Wednesday, July 22, 2009

Latest Dad's Divorce post: Rules for families with children

Dan Danford does a regular podcast for Dad's Divorce on money issues for those in the midst of divorce, but much of the time, his advice works for anyone who needs sound financial advice.

The latest installment can be found here:

Tuesday, July 21, 2009

Smart Money highlights advisors who offer counseling

Marie Swift asked for my comments on this article, and I posted them on her blog this morning. Here's what I posted, and a link to the article. If you're interested in keeping up with best practices in financial management, Marie's blog is helpful. You can find it here.

It's an interesting discussion. Clearly, more knowledge about clients can be an aid to helping them. But it might be a hindrance as well. Knowing that a client is neurotic about money doesn't really change the best financial solution for them. You might devise some strategies that keep them more comfortable, but it probably won't grow them more money for retirement. Understanding their fears and concerns might help communicate or educate them (good!), but it's far from certain that that yields tangible results.

I'm just unclear about the benefits of this. Nick Murray says that 80% of financial success is behavioral, and I think that's likely true. But I'm not sure how all this fits together to benefit the client. I'd say it has as much to do with the advisor's personality as the client's.

Here's the article from Smart Money:

Financial Planning Gets Personal

More financial advisers are moving beyond money matters and playing counselor with their clients. Not everyone thinks that's a good idea.

Monday, July 20, 2009

Everyone needs a will

On Mondays, we post a question and answer from a reader. This week's question is about estate planning for someone who is young and single. If you have a question, post it in the comments section.

QUESTION: I am 30 and single. I have a home, with a mortgage and a car with a car payment. I do not have any children. Do I have to have a will? What about life insurance? If so, who should I leave my estate to? My parents?

ANSWER: Estate planning is helpful for anyone. It becomes more complex with a family and wealth. Your situation is fairly simple right now, and the estate planning solutions are, too. First, if you die without a will, state statutes will decide who gets your estate. Basically, a court will supervise the sale of your stuff, pay off any outstanding debts, then pass along the remainder as specified by state law. Probably to your parents.
With a will, the process is similar, but you could specify other beneficiaries if you want. A friend, perhaps, or charities of your choice. You can also nominate who you'd like to oversee the liquidation process (called an executor or personal representative).

Life insurance is different. The beneficiary of a life insurance policy is determined by contract. So, you decide who gets the money in event of your death when you buy the contract, and you can change it in the future. That money will be paid to them directly upon your death. Importantly, the main reason to have a life insurance policy is to care for people who are financially hurt by your death. If you have no children, and your parents don't need assistance, you probably don't need life insurance.

Today, your needs are simple, but they aren't likely to stay that way. As your assets and responsibilities grow, so will your estate planning needs. You should revisit this issues every few years and as life circumstance changes. When you marry of have children, I'd advise a visit with an attorney.

Friday, July 17, 2009

How to compute your net worth

By Dan Danford

A family statement of net worth (balance sheet) is a powerful financial tool. A statement is easy to compute, updated quickly, and offers a great way to evaluate decisions.

First, to build your family’s statement, start by listing the honest resale value of all things you own. List all houses, cars, boats, household goods (the national average for families is around $30,000), collectibles, and anything else of value. Next, add financial assets. Include bank, brokerage, or mutual fund accounts. Include IRA accounts or retirement plans from work. Include the cash surrender value of insurance policies. In short, this list should include everything you own with the current value.

The second half is -- hopefully -- a much shorter list. Here, list everything you owe with today’s payoff value. Start with the mortgage. Then, add any car, student, or consumer loans. List the balances on credit cards or money you owe family members. Don’t forget loans on insurance policies or money owed to a company retirement plan.

Simply, Family Net Worth (FNW) is the difference between what you own and what you owe. It’s the liquidation value of your financial life. If you sold and liquidated everything you own and paid off all debts, what would be left in your wallet?

Knowing this number helps you financially. It’s a running tally of financial progress. Update the numbers occasionally and see if your FNW is rising or falling. A rising number indicates progress; one that slips requires attention. Of course, there are life stages where FNW is expected to fall -- college years for children is one.)

