, we grew because we lost less money than most people now. Market was down, we lost a little bit, but we did much better than people that already jumped on the bandwagon and loaded up on tech stocks. And the Nasdaq was down around 80% and a lot of people took massive losses like that.
And, you know, I think people have recognized the value after that downturn. And there’s many clients that we’ve lost in ’99 that wanted to jump on the tech bandwagon, or probably a few that stuck with us, they were probably thinking, “God, these dummies. I wish they had been more aggressive.” That when the market did turn, I think they were happy.
Taylor: That’s incredible. So Dowling & Yahnke is the largest fee-only wealth management firm headquartered here in San Diego. You guys manage over, I think, three and a half billion dollars. It’s a billion with a B. You’ve had, and continue to have tremendous success. What’s next for you and the firm? Where do you see yourself and the firm in 5, 10, 15 years from now?
Dale: Well, you know, we’re the biggest in what’s a remarkably fragmented business here in San Diego. I feel like I’m the luckiest person in the world to have been part of this great industry. I’ve loved what I’ve done. It’s allowed me to raise my family. I think I’ve helped a lot of people over the years. I’ve developed some great friendships and relationships. I still have a ton of energy. I’m the second oldest in the office now whereas before, I looked really young and people wondered what I knew. Now, I got, you know, white hair. It’s grey. And people are asking when I’m gonna retire. I don’t have any plans. I’d like us to continue to be great at what we do.
What this business will look like in 5 or 10 years, I’m not really sure. You know, we have our ideas and we try to position ourselves just like the old rescue line, you know, skate to where the park is gonna be, not where it is. And so we continually look at ways that we can be better at what we do for our clients. We wouldn’t be here without our clients. So clients come first, employees come second, and partners come third. So it’s all about how do we add value to our clients and how do we help people? And we’ve been pretty successful. We’re bringing in a lot of great young people in the last three or four years. So as a firm, we’ve gotten younger and as I mentioned before, it’s getting easier to hire people smarter that…you know, we’re embracing technology as much as we can. We’re making significant investments in software.
But at the very core, it’s a people business and we wanna continue to be…I have a high level of empathy, continue to pursue the highest educational credentials we can get. And offer value to our clients. And so my hope is in 5 or 10 years, you know, whether we’re the biggest or not, and frankly, it was never the goal but it was always to be the best at what we do. And there’s a lot of really good competitors out there. I hope that we’re still at the top. We’re in the top group of firms that people say really nice things about. And the people say, “You guys have a great reputation, you know, of being really smart and really ethical.” That’s all I can ask. And if we can do that, then I think the rest will take care of itself.
Taylor: Great. What advice would you give to a young person out of school or even someone who’s had a career change that wants to work in wealth management?
Dale: Well, I think, you know, back a long time ago, 20, 25 years ago, you know, this business was about selling products and people could make a lot of money doing it. And so for people that got into the business for the sole purpose of making money, you could do it, but to me, that was kind of an impure way if I can be judgmental about how people got into the business. You know, I love mentoring young people. I had a mentor at the law firm. His name was Ted Cranston [SP]. He was a trust and state’s attorney and one of my favorite people in the world and was hugely helpful to me. And I never saw Ted turn away a young person if they wanted to talk. And so I try to mentor young people and I try to honor Ted in doing that. And my goal is always to give people advice that maybe I didn’t have when I was starting off in the business and give them a little bit of direction.
If it’s a young person, you know, there aren’t many people that wanna get advice from a 25-year-old, but you know what? Twenty-five-year-olds are smart. They’re good test takers. I think that you should have responsibility getting the best credentials in the industry, whether it’s a CPA, CFA, CFP, CLU, whatever it might be. Put as many arrows in your quiver as you can from an educational point of view. You know, some clients don’t care about that stuff. I do. But when I look at young people, I want people who really wanna be great at what they’re doing. So get as smart as you can. Get a specialty, you know, corporate benefits, or estate planning, or taxes, you know, get really good at something.
And so when you then get a tiny bit of gray hair or start to lose a little bit and you may be in your late 20s, early 30s, mid 30s, that you have a really great educational background. And then it’s just gonna be experience you need to get. If someone wants to get in the business and is like, “Well, I don’t have any experience here. You know, what do you think I should do?” You gotta have some ability to work with clients fairly quickly, get the education.
So people come in to me and say, “You know, I’m thinking about making a career change.” One thing I look at, “Well, have you done anything yet?” “Yeah, I enrolled in the CFP program and I’m halfway through.” I look at that and go, man that’s someone who shows a little bit of initiative and spend a little bit of money on their own. That shows a commitment to me as opposed to someone says, “Oh, I’d love to work with you and if you hire me, then I’ll do those things.” I much prefer the person who’s more of a self-starter that’s done that. So my advice would be get a great education and it does two things. It makes you smart in the industry and to me, it shows a commitment that you’re really serious about it.
