Everyone is Different (and Better!): Part 4

Overall costs of service.  Investment costs present some interesting issues.  Various distribution channels have traditionally used different disclosure methods.  Because of these differences, many consumers had little idea of the fees they paid.  Often, options that seemed low-cost were quite the opposite.  There’s a sign in our conference room reminding clients that:

“The cheese is always free in a mousetrap.”

On some levels, fees might seem unimportant.  One very smart attorney explained this to me in football terms: who would you rather have as quarterback of your favorite team, a star like Joe Montana or some lesser-rated journeyman?  Obviously, most of us assume that Joe Montana in his prime was worth a lot of extra money.  You always pay for what you get, my attorney friend argued.  It’s an interesting point, but, again, flawed. 

Investing isn’t very much like football.  There’s an abundance of research suggesting that investment managers operate with much less skill than quality quarterbacks.  That’s not saying they’re worthless, just that active management adds less value than you’d think to most portfolios.  In the main, a major component of performance comes from general market movement, not the portfolio manager.  So why pay huge expenses? 

Timing also plays a role in the perception of fees.  High fees are simply more tolerable in period where markets are quickly rising.  No one complains about a one percent (1%) fee when the market gives their portfolio a twenty percent (20%) boost!  Ask again after the market is down by twenty percent (20%) and see how they feel.  (A good advisor may genuinely earn one or more percent in a down market by reducing risks and protecting against a sharper correction.)

Of course, there are some parts of the investment world where expertise plays a key role.  Smaller sectors – say, developing markets or very new companies – aren’t covered as broadly by the general press or analysts.  Managers specializing in these fields may incur higher costs and reasonably pass them along to investors.  Yet, how do we decide what deserves higher fees and what doesn’t?

The Schwab Center for Investment Research did an extensive study of mutual fund performance (June 1999, Vol. II, Issue I).  They ran computer analysis on dozens of factors that might contribute to mutual fund performance.  Two primary factors emerged with strong correlation – lower costs and recent performance.  Good performers tend to repeat (sadly, so do bad one) and, since costs necessarily reduce performance, lower fees mean higher returns.  They didn’t specifically test this on other non-fund asset classes, but experience tells me that it’s true.

Investment fees are changing across the board.  The Internet and other resources have created a very transparent environment.  Fees are no longer hidden, and savvy consumers can easily locate helpful information regarding costs and value provided in exchange for those costs.  Trading and other costs have fallen (and keep falling) while convenience and ease of use keep going up.  It’s a terrific environment for do-it-yourselfers.  Providers that can’t measure up in this environment won’t survive.

Environmental changes spur different kinds of investment services and fee schemes.  From all this, some casual observers are predicting the demise of investment professionals.  I’m very skeptical (as you’d expect).  Oh, there’s no question that our industry is changing and that some professionals will not survive.  As with any era of rapid change, traditional methods often implode, just as new methods thrive.  It’s a natural progression.  Survivors simply adopt new and better ways to serve their customers. 

I’ve already observed one radical new behavior among investment consumers.  The freedom to do something – virtually anything – includes the freedom not to do something as well.  Consider the routine or mundane tasks often delegated to others: lawn service, oil changes, laundry, maybe housecleaning.  Cooking (at least some portion of family cooking) slipped into this category decades ago when low cost and convenience slammed the restaurant world.

True, today’s consumer faces some wonderful new opportunities in investing.  But, easy as it has become, it still takes time, concentration, and energy to invest wisely.  It’s a fine diversion for some people (a hobby, perhaps), but it’s not for everyone.  Is investment management where you really want to spend your time, concentration, and energy?

Many smart, talented, and extremely successful people are deciding not.  I’m talking with more and more people who are actively deciding to delegate part of the investment management function to outside professionals.  They want to stay involved to some degree but not at an activity level necessary by themselves.

It’s never been easier or cheaper to delegate.  The same tools that lower costs for consumers also lower costs for advisors.  The same technology that brings quality research to the home desktop also brings it to professionals.  Good advisors provide more value and cost less than ever before.  Across most areas of our lives, it’s more affordable than ever to hire outside help.  It’s true around the house and it’s true around the portfolio.  Technology creates better value.

