Supporting the Four Corners of Your Financial House

Episode: 165
Originally Aired: March 4, 2016
Topic: Supporting the Four Corners of Your Financial House with P.J. DiNuzzo

The Lange Money Hour - Where Smart Money Talks

The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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Please note: *This podcast episode aired in the past and some of the information contained within may be out of date and no longer accurate. All podcast episodes are intended to be used and must be used for informational purposes only. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment strategy or plan will be successful. Investment advisory services offered by Lange Financial Group, LLC.


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  1. Guest Introduction: P.J. DiNuzzo
  2. The Process and Consultations
  3. The Stack Analysis
  4. Preparing the Information and Putting the Stack Analysis into Action
  5. The Personal Balance Sheet
  6. Dimensional Fund Advisors

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Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at Now get ready to talk smart money.

1. Guest Introduction: P.J. DiNuzzo, CPA, PFS®, AEP®, AIF®,

Dan Weinberg:  And welcome to The Lange Money Hour.  I’m Dan Weinberg, along with CPA and attorney, Jim Lange, and tonight, we welcome back to the program P.J. DiNuzzo.  P.J. is a nationally recognized expert in investment management and was approved as one of the first one hundred Dimensional Fund advisors.  His Pittsburgh area firm, DiNuzzo Index Advisors, Inc., was founded in 1989 as one of the first few hundred fiduciary, or fee only, advisors in the U.S., and it consistently ranks among the country’s top five hundred investment companies.  Tonight, Jim and P.J. will be talking about your house.  Not the one you live in, but your financial house.  Like your physical house, your financial house has four corners: legal planning, tax planning, financial planning and investment planning.  Take away one corner or build it the wrong way and your entire house could fall down around you.  So, over the course of the next hour, we’ll talk about how your CPA, estate attorney and money managers can all work together to make sure you’ve got the strongest possible foundation for your family’s financial success.  Our show is live, so give us a call with your specific questions.  The number here in the studio is (412) 333-9385, and with that, let’s say good evening to Jim Lange and P.J. DiNuzzo.

Jim Lange:  Welcome, P.J.

P.J. DiNuzzo:  Good evening.

Jim Lange:  So, before we get into the substance of tonight’s program, I do feel honor bound under full disclosure to say that I have a different financial relationship with P.J. than I do with virtually every other guest that I have.  Usually, I try to get the best guests, the people who have the most to say that I consider of great value to our listeners, whether it’s John Bogle or Jane Bryant Quinn or Burton Malkiel (who’s going to be on in the next two weeks) or Ed Slott (who’s going to be on right after that), and frankly, as much as I admire all these men, I have no financial interest one way or another in either their businesses or in their publications.  Now, most of them have written best-selling books, and usually, what I do to prepare for a show is I actually read their books, I take notes, and develop questions that I think are appropriate.  I should tell you, also by full disclosure, I usually don’t zing them and surprise them on air, although I have done that too, but I usually run it by them, and then it’s not a scripted show, but it just kind of goes back and forth.  But the point is, I don’t have any financial interest in them, their business, their books, etc., though I do often put in a plug if I think it is a good book.  That is not true of P.J. DiNuzzo.  P.J. and his company, DiNuzzo Index Investors, and our firm, Lange Financial Group, do have a financial relationship, and I wanted to describe it before anybody gets a wrong impression or, let’s just say, has any reason to think that we do anything less than full disclosure, which we don’t.

So, the way our arrangement works is if somebody is a candidate for assets under management services…we do have a $600,000 minimum, subject to exceptions, but that’s our general starting minimum.  If somebody has $600,000 and they are interested in a suite of services, including money management, what will happen is that our office, and let’s say usually that the process starts with our office, whether it’s coming to our workshop or hearing a radio show or reading one of my books, etc., and they will contact our office.  Then they will have, depending on the situation, one, perhaps two, meetings with me, and then, if it goes further (and we’ll talk more about that), then they would meet with P.J. and his office.  But if that person ends up doing business with us, it is a combination of our office and P.J.’s office.  So, our office, whether we draft the will in the estate plan or whether we just oversee it and make sure that it is to our liking, we take that legal part.  Then we also do things like tax planning and Roth IRA conversions, Social Security analysis, how much you could spend, etc., and those are the parts that we do (and we’ll talk much more about that at length during the show).  Then P.J. and his part, they do the actual financial planning.  There might be a little bit of overlap with what we do, but they’re actually the ones doing the cash planning, where you’re going to get your money in year one and two, where you’re going to get the money that you need, where you’re going to get the money that you want, how should that money be invested, which is another component.  And anyway, working together, our office actually provides these four combined services for one fee, and then P.J. and I do split that fee.  So, the point is, I am not independent of P.J. and that P.J. and I do have an interest in the clients that work with the combination of P.J. and I.  So, I hope that that is a fair disclosure, and maybe we can get into the meat of the show.  Is that okay with you, P.J.?

