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

15 Years of Fee Transparency

How much are you paying on your 401(k)?  A poll conducted by AARP concluded that 71% believed that they paid no fees for their 401(k).  In reality, all 401(k) plans have some fee structure set up.  Because the amount of fees paid will impact your nest egg over time, every individual investor should be aware of the fees he or she is paying.  An article recently published by MSN Money called "Is your 401k ripping you off?" further explains the affects of fees in employer plans. 

It is important to understand the many different levels and types of fees as well.  There may be portfolio management fees, transaction fees, commissions, mutual fund expenses, loads, or other types of expenses "built into" accounts.  Regardless of the account type, MAKE SURE you know what fees you are paying and seek to reduce those costs.

Positive change: three innovative investment ideas

By Dan Danford, Principal/CEO, Family Investment Center

● $100 million of insurance per account. Banks usually offer $250,000 of FDIC insurance, and brokers $500,000 of SIPC.

● No sales or transaction fees. None.

● The world’s top experts in stocks, bonds, and mutual funds. World-wide investment luminaries like Bill Gross, usually at reduced fee.

One academic study explored the pace of change within a community. As I recall, researchers carefully documented how long it took farmers in a particular region to switch to a wholly-superior hybrid seed corn.

The pattern of change became famous. A small group of progressive farmers adopted new corn almost immediately. Typically, others were more cautious and waited a few years. At the study’s end, a few stubborn hold-outs were still planting the old corn even though the new was safer, widely-accepted, and proven through years of production.

That pattern is typical among consumers of all kinds. It’s true of technology, automobiles, and even new medicines. A few innovators jump right in, and almost everyone else pulls the old “wait and see.” A few people never try anything new.

Family Investment Center started in 1998. We brought some innovative ideas to our marketplace, and some successful groups and families joined us almost immediately. Since then, many other clients have adopted our unique approach to investing. Our largest single portfolio today is over $15 million.

Instead of being a more-traditional “seller” of investments, we are an expert “buyer” for each client. We seek quality investments, tailored to each client’s need, at a wholesale or institutional price. We select securities and investments from thousands of choices and dozens of fund families and firms. Virtually unlimited investment choice.

Today, we steward nearly a $100 million and our clientele has grown from early adopters to mainstream institutions and families. We serve several dozen nonprofit groups along with hundreds of successful families. Almost all those portfolios transferred here from other (traditional) institutions.

Our professional fees are based on the work and responsibilities involved. We work like an independent consulting firm or law practice. There are no hidden fees or commissions, and we have no financial relationships with outside firms. Essentially, clients pay us because we can help them accomplish more.

I’d welcome an opportunity to discuss our services with you. I think we can help you save substantially on fees while increasing the quality of your investment portfolios.

Things Your Wall Street Broker Doesn't Want You To Know

This video, presented by Alexander Efros of Athelon Wealth Management, discusses "7 Things Your Wall Street Broker Doesn't Want You To Know." As a commission-free investment advisory firm, we at Family Investment Center like his message and agree with his conclusions.



Most investment professionals work as sellers, representing specific investment firms or products. They earn sales commissions or transaction fees directly related to their success at selling. Good for their companies, but maybe not so good for their customers. Things are very different at Family Investment Center. We earn our fees by representing clients. We work as a buyer for each client family, matching low-cost and productive investments to their circumstances and goals. Our commission-free platform values expertise and experience above sales ability.

Danford book helps families

Dan Danford started Family Investment Center in 1998 to help families manage existing investments and grow financially independent. The firm currently serves over 150 key client families along with companies, retirement plans, and nonprofit groups. Family Investment Center is a commission-free Registered Investment Advisor stewarding almost $100 million. Danford was interviewed in his St. Joseph office.

Why write a book? Surely there are enough investment books in the marketplace.
True. But there’s a big story not generally told to consumers. I’m still astounded to encounter people who think of investing as a big game of chance. In truth, there’s solid science to investing, and I think it’s time for families to know about it. Instead, it’s often been limited to wealthy people and large foundations.

Why hasn’t this story been told to consumers before now?
It’s a function of the investment distribution system. Smaller investors – the typical family – buy investments through retail stockbrokers, insurance agents, banks, and fund salespeople. These channels focus on selling, and selling doesn’t allow much time for good consumer education.

