Wednesday, February 27, 2013

Everyone is Different (and Better!): Part 3

Ease of Evaluation.  This subject is incredibly important and often ignored.  In fact, most people find the process so difficult they skip it entirely. 

I can’t tell you the number of times that someone has bragged to me about an investment that “doubled” their money.  Surely, that’s a terrific investment, and worthy of bragging rights, right?  Maybe.  Time is the critical element, often ignored.  Everything from bank accounts to mutual funds will eventually double your principal in just twelve (12) years!  At ten percent (10%), it’ll happen in seven (7).  At twenty percent (20%), around three and a half (3.5) years.  Clearly, doubling your money isn’t as impressive as it sounds.

The Danford kids used to argue with me about the intelligence of our family dog.  “She’s very smart,” they proclaim.  My response?  “She’s smart for a dog, but dumber than cement for a human.´ In investing or animals, it’s all in what you compare to!

I remember one meeting where a client raved about his favorite mutual fund.  And, truthfully, it had grown nicely over the years.  Yet, comparison with similar funds showed that it had, in fact, lagged during a raging bull market.  It had grown very well compared to a bank account, but not so well compared with similar investments.  His informal evaluation was flawed because he was comparing to the wrong benchmark. 

Any portfolio of common stocks or individual bonds faces evaluation problems.  Objective performance analysis requires an accurate picture of cash flows, trading practices, investment risks, time horizons, risk tolerances (of the client), and account objectives.  How easily is that accomplished with a portfolio of twenty-five (25) or more different stocks and bonds?  Most people find the task daunting.

Brokerage and mutual fund firms aren’t much help either.  Account statements routinely omit purchase prices (cost figures are reported upon purchase or sale by confirmation only).  They report current market values (important) but deliberately avoid the original cost (equally important).  If you don’t track the purchase price, and they don’t remind you, how can you easily judge performance or make decisions. 

Further, even if you do maintain accurate records, how do you compare investments meaningfully with economic benchmarks?  Almost everyone follows the Standard & Poor’s 500 Index® (“S&P 500”) and the Dow Jones Industrial Index® (“Industrials”).  They are reported every day on television and radio.  But, how representative are they for your portfolio?  Today, over 100 different indices provide meaningful benchmarks for evaluating various sectors of the investment markets.

Evaluation is one reason for the explosive growth of mutual funds.  Firms such as Morningstar® and Wiesenberger® provide detailed and objective information on performance, risk, expenses, and portfolio holdings for thousands of publicly available funds.  Magazines and other publications feature fund issues and evaluative criteria.  In all, there are reams of material to help gauge a fund’s success (or failure) in the market.


Excerpt taken from Million Dollar Management: Simple Lessons to Use Wealth Management Principles for Your Family Investments by Dan Danford (with Gary Myers), 2002

Wednesday, February 20, 2013

Everyone is Different (and Better!): Part 2

Flexibility and convenience.  As professionals, we place huge emphasis on flexibility.  The ability to respond to change is everything.  Most of the absolute worst financial disasters I’ve ever seen took place at some crucial moment when change exploded into crisis. 

For clients, we seek many conveniences.  There should be a friendly local face, 24/7 Internet, checking, recognized debit cards, ability to electronically transfer funds, access to international services, wide choice of investments, and freedom to trade whatever and whenever they want.  Most people won’t use a third of these services, but they should have them anyway.  Who knows what tomorrow will bring? 

There’s no reason to scrimp.  Most national firms have the ability to provide all of these services at nominal (or no) cost to clients.  This is the age of technology and every client should demand flexibility and convenience. 
 
Investment and financial expertise.  Where to start?  Expertise is a relative concept.  The investment world is so broad and client needs so diverse that no single measure of expertise defines the term.

Take bonds, for example.  Most people assume that bonds are a pretty boring investment subject.  They make up the “stable” portion of many portfolios (“more stable” is more appropriate) and government bonds are an investment of choice among wealthy senior citizens.  But it’s not really that simple.