The truthful answer about which options are best lies with the client.  Each client brings a unique set of needs.  Some clients need a lot of safety and convenience; others need considerable expertise or reduced costs for active trading.  Chances are very good that the same firm can’t serve both clients equally well.  You have to understand the issue to reach wise choices. 

 

 

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

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

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

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

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.

 

Family Investment Center Announces Dan Danford as NFL Players Association Registered Financial Advisor

Dan Danford, CFP^®

FAMILY INVESTMENT CENTER

3805 Beck Road

Saint Joseph, MO  64506

(816) 233-4100

Be sure to visit our Athlete's Future page at http://athletesfuture.com/!

Also, check out this article, "Five Bad Financial Fumbles by NFL Players": http://www.foxbusiness.com/personal-finance/2012/02/01/five-bad-financial-fumbles-by-nfl-players/.

 

Yesterday’s Approach Doesn’t Work Well in Today’s World

Everybody loves Goober. He’s the simple but lovable mechanic on the old Andy Griffith TV shows. I love Goober, too, but I think he represents a bygone world. Cars used to be simple, and it didn’t take a rocket scientist to fix them. A lovable guy like Goober was a perfect fit for that simple world.

Personal finance used to be like that, too. There were a few simple options, and people finally retired when they couldn’t work anymore. So they talked with their friendly banker or insurance salesman, and things worked out fine. Times were simpler, and solutions were, too.

But cars are more complex today and so are finances. People live decades after retirement, and there are hundreds – maybe thousands - of investment choices. The hometown bank is a giant corporation, and insurance companies offer a dizzying array of complicated policies. Simple approaches aren’t sufficient in today’s complicated world.

Personal finance still isn’t rocket science, but it is science. Our expert team can help sort through the issues, with minimal cost and fuss. We’re lovable, too, but we really understand personal finance and investing in this complex world!


By Dan Danford, CFP(R), Principal/Founder of Family Investment Center

Coffee, Wine, and Children: Choose Experience and Expertise

By Dan Danford, MBA, CFP®

Founder and CEO of Family Investment Center

It’s the toughest hurdle we face.  People just assume that all investment people and firms are alike.  That’s a bit like assuming that all coffee is alike, or all wine is alike, or all children are alike.  The idea makes me laugh. 

It’s simply not true.  I lead a local team that manages nearly $100 million for clients.  Actually manages it; follow it daily, analyze the investments, and make changes as necessary.  Every single day, and we’ve been doing it for almost fifteen years.  It’s an awesome responsibility, and we take it very seriously. 

Few of your acquaintances have this kind of expertise or experience.  In fact, few people in this region have this kind of expertise.  You may know others who sell investments or insurance or mutual funds, but they probably don’t manage portfolios.  Selling is very different from managing, and it’s very dangerous to confuse the two.

You may know a lot about investing, but it’s likely a very limited view.  Even if you’ve been doing it for a long time, you’ve only observed one set of circumstances.  You know only the investments that you’ve owned since you started.  That’s a very small sample size.

Plus, how would you know that something else didn’t work better?  Every decision has an opportunity cost, and few do-it-yourselfers (even fewer investment salespeople) carefully review all options.  Financial success is always about choosing pathways to a particular objective, but different paths may be safer, or faster, or easier. 

Seriously, I get it.  You want convenience, simplicity, and value for your family.  And you know that finance and investing is important for accomplishing your dreams.  Here’s the key: ask someone who really knows the answers.  Seek out genuine expertise and experience.

Advisors – like coffee, wine, and children – aren’t all the same.

 

Should I Buy an Annuity? Some Keys Points to Consider

What is an annuity? Annuity payments are different from annuity products. Annuity payments are just an equal stream of payments over a specified period of time. So, if someone agrees to pay you $500 per month for 10 years, that’s an annuity payment.

An annuity product is a formal contract promising a certain payment stream. Simply, for a price, you can buy a specified stream of payments, usually from an insurance company. You trade a lump sum (or, in some cases, multiple payments) for a promised payment stream. The stream could be a specified number of years or it could be your “lifetime.” In fact, it is often your “lifetime” and/or the “lifetime of your spouse.” Sometimes, the amount is decreased to your surviving spouse.