Still, there’s no shortage of investment information.
Just look at the consumer press, though. I mean really look at the headlines and magazine covers. They simply mirror things that consumers already think. They’re selling buggy whips to horse owners. No one bothers to mention that Henry Ford created the automobile. Many financial salespeople do the exactly same thing.

Surely you’re not comparing yourselves to Henry Ford.
Of course not. We simply report the excellent work of others. Believe it or not, there’s a very large body of research about wealth management. Our book suggests over a dozen titles for further reading. Many, many, many people have contributed to the field and we’re not even part of that development. But I have taught investment classes in the business department at our university and I’ve spent nearly three decades managing money for wealthy people and groups.

Why Million Dollar Management? Many readers don’t have a million dollars.
And many financial professionals don’t manage a million dollars, either. That’s part of the point. Our sub-title is “Simple Lessons to Use Wealth Management Principles for Your Family Investments.” Many of these principles were originally discovered while studying and building large investment portfolios. But they work just fine with smaller accounts, too. That’s the first message of our book – families will enjoy more financial success if they manage resources in the same way as savvy millionaires.

What’s a good example of a difference between millionaires and the rest of us?
Dan Did you know that only one percent of millionaires trade stocks on a daily basis? Another one percent trade on a weekly basis. When Tom Stanley and William Danko wrote The Millionaire Next Door [1996, Longstreet Press] they found that fully 42 percent of interviewed millionaires hadn’t made a single trade in their portfolio during the prior year! Is that what you’d conclude after reading most personal finance magazines? I don’t think so.

Okay, you’ve made that point. Are there other messages in your book?
We think a lot about the morality of money. The notion that money is a responsibility and those of us blessed with having it should exercise sound judgment in its care and maintenance. We highlight some practical and religious family stewardship issues.

You’re beginning to sound like a prudent bank trust officer. How much has prior banking experience influenced your investment thinking?
A lot. I learned some terrific things during fifteen years as a trust officer. The best things we’ve carried over into Family Investment Center.

What’s something important that you learned?
For the typical investment professional, sales skills are critical for success. Brokers making huge money aren’t necessarily those knowing the most about investing or providing the highest return to clients. Instead, these are usually people with strong social skills and a powerful ability to persuade.

You sound as though this isn’t a good thing.
It isn’t necessarily a bad thing. But it can be a bad thing. Remember, this is a sales environment. These people are usually paid by sales commission. An ability to persuade can be a dangerous thing when coupled with high sales commissions.

So you dislike brokers. That’s what you learned?
That’s not right at all! There are some brokers I like a lot and some with very high ethical standards. But I intensely dislike any commission system. It places a salesperson’s need above the client’s. A few good people rise above this structure, but I can’t think of a single argument why sales commissions are good for the consumer. They were designed to help the company.

Yet, it is a salary system which has endured, even prospered, for decades.
Of course it is. These firms used to have a monopoly on market information. You had to use a broker to invest because there wasn’t any other choice. Charles Schwab and the Internet changed all that for the better.

How?
Now anyone wanting information can find it. The Internet combined with 24-hour news coverage has virtually eliminated any information advantage, so that reason for using a broker has diminished. And, thanks to Charles Schwab, you don’t have to use a high-priced intermediary anymore to place stock or bond trades. Today, full-service brokerage firms look like dinosaurs. Banks aren’t much better. I’ve got a glass jar in my office that is full of matchbooks from now-extinct local banks. Why do you think they’re merging like mad and trying so hard to enter other financial businesses? Consumers simply don’t understand competitive pressures taking place in the financial services industry.

If not traditional brokerage firms or banks, then what? What is the future for consumer investment services?
Well, I can’t be sure. We believe that “commission-free” investment services are a clear improvement. Commission-free professionals earn fees directly from clients and avoid commission-based investments. Working directly for the client frees them to make quality recommendations without real or perceived conflicts of interest.

