First of all, what do you do?Dan Danford – I understand investments and finance better than most people, and I explain things really well. People ask me to help.
What exactly does Family Investment Center do?Two main things. We manage large portfolios for clients. These are discretionary accounts for families, nonprofits, and companies. We use proven techniques, based on decades of academic research, to design, implement, and review portfolios. Another facet is consulting, where we do research and evaluation for nonprofit and corporate clients. Our internal team is remarkable.
How’s business?Good. Most of our new business happens when people move portfolios to our care from somewhere else. Movement slows when the economy shudders, and the past few years have been traumatic. Despite that, though, we’ve continued to maintain our client base and Assets Under Management (AUM). Actually, we’ve been pruning a bit.
How do you differ from stockbrokers or other firms?Family Investment Center is registered to actively manage portfolios. We don’t sell investments, and we don’t earn or charge sales commissions. Among competitors, we probably look most like the trust department of a bank, although we are regulated by the U.S. Securities and Exchange Commission. We have a fiduciary duty to our clients and we are genuinely independent.
Independent? What does that mean?In the investment world, over ninety percent of professionals are aligned with some large firm. Brokerage, maybe, or a bank or insurance company. There’s a tendency to create and sell certain products or services. There’s a huge amount of redundancy in the marketplace and a host of mediocre products. Firms like ours have no ownership or financial alignment with other companies. We’re free to choose products and services that excel for our clients. From thousands of good choices.
I’m not sure I understand.Ask yourself this: does the world need 26,000 mutual funds? Seriously, there are over 9,000 bond funds tracked by Morningstar. Bond funds! Few have the long-term performance of Bill Gross and the PIMCO organization. So there are a few stellar performers and most of the rest are mired in mediocrity. Why do they even exist? Because they create revenue or convenience for some particular investment firm. It’s not for the consumer, that’s for sure. That’s just one example, of course. There are thousands.
How much does any of that matter?I think the business structure matters a lot. Obviously, what’s most important is competence and trustworthiness, but there is a big advantage to staying in a commission-free environment. Salespeople simply aren’t – can’t be – objective. Mostly, they are the ones selling those mediocre products.
And, again generally, I think it’s best to use bankers for borrowing, and insurance agents for insurance. I’m not fond of cross selling.
I’ve never heard that before. Why?I just think specialization has value. How many pitchers also hit 300? How many successful physicians also keep the books? It's hard to be really good at multiple tasks. Banks and insurance companies have their strengths; investing isn’t often one of them.
A related mistake, I think, is that people somehow equate big with good. They think it’s safer or better to work with a big bank or big brokerage firm. Remember, those are the banks that brought us TARP, and that Lehman Brothers – among the biggest of big investment firms – collapsed entirely. Both groups played a hand in the mortgage crisis and its aftermath. Bigger is not necessarily better.
What should consumers look for in choosing an advisor?There are at least three really important things to consider. First, what is this advisor’s history? Were they insurance people? Stockbrokers? Bankers? It’s important because their initial training – and possibly their belief system – hales back to that early history. Just realize that they likely have some bias shaded by history.
Next, whom do they serve? Their clients should look and live a lot like you. Sometimes I see these people selling tax-free bonds to folks who don’t even need them. Seriously, most advisors have expertise with one kind of client or another. Maybe two. You want one who helps other people in similar situations. Unless advice fits your personal circumstances, it isn’t very helpful.
Last, and maybe most important of all, do you want a long-term relationship with this person? I’m not saying you have to socialize with them, necessarily. Just ask yourself, is this someone I want to work with and rely on for the next decade or two? If not, I’d keep looking.
What about investing? None of the top three is performance?Good point. Let’s just say that investment performance alone isn’t enough. Good investing is always better for these three factors. In fact, investing is about achieving goals. That happens more easily when you work with similar families, engage in a long-term relationship, and understand some professional history.
What’s the very best thing an advisor can do for a client? And don’t just say, “make them money.” What should clients look for from a good advisory relationship?Now, that’s a great question. I work with a lot of really smart people and most of them could manage investments. What they lack is context. They read an article or see a powerful spot on television, and they think maybe that’s a good idea. But they’ve not seen anything like it before, or during any other time frames. They don’t know exactly how it works or whether is works all the time. Or half the time. That’s the value a good advisor brings. They’ve seen it all before, and whether it works or fails. They’ve seen it with other similar families, and they’ve studied it in trade journals. With thousands of products and strategies, that’s valuable insight.
Is it worth paying for, though? And how much?Well, how much could it help your family? I can suggest a tweak to your investment mix that generates an extra $50,000 over the next twenty-five years. What’s that worth to you? Maybe I’ll talk you into or out of some strategic move because I’m seeing a particular result with other families. What’s that worth to you? Most times, the modest fee that a good advisor charges is worth every penny.
There’s another side to this, too. It always astounds me that prosperous people have quality advisors, and less prosperous ones don’t. I mean, come on, this isn’t rocket science! Did you ever think that maybe those folks have a lot of money because they have good advisors? That, alone, is proof enough for me. Sure you can do-it-yourself, but is that what wealthy people do? It’s a real laugher.
Theoretically, that makes sense. But I also hear stories about bad advisors. Say I agree with you that there is value in quality advice. What next?Find someone really good to help. As I said earlier, structure matters, but only to a point. Competent advisors share some basic principles about personal finance. Spend less than you make. Invest for the long-term. Let the tax code increase your returns. Again, it’s not rocket science, and advisors might argue about which mutual fund is best, but most of us will agree that a growth fund is a good choice for a retirement account. Fees, funds, and brand names differ slightly, but smart investing makes sense anywhere.
One thing I’ve noticed is that the crooks usually promise something for nothing. Outsized performance or unrealistic safety. Ask yourself this? Is what they are recommending in the mainstream? Is it what you’d expect to see in Money magazine or the Wall Street Journal? If not, there’s a strong chance it’s dicey.
Once or twice, I’ve responded to a troubled client, “ninety percent of competent advisors recommend the same things we’ve done.” And I truly believe that. Personal finance is a science and there’s a body of knowledge to support our decisions. We can’t always control the results, but our choices are based on the best probabilities for achieving success. That’s what you should expect with a good advisor.