The issuer of an annuity – usually an insurance company or pension plan - faces a lot of uncertainty. An actuary is a trained mathematician in these specialized calculations. He or she looks at your age and gender to estimate how long you (and/or your spouse) will live. Once they estimate the duration of payments, they estimate the investment pool necessary to pay them. Today’s retirement lifespan can last 30-35 years, and that’s a lot of uncertainty.

To protect the issuer, an actuary needs reliable estimates for both longevity and investment earnings. If they pay you too much or too long, then the issuer loses money. For a pension plan, this mistake means that the company sponsor will need to add more money to the plan. For an insurance company, that deficit comes out of reserves or profits. Neither of these options are acceptable, so actuaries tend to be (need to be) conservative in making estimates.

What’s this mean to you or me? Partly, it means that we are likely to do better than those estimates. Estimates are necessarily based on the conservative end of a conservative spectrum of investment returns. That’s how actuaries protect the issuer.

There’s a strong chance we can do better. Why? First, we can use a broader pool of investments for our portfolio. Second, we can adjust the portfolio as conditions change (the actuary has to estimate the future today). Third, there’s no margin built into our model for insurance company profit.

In the end, the residual of these factors – any amounts accumulated over the above the actuary’s estimate – may be passed on to our beneficiaries. Remember, most annuity products are exhausted after the annuitant (or annuitants) dies. There is no surplus to the buyer when an actuary overestimates longevity or underestimates investment returns.

That brings up another really important point. An annuity’s stream of payments is inflexible. Should an emergency – or an opportunity – arise, there is no way to interrupt the payment stream. This lack of flexibility is a huge issue for today’s typical retirement horizon.

Another related point is that inflation wreaks havoc on long-term annuity payments. Think back to your salary in 1987. Would you like to live on that amount today? Could you live on that amount today? Now, leap ahead to 2027; how much will today’s monthly annuity payment buy in tomorrow’s world? Avoid any annuity product that doesn’t include an annual Cost of Living Adjustment (COLA). It will reduce the early payments, but add genuine value down the road.

My last point is also important. Don’t buy an annuity product without comparing prices. Every insurance company uses their own actuaries and estimates. These can vary quite a bit at any point in time. Any buyer, especially those with larger sums to invest, should seek quotations from several highly-rated insurers. Most local insurance agents represent just one company, and I’d always recommend a second opinion before buying.

Dan Danford, CFP® is Principal/CEO of Family Investment Center in St. Joseph, MO. The firm offers commission-free investment services for families, businesses, and nonprofit groups.

How is our money backed in a financial crisis?

With many parts of the world experiencing financial crisis, what has backed the money for all these years?

In the video below, Dan Danford, CFP®, Founder and Chief Executive Officer of Family Investment Center, explains what is backing our currency, the currency of other nations, and why it all doesn't just fall apart when countries face perilous economic issues.  Danford also addresses the functions of monetary and fiscal policies, which were created to help in times of a financial crisis.

Asset protection strategies

Asset protection is an area of law in which your attorney works with you to ensure that the assets you have worked to accumulate are legally safeguarded from third parties.  In the video below, Dan Danford, CFP® and Principal/Chief Executive Officer of Family Investment Center, explains several asset protection strategies.

It is best to implement an asset protection strategy early to avoid the appearance of fraudulent transfer and to ensure you will be protected should the unexpected arise. It is much easier to create an asset protection strategy when the creditors are hypothetical future collectors and not creditors currently knocking on your door.

Protecting CDs in Trust Accounts

There is a lot of misunderstanding about trusts.

In the video below, Dan Danford, CFP®, CRSP®, MBA, and Founder/CEO of Family Investment Center, answers this question about bank CDs and trust accounts:

"How do I purchase bank CDs and make sure they are protected in my trust account? I purchased one already, thinking that because I used trust fund money to buy it, it would be held in the trust. It isn't and I don't want to make the same mistake twice. Also, is there a way that I can move the existing CD into the trust without penalty?"

"Safe" Investments

The current economic climate is a great time for borrowers but a lousy time for savers.  Because of the recession, the Federal Reserve has lowered interest rates to the lowest rate in roughly 50 years.  While this was done to stimulate borrowing, which is beneficial for the economy, low interest rates mean low risks and thus low returns for savers looking at investment vehicles.