That sounds much better. Why isn’t it the industry benchmark today?
It is growing quickly and some major firms are trying to transition to fees. One sad truth is that client fees are often less lucrative for the professional. Fees can be a great tool for both the client and professional, but you’ve got to have some volume to earn a living. Many brokers, insurance agents, bank investment officers, and fund salespeople can’t gather enough investment assets to survive. So, they stick with more rewarding commissioned products.

What about you? Your firm has used this fee-only model since inception. Does it work?
It works great. We are truly independent – not related to any bank, brokerage firm, or insurance company ¬ and revenues come directly from providing client service. We please clients or we die. Just like my grandfather’s grocery store back in the 1930s. Having said that, though, it hasn’t always been easy. Things change very slowly in the Midwest and we compete against some very talented traditional marketers. And, of course, over half of our existence has been during the worst bear markets ever. But, we’ve built enough volume to survive and we’re gaining a reputation that allowed us to grow during a pretty tough period. All things considered, it been a pretty good run. No complaints at all from me.

To purchase the book, click here.

Tips for Surviving Spouses

The Circumstance: Often, a surviving spouse is faced with daunting financial decisions at a time of maximum vulnerability. A survivor sometimes receives large life insurance payments, legal settlements, retirement benefits, and money from other sources.

The Danger: Unfortunately, some individuals and firms market to these vulnerabilities with carefully devised presentations and strategies. Some boast bogus expertise or empty promises. Products are often very expensive, inappropriate for the individual, and inflexible for future years.

The Culprit: A commission schedule is the culprit. Most financial products are distributed through expensive sales channels. A commissioned broker, insurance agent, or financial planner earns high sales commissions for marketing annuities, mutual funds, or IRA rollover accounts. Since survivors often control large pools of money, a crafty sales organization can create hefty profits. Many do.

The Solution: Take away the sales commissions and you take away the problem. At Family Investment Center, we offer:

• Genuine compassion for grieving survivors
• No product sales
• Honest advice on the full spectrum of investments
• Honest expertise gained through decades of investment, trust, and life experience
• Genuine credentials earned through higher education, national trade organizations, and government regulation
• Fair and reasonable prices for professional services rendered
• Commission-free (“fee-only”) investment management services (if desired)

The Price: Free initial consultation. Registration, organization, and clerical services are available for an hourly fee. Investment management services are provided for an annual percentage of account value. Special projects quoted on a case-by-case basis.

Dan Danford joins NAPFA

Dan Danford, Founder and Chief Executive Officer of Family Investment Center, was recently accepted to the National Association of Personal Financial Advisors (NAPFA). NAPFA is the nation's leading organization for commission-free advisors, focused on delivering unbiased, client-centered advice. Click here to read the announcement.

Aligning incentives between advisor and client

By Dan Danford, Principal/Chief Executive Officer, Family Investment Center

When I bought my last car, I faced a dilemma. At a critical point, I discovered that I liked the car a lot, but not the dealership. I had to choose: give up the car, or buy from a dealer I didn’t like.

Other people face the opposite problem. They like a particular dealership but aren’t happy with available brand names or models. They’d prefer a different car, but they want to buy it through their chosen dealer.

With cars, maybe you rely on a salesperson to answer technical questions, arrange test-drives, and help with the financing. You trust them to help you reach the right decision, sign necessary papers, and – hopefully – you go home happy.

What if you learned afterward that the salesperson earned special “incentives” all along the way? That the car you bought paid higher sales commissions (and cost more) than others? That your lender awarded paid vacation to sellers closing the most “deals?” Ultimately, you may have overpaid for the car and missed better financing opportunities. Would this upset you?

One solution might be a car “supermarket” – featuring multiple product lines through one dealer. You could get any vehicle you want through the same local dealership. Salespeople would be salaried, or at least they’d disclose how they are paid on every car. Then, you could reach truly informed decisions.

The compensation system is the problem. Behavior is often motivated by the way people are paid. Today, dealers sell the models they’re allowed (limited by the manufacturer) and salespeople sell easy options or those offering greater personal reward. For the consumer, it’s a dangerous system.

Family Investment Center exists to avoid similar problems in the investment industry. We don’t earn sales commissions or transaction fees. We help clients choose between thousands of investment options (no captive funds); there’s no financial incentive to recommend one choice over another. Our financial rewards are tied directly to long-term customer satisfaction.