There are thousands of bond options – literally safe as a two-year government bond, or risky as a ten-year junk bond.  Nearly every city issues municipal bonds (tax-free) and a number of government agencies (“quasi-government”) issue bonds, too.  Municipal bonds are either General Obligation or Revenue bonds.  There are blue chip and high yield (“junk”) corporate bonds.  Some are insured, others not.  In fact, there are often both insured and un-insured bonds in the very same offering

What’s the point?  The investment world is filled with specialists, people who are “experts” in some aspect of the investment world (bonds, for example).  This is necessary expertise in a global sense (someone has to know about everything).  The important question for clients, though, is one of pure relevance.  Who offers expertise in areas of importance to their situation?

Most people – even those with a million dollars – don’t need to know the intricate details of bond pricing or stock valuations.  They don’t need to know about Lou Rukeyser’s Elves or Mario Gabelli’s economic outlook.  They might know Alan Greenspan if they bumped into him at the dry cleaners (not likely), but they probably haven’t a clue what the Federal Reserve Bank does or why it makes a difference.

They don’t generally need to know the details of Modern Portfolio Theory (MPT), but they do need to know that investment diversification reduces risk and increases long-term performance (the essence of MPT).  The do need to know how to get the best deal on mortgage interest rates or financing a car.  They do need to know that an allocation of investment savings to common stocks is a good hedge against inflation (someone should have taught this gem to our grandparents).

Even with a million dollars to invest, the right expertise is far more important than the truckload of credentials.  Many national firms tout investment celebrities (Peter Lynch at Fidelity is a great example), but how exactly do they serve common people?  That’s the important question.



Excerpt taken from Million Dollar Management: Simple Lessons to Use Wealth Management Principles for Your Family Investments by Dan Danford (with Gary Myers), 2002


Wednesday, February 13, 2013

Everyone is Different (and Better!): Part 1


“A market is a combined behavior of thousands of people responding to information, misinformation, and whim.”
-Kenneth Chang
 
 
Garrison Keillor talks about the mythical village of Lake Wobegon, where all the village children are “above average.”  The financial industry is a bit like those children.  Every segment and company think they are best.  Truthfully, each one offers certain structural strengths.

Experience suggests that clients often reach decisions by default – the firm where an advisor works, for instance, or a bank close to home.  These are understandable choices, but hardly an informed way to decide.  An objective consultant would likely consider a whole matrix of factors including safety, convenience, flexibility, financial expertise, investment expertise, ease of evaluation, and overall costs of service.

Safety and security.  One topic that commands attention is client safety.  Virtually every investment client should be concerned about the people and firms they use.  Surprisingly, though, there is a lot of bad information about this general subject.  Perhaps we can shed some light.

First, it’s important to recognize that different regulations apply to different types of firms (all claiming that they’re best and safest).  Most brokerage firms fall under scrutiny of the Securities and Exchange Commission (SEC).  So do many Registered Investment Advisors (RIA), although smaller RIAs are covered by state regulation (In Missouri, RIAs are regulated by the Secretary of State Securities Division). 

Most investment professionals are required to pass examinations conducted by the National Association of Securities Dealers (NASD), a self-regulatory body of the investment industry.  Various examinations apply to different kinds of securities, but virtually everyone selling or managing investments in our industry is required to pass at least one examination.  (Passing isn’t always enough – in Missouri, one qualifying officer of an RIA firm must earn at least an 80% grade on the Series 65 exam.  That’s 10% higher than a “passing” grade.)

Banks, as a rule, are governed by banking regulators.  So, the trust department of a bank or independent trust company is regulated by the Office of the Comptroller of the Currency (OCC) or state banking department.  Certain bank employees that sell investments – through a discount brokerage division, perhaps – must pass NASD exams, too. 