In this video, Dan Danford, Founder and Chief Executive Officer of Family Investment Center, shares basic economic principles and helpful financial tips on different investment types.

When to buy long-term care insurance

When should you start thinking about purchasing a long-term care coverage policy?

In the video below, Dan Danford, Founder and Chief Executive Officer of Family Investment Center, gives an outlines the four things everyone should consider when deciding to purchase long-term care coverage.

Estate Planning Essentials

Wills and trusts are two different types of estate planning devices that allow you to look into the future and determine how you can protect your children and your assets if something were to happen to you.

Dan Danford, CFP® and Founder/Chief Executive Officer of Family Investment Center, says that many people use the terms wills and trusts interchangeably even though there are major differences between the two.

In the video below, Danford explains the disparity and in what situations people are more likely to need a will or a trust. He also suggests that any asset protection estate planning document should be handled by an attorney. According to Danford, a small fee can ensure a lifetime of peace of mind.

Mrs. Lentz was right: I am disruptive. Clients love me for it, though!

Hold up your hand if you like disruptive innovation! If you love your iPhone or enjoy a flat screen television, you are one of millions who benefit from dramatic changes in the marketplace.

Telephones and televisions have been around for decades, of course, but the old ones are nothing like the new ones. In fact, in a few very short years, traditional models are forever gone. Consumers – folks like you or me – love new products and services. Businesses, especially ones steeped in those old products and service models, don’t share our giddiness.

Banks and brokers are slow to adapt. Rapid changes in technology make some inroads, but ATM machines and on-line banking haven’t replaced the branch bank on every urban corner. Brokerage firms (well the ones that have survived, anyway) still manufacture investment products and rely on captive brokers to sell them to investors. Debit cards haven’t replaced checking accounts, and the sales commission still reigns as king of the brokerage compensation model.

Twice, I’ve been part of disruptive innovation in my home town (St. Joseph, Missouri). Both times, we changed some things forever, but not enough to satisfy me! The first time was in the late 1980s, when four of us founded an independent trust company. Trust services are a specialty financial service, and you probably don’t remember or care about the details. Let’s just say that other banks in our city and region weren’t especially pleased with our early success.

Ten years later, I left that trust company to start Family Investment Center. I grew frustrated because we couldn’t keep up with consumer-friendly technology (even in a firm I founded, for crying out loud). That was 1998 and our investment clients didn’t have on-line access, checking/debit privileges, auto-deposit or withdrawal to other accounts, or a host of other things we take for granted today. I could see them coming, just couldn’t provide them through the trust company platform.

So I left to start something better and, again, the bankers weren’t happy. This time, however, the brokers weren’t happy either. The RIA model we adopted was both commission-free and highly-regulated, putting us in direct competition with both groups. It was disruptive to the status quo and I discovered quickly and painfully that many important people in St. Joseph had financial and social ties to that old order!

Funny thing, though. Consumers loved us from the very start. One former colleague famously predicted that “Dan won’t last six months in the business.” That was 1998, and we never even looked back. The truth is that we’ve grown progressively over years where many traditional providers have lost clients, lost support staff, and lost quality professionals. Today, we are the only independent, locally-owned, commission-free, registered advisory firm in this city. No locally-owned bank trust departments or brokerage firms, either.

That’s nice and it makes us proud. What makes us even prouder is that consumers put us here. We’ve enjoyed little institutional support in building this company. Many of the groups and businesses who ordinarily support entrepreneurial effort have financial or social ties to our older competitors. No worries, though, consumers love us and that’s all we needed to thrive. National newspapers, journals, and trade groups appreciate us, too, and that has helped spread the word.

It turns out that disruptive innovation is pretty popular with the people who really matter – clients.

Tips to create financial success

Evidence suggests a person's behavior has more effect on financial success than income, and no matter how much money you make, most people wish they earned 10% more.

In the video below, Dan Danford, CFP®, Founder and Chief Executive Officer of Family Investment Center, shares tips to create financial success and how to overcome the three money disorders that impact a person's ability to achieve their financial goals.