It’s also a spectacular decision-making tool. Say you’re trying to decide whether to replace a car or start a mutual fund account. Consider what will happen to your FNW five years from now. Estimate the future worth of the car and the mutual fund in 2004. Does this help decide? Similar processes can help decide between two cars (which will have better resale value?) and houses (ditto).

Not every family decision is reached on the basis of finance. But, finance should be considered as part of any major decision. Understanding FNW helps all of us make better choices.

Friday, July 10, 2009

Don't put all of your money in one investment

By Dan Danford

You need fish. For the sake of illustration, let’s pretend you own a seafood restaurant and you need fresh fish every single day. In a sense, your business – your very livelihood – depends on the fisherman’s ability to catch fish daily in the varieties and quantities you need.

Now, nothing can be easier or cheaper than using just one fisherman. He ventures out each morning, returns around noon, and you meet him at the dock when he arrives. The fish are fresh and his schedule predictable. Besides that, Mr. Fisherman is delighted to sign a contract giving you preferred prices.

There’s only one small catch (you’ve already spotted it, haven’t you?). Sometimes the fish don’t bite. Mr. Fisherman meets you at the dock with an empty creel. Franticly, you race from boat to boat to boat seeking tonight’s red snapper. Too late, you discover that today’s bay is empty. The fish moved on during the night. Perhaps tomorrow will be better.

Tomorrow? What about today? There’s an anniversary party … and a business meeting … lunch customers already waiting … well, you get the picture. Tomorrow is too late, and crisis is a bad time to learn anything.

Looking back, one lesson is pretty clear. You can’t rely on one fisherman or just one bay. Instead, you need several (maybe dozens) of fisherman working with a variety of bays, baits, and boats. Good fisherman, all, but each subject to the ocean’s movement and whims. When one fails, another succeeds. Through variety, you develop a reliable source of fish for your restaurant. And, a safety net for your livelihood.

Mutual funds and investment managers are a lot like those fishermen. By design, they use certain techniques in certain waters. They are experts at catching fish, but only when fish in their part of the bay are biting. Otherwise, they troll for the day when fish return. That’s their job and they do it rather well.

My job is to develop reliable sources of growth. We build a network of solid managers operating in a variety of strategic environments – a portfolio. We diversify to include different kinds of investments and different kinds of managers. Through diversity, we build a safety net for the future.

Monday, July 6, 2009

How to take advantage of the real estate market

On Mondays, we post questions from our readers and answers from Dan Danford of the Family Investment Center. If you'd like to ask a question, please post it in the comments or send it to us on Twitter @family_finances.

QUESTION: I am thinking of taking advantage of the incentive to buy a home that’s being offered this year. But it seems that the terms for lending have very much changed. What should someone with good credit expect when they go to buy a house? How much down payment is typical now? What other terms should you expect?

ANSWER: Mortgage terms are very fluid right now. Thirty year rates are around five percent and you might do a little better with a fifteen year mortgage or exceptional credit. Usual down payments are 20 percent, but you may do better with an FHA or VA guarantee. Things change very quickly as the credit markets and economy evolve from the earlier meltdown.

Remember this. Banks are looking for good loans. They make their profits from loaning money and the past several years haven't been very profitable for them. If you have good jobs, good credit, and a history of paying off the loans you take, bankers are anxious to meet you. House sales are picking up some, but there are still a lot of Realtor signs in yards. The government will give you a $8,000 tax credit for buying this year, too (first-time home buyers, only). It's a great time to buy and a great time to borrow - if you qualify.

Bookmark a decent lending site like and watch as rates change. Find a good local lender to help, and start shopping. This could be the housing bargain time of our lives!

Jason White makes Business Week

Our very own Jason White, ph.D., made Business Week. The magazine interviewed Jason, 41, about how he's saving for retirement.

We're delighted to see him featured. He's truly an asset to our firm and to his students at Northwest Missouri State University in Maryville, Mo.