Taylor: That’s great. So this is a podcast aimed at San Diego residents. I’ve got two questions left here. My second to last question is what’s your favorite up and coming company here in San Diego that nobody knows about or maybe even like a hidden gym, your favorite place to go here in San Diego that maybe often gets overlooked.
Dale: Oh, my gosh. So I’ll make fun of myself a little bit. I’m absolutely a creature habit. My executive assistant here laughs at me all the time. And so it’s kinda boring. I eat at Sammy’s like three days a week. So she had a little plaque made, you know, “Sammy’s favorite client.” One day I got to Sammy’s and this thing is sitting on the table. By the way, I know which table number I usually sit at. And this thing sitting there going like, “Sammy’s favorite client.” I’m going,” Oh, my God, that was really nice of them to do that.” And then I realized it was my executive assistant playing a joke on me.
So I’m boring. Sammy’s is my favorite place to go eat. And so that’s nothing exciting or new but kinda boring. And there’s a new restaurant called Bushfire up on the west side of the 5 Freeway off Del Mar Heights Road. That’s a really healthy place to eat. I’ve recently from all my basketball and I play a dumb game called squash. I wore my hip out. I got my hip replaced back in February and the doctor said, “This will last longer if you don’t put as much weight on it.” And I think that was his way of calling me fat. So I’ve tried to be a little bit healthier and eat a little bit better certainly since my surgery back in February. But I was back in a couple of weeks and I’m back out running around. So technology is a great thing.
Taylor: Too funny. Sammy’s Woodfired Pizza. Yeah, we grew up eating there, chicken chop salad. So like you, I’m a financial planner. The name of this podcast is “Stay Wealthy San Diego.” So my last question is what’s your best tip for people for building and preserving wealth? And this doesn’t need to be a recommendation. It can be as general as you’d like it to be. But what’s your best tip for building and preserving wealth?
Dale: You know, my best tip, my best advice is, and I give this to clients sometimes and I think they accuse me of maybe lecturing once in a while. But I truly care about my clients. Money for money sake is nothing. I love the impact money has and the freedom it gives you to do the things you wanna do. So my best advice is, you know, you wanna be smart. You wanna hire the right person, you wanna invest your money well. But what it really comes down to is you have to live within your means.
And so I was talking to somebody about this earlier today about, you know, delayed gratification. And I joked that if I knew how successful I was gonna be in my 50s, I would have had a lot more fun in my 20s. But I say that jokingly because I’ve always been a saver. I’ve always been really cautious and try to look at, you know, what can go wrong? What can derail a plan? And so, you know, live within your means. And don’t let money drive everything. Let money give you the freedom. And I always have this thing I like to tell people. At some point, I’d like you to be able to work because you wanna work not because you have to work. And so for people…you know, the idea of going to work and hating your job is something that is…I hate that idea.
The great thing for me, since we’ve had these business is I’ve never done clockwatching for the sake of getting out of here. I’ve loved what I’ve done and I’ve worked plenty of weekends or I’ve worked nights but I know I’m doing it for myself and my family. So I feel really lucky and fortunate to have found something that when I love to do and chose that I don’t like at the clock, and I can, you know, I’ve done this long enough and I’ve had enough success. I could have retired 5 or 10 years ago and been in really good shape even in my conservative, you know, paranoid way. I work because I like working and I really enjoy it. And many of the young people that are at the firm here are people that I’ve helped recruit over the years and stuff. I get such a kick out of coming and seeing them be successful, and I love growing the firm because the more we grow the firm, the more opportunities we provide.
And we have so many young people here who have just…we brought them in and they were kind of shy and stuff. And they just exploded and excelled. And they are the ones that make our firm really a great firm. So, you know, that’s a long worded answer to your question but live within your means. And if you can find something you really love doing, again, work because you wanna work. And the financial side of it just gives you the freedom to do the things you wanna do.
Taylor: I think that’s a fantastic answer and a great place to end. I really, really appreciate your time and support and for coming on this podcast. Thank you. Thank you very much for opening up and sharing your wisdom with us.
Dale: Well, thanks Taylor. I love meeting young people in this industry that care as much as I do and stuff. And I was very impressed in our meeting last week. And frankly, if there are people like you out there doing what you do, this town will be well served. And this industry really didn’t exist 25 years ago. And the one thing that scares me is when I meet people as talented as you, that shows me that the competitions is gonna be tough. And if we don’t up our game, we’re gonna have our lunch eaten. And so thanks for having me on and it’s my first podcast, and it’s been an honor to do with you.
Taylor: That’s great. It really means a lot. Thanks again, Dale.
Dale: All right. Take care.
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