Effective tax planning requires forethought

Q: When I finished preparing my tax return for this year, I discovered I owed the government close to $10,000, which was far more than I thought I'd have to pay. How do I avoid future surprises like that?

A: Sometimes the situation you describe can't be helped. Maybe your practice had an especially good year or you earned a large one-time consulting fee. Even those of us who don't see payments like that face occasional tax surprises. Those surprises are maddening, but you can use a few tricks to keep them tolerable.

Effective tax planning is done in real time. It's done with a bit of research, good record-keeping, and deliberate decision-making. Most taxes are saved by not incurring them in the first place.

Retirement plans provide a good example. They come in a variety of shapes and sizes. Some are suited to sole proprietors, whereas others to partnerships or corporations. But most require some set-up and adoption before tax year-end. A bit of forethought sends dollars to retirement, not Uncle Sam.

The same principle holds true for charitable giving. In general, gifts given by December 31 count toward that year's tax. Because taxes usually aren't prepared until April (much of the required paperwork doesn't come until late January of after), it's difficult to measure tax effect without some late-in-the-year projections. Talk with your accountant each December to "mock up" that year's income obligations. Then you can make informed decisions about giving.

Remember these three steps: research, record-keeping, and deliberate decision-making. Useful tax-related information is available on the Web, or at the library or bookstore. If you don't want to do the research yourself, hire an adviser or ask your accountant. The point is, don't wait until your taxes are prepared or until they are due before acting.

Q: My wife died last year, leaving assets of less than $5 million. Must I file a federal estate tax return?

A: It is not required, but for your beneficiaries to enjoy the benefit of both your and your wife's exclusion at the time of your death through "portability," you are required to file a Form 706 (the federal estate tax return). This form generally is due 9 months after the death of a spouse. If your spouse died in the first half of 2011, however, the Internal Revenue Service has permitted retroactive extensions, giving you 15 months from the date of death to request an extension and to file Form 706.

Q: Because my children are the beneficiaries of my estate, does it make sense to name my estate as my individual retirement account (IRA) beneficiary?

A: Generally, it does not. Even if your children are beneficiaries of your estate, if they are not the direct beneficiaries of the IRA they must take distributions based on your life expectancy, not theirs. Designating the children individually as beneficiaries allows them to spread the withdrawals over their own life expectancies, producing lower annual withdrawals and continued deferral of taxes.

Q: What happens if an individual retirement account (IRA) owner who is older than 70 1/2 years dies without having taken a distribution for that year? Is the heir required to take a distribution by December 31?

A: If you are past age 70 1/2 and die before taking the current year's withdrawal, your IRA beneficiary must take a distribution by the end of that year. The distribution is based on your life expectancy and should be reported as ordinary income on your heir's own tax return. Most custodians require that the beneficiary set up an inherited IRA account and move the assets into it before taking the current year's withdrawal.

Q&A session published in the May 10, 2012 issue of Medical Economics magazine. Questions answered by Dan Danford, CFP(R) and Principal/Chief Executive Officer of Family Investment Center, and Medical Economics editorial consultant David Schiller, JD, of Schiller Law Associates in Norristown, Pennsylvania.

Maximizing your 401(k) and retirement plan earnings

Dan Danford, CFP® and Founder/Chief Executive Officer of Family Investment Center, has been advising how to invest 401(k) and retirement plans for years. In the video below, he answers this question about what to do when dissatisfied with your 401(k) funds:

I want to shift my money to different funds within the plan. When making this decision, which do you think I should focus on more: the funds' expenses or the returns the funds have earned?

Danford explains why you should focus on expenses first, but that there is an important caveat when it comes to ensuring you are comparing apples to apples with different 401(k) funds.

Are you an aggressive investor?

According to Dan Danford, CFP® and Founder/Chief Executive Officer of Family Investment Center, forget rules of thumb when it comes to determining your aggressiveness in investing. In this video, Danford answers the question of whether or not the rule of thumb of limiting your stock percentage to 110 less your age makes sense if you don't want to risk giving up potential gains. Danford offers his reasons for ignoring that oft-used financial expression and why answers to retirement questions and portfolio diversity depend on what your retirement time horizon is.