Here's a link to his story:

Sunday, July 5, 2009

The true meaning of financial freedom

By Dan Danford

Financial freedom isn't what most folks think. Most people think about debt, but I find that too narrow. Debt can be a problem for some people, and freeing those folks from debt can be a worthy goal (think Dave Ramsey!).
My definition is different. Freedom means options. Simply, to lack freedom means that you lack financial options. When the refrigerator breaks or the lawn mower dies, what are your options? Do you have to rely on a credit card, or can you write a check to pay? Maybe a department store is running a sale, and they offer additional discount for opening a credit account with them; is your credit good enough to make an instant application? It might be worth 10 to 20 percent off.
I know it's an American Dream to pay off the mortgage, but I like this even better: I could pay off my mortgage if I wanted, but I choose to keep it because it's a real good deal. Maybe, I have a large portfolio growing at 8 percent a year, and I don't want to use it to pay off a 5 percent mortgage. That's financial freedom.
This extends to other arenas, too. Say your job sucks. Education creates options. With a quality education, you don't have to stay with a job that sucks, you can find a better one. Or, maybe, you choose to stay with a lower-paying job because you like the hours, or the people, or the quality of life. Having a nice savings account creates that luxury.
I've been helping people financially for almost 30 years. Flexibility is a key factor in financial freedom. Flexibility means that you keep options open. You can make changes when you want and you have the ability to adjust to new and better things when they come along. When meeting with high school or college students, I always emphasize the same thing. More money means more freedom. It's as true at 50 as it is at 18.

Thursday, July 2, 2009

Referrals are the ultimate compliment

By Dan Danford

We received another great compliment last week. Well, actually, it started several months ago, but it culminated last week when we signed some papers.
Our business is fueled by referrals. Various studies show that investment management services are chosen on the basis of friendship. Not necessarily friendship with the manager, but people generally choose managers recommended by friends and associates. Even among the wealthiest households, these informal referrals carry tremendous impact.
Referrals are even more important for me because I don’t like to sell. I’m at my best when someone approaches me to help solve a problem or organize investments. I don’t persuade people to buy our services. Instead, I show what we do and they decide whether I can help. If I can, great. If not, that’s okay, too.
Any referral is a nice compliment. It’s one person telling another that they know me, they like me, and – most importantly – they trust me. In a sense, it is a Stamp of Approval on my professional competence issued by the very best source: a trusted friend or respected colleague.
The ultimate compliment is a referral to someone’s parent. As adults, most of us worry about our parents. We want to help (if they need it) but we respect their independence and privacy. We are fairly protective and particularly cautious in recommending help, especially financial help. In brief, the standard of trust is exceedingly high.
Friends are always good to me and I help many parents and in-laws. But, this case was especially gratifying because the family genuinely needed assistance. We helped them identify assets, organize recordkeeping, plan their estate, and consolidate a variety of bank and investment accounts. They are such nice people and they were so grateful for my help.
It was touching. Their accountant son introduced us and I consider it the highest compliment I can get. It’s precisely why we started Family Investment Center.

Wednesday, July 1, 2009

How trusts work

By Dan Danford

News broke today of Michael Jackson's will, which was filed in court. Mr. Jackson left his estate to a trust. This prompted the question, "What is a trust? How does it work?" and we're happy to answer that here.

The concept of trust originated in the Middle Ages when crusaders left someone behind to care for their family and property. The trustee watched over their stuff and made financial or other decisions on their behalf. If necessary, they bought and sold property, reached investment decisions, or spent money for necessary items. Legally, they "stood in" for the missing person.

Today's trust is similar. It's a legal form of ownership with several key parts. The Grantor is the person creating the trust. The Trustee is the person (or institution) who stands in the grantor's place. The Beneficiary is the person for whom the trust exists. In a so-called living trust, the same person can serve in all three capacities. However, a Successor Trustee is named to take over when the trustee is unable or unwilling to serve. Trustees can be a bank, trust company, or friend.

In estate planning, the trust is an important vehicle because it allows a trustee to care for and invest for a beneficiary, often long after the grantor is dead. It's a way of assuring that a spouse, children, or grandchildren get professional guidance for taxes and investments. It's also a way to establish some guidelines about how money should be invested or spent.

Importantly, a trustee has a fiduciary duty to beneficiaries. That means a legal duty to serve in their best interests. Decisions must be made according to the best interest of each beneficiary, without conflict. For this reason, a trust can be a good way to care for important friends or relatives after we are gone. Especially if they are young, inexperienced, or have special needs.