Surprisingly, I spent fifteen years as a trust officer for three different banks and never had to pass any securities exams.  Banks were specifically exempted from most securities laws because they fall under banking statutes instead.  Both banking and investment firms are required to meet certain capital, insurance, and bonding guidelines.

Many investment firms are also registered with the United States Department of Labor (DOL) to manage pension and other retirement plans.  The DOL provides oversight for retirement plans and advisors must register to comply.  Special bonding is required for each retirement plan, both for the employer and investment advisors.

Registered Investment Advisors actively manage client investments.  A federal law requires separate custodial accounts for each client.  In plain English, this means that investments (stocks, bonds, or mutual funds) must be held at another investment firm (this law provides protection against two obvious perils: that an RIA employee might steal cash or securities, or that an RIA firm might declare bankruptcy.  Clearly requiring an outside custodian avoids both situations).

Each custodian brings another level of safety.  Charles Schwab (one choice for many people), for instance, insures each client account against brokerage default up to $100 million.  Other custodians provide similar insurance.  Remember, custodial accounts are where client investments are actually held, so this protection is extremely important.

Several other types of protection are covered through bonding or insurance.  The best investment firms or advisors carry professional liability insurance as protection against claims of error or negligence.  Separate coverage should protect against employee dishonesty or fraud.  Firms that handle retirement accounts must have special ERISA bonds.



Excerpt taken from Million Dollar Management: Simple Lessons to Use Wealth Management Principles for Your Family Investments by Dan Danford (with Gary Myers), 2002

Friday, February 8, 2013

Danford registered to advise NFL players



Taken from the St. Joseph News-Press article "Danford registered to advise NFL players" by Jimmy Myers, January 31, 2013

"Dan Danford, principal/CEO of Family Investment Center in St. Joseph, said the association’s new system of doing background checks and confirming the credentials of financial advisers approved him to work with players.

In years past, players could choose whoever they wanted as a financial adviser. Now, the association’s registered financial adviser program includes a list of experts who can help players reduce the likelihood of sudden loss of wealth, fraudulent investments and other issues.
 
Mr. Danford said players have an average lifespan of three years on the roster. The league minimum salary in the NFL is $400,000. The payoff is big, but brief, and these players, he said, need quality representation.
 
'Because they are high visibility,' Mr. Danford said, 'they can be easy prey.'
 
He said he did not know how many other financial advisers have been approved by the NFL Players Association. His firm, he added, likely will attract players who are interested in conservative investments, not high-risk ventures like opening nightclubs.
 
'They have a high standard of living, and then all the sudden it’s gone,' he said of investments gone wrong.
 
Mr. Danford recently completed a six-year term on the Missouri Western State University Board of Governors."


For more information about Dan Danford and Family Investment Center, visit www.familyinvestmentcenter.com or www.athletesfuture.com.

 

Wednesday, February 6, 2013

NFL Players: Financial Success Comes from Practicing the Fundamentals

 
Fox News shared some sobering information in this recent story about a few famous NFL players and their finances:  "Five Bad FinancialFumbles by NFL Players" by Clark Palmer.

Here’s the player and the lesson:

·     John Elway - Seek credible advisors who are part of the community. The National Association of PersonalFinance Advisors (NAPFA) offers a free questionnaire to help any investor choose a reputable advisor. Click here for the questionnaire.
 
·     “Deuce” McAllister - Don’t over-commit. Don’t exceed 10-15 percent of your net worth for starting a new business.
 
·     Mark Brunell - Spend as much time thinking about a new venture’s failure as success. What is the downside risk?
 
·     Drew Bledsoe - If investing in a new venture, check out the people running it.
 
·     Dez Bryant - Figure out how much you can really afford for housing, food, entertainment, and investments.
 
These are important lessons for any investor. Focus on the fundamentals for success.
 
 
For more information on Dan Danford and Family Investment Center, visit www.familyinvestmentcenter.com or www.athletesfuture.com.
 
 

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