P.J. DiNuzzo:  Yeah, sounds very…

Jim Lange:  Did I leave anything out?

P.J. DiNuzzo:  No, it was very thorough.

2. The Process and Consultations

Jim Lange:  All right.  So, why don’t we describe…so, I’m not going to start with the process at our office.  We’ll get to that maybe a little bit later.  But let’s assume, for discussion’s sake…typically, by the way, people have come to my workshops or read my books as a starting point, and that’s one of the reasons why we try to have the finest substantive information out there.  That is basically my marketing plan is to have excellent substantive information, whether it’s about Social Security, like the new Social Security book that we just wrote that we’re going to make available to listeners for free, or my other book, Retire Secure!, or The Roth Revolution, or, again, the workshops.  So, people will typically have an entrée into that.  Then, if we are a good fit, and I meet with them, and then there is a second meeting and we still are all on board, that is, we want to do business with you and you want to do business with us, then we will typically set up a meeting with the prospect and P.J., and we always ask for permission to share the information that you provide us with P.J., and that’s always granted.  So, P.J. doesn’t walk into the meeting cold.  He knows what your tax return looks like.  He knows what your investments look like.  By that point, we have already probably actually done a relatively thorough analysis.  We’ve run your portfolio by Morningstar.  We’ve made some recommendations.  You’ve apparently liked them enough that you consider it worth a third meeting to meet with P.J.  So, P.J., why don’t you describe what happens from that point and then what your firm does?

P.J. DiNuzzo:  Yeah, Jim.  That sounds good.  I would just like to do just a brief recap, I mean, from my perspective because I think you, yourself, with your firm is very used to…you just think it’s sort of business as usual, standard operating procedure.  But ourselves, just being a registered investment advisory firm, the two largest holes that we have are that estate planning corner that Jim talked about, and the tax planning corner.  Of course, Jim is an estate planning attorney.  He has a law firm based in Squirrel Hill, and also Jim’s a CPA and has a CPA practice based in Squirrel Hill as well, and if the audience can consider, as Jim said, educating our clients is arguably the most important thing that we do.  So, an individual comes to a workshop.  Sometimes, they’ve attended multiple workshops for Jim and they’re very substantive, as Jim said.  The information is well above average.  I mean, I’ve enjoyed every one that I’ve ever gone through as well.  So, the education process starts at that level, and by the time Jim has made a referral over to us, he has done executive level analysis regarding your situation, regarding your will, trust, estate, etc., and on the tax side.  So, we’re very comfortable, and there’s just a phenomenal amount of value that’s already been placed by Jim, arguably with a workshop and with those two initial consultations.

So, as Jim said, when someone comes in, we’ve got a tremendous amount of information as we start on what we call the initial discovery consultation, the very first time that we would meet a client after Jim has fully prepared them and educated them tremendously on the front end.  Typically, the initial consultation we would have will last two hours.  The last couple ones, I was just talking to Jim out in the hallway, were closer to three hours!  But just whatever it takes.  You know, we tell folks, I mean, that initial meeting, it’s a little bit like taking a drink of water out of a fire hydrant for individuals, and it’s amazing the things that we see over and over again in that typically, the client, the type of clientele that Jim attracts are very solid financially.  They’re savers versus spenders.  They’ve accumulated a lot.  But if you just think about that typical accumulator, those of you in the audience, this may very well resonate with you, I say it’s just like you’ve got your head down and you’re just taking the money and throwing it over your shoulder, throwing it over your shoulder being just a metaphor for money coming out of your paycheck, going into your 401(k) or 403(b).  But it’s amazing that the typical individual doesn’t really think about what they’ve been throwing over their shoulder.  A lot of cases, it’s thirty, maybe even some other cases, forty years later, and you say, “Hey, holy mackerel.”  You’re talking to your spouse or your partner in the house and saying, “Hey, we’re getting close to retirement.  It’s coming around the corner.”  So, that initial consultation again, with the preparation that Jim’s done with his team and his two companies, is a lot of work because it’s really gathering thirty, and, in other cases, up to forty years of data, financial information, that we’re starting to get our arms around, our mind around, to provide you with the best advice.

Jim had mentioned from the fiduciary standard, which he maintains at his firms as well as maintaining it at our firms, you know, these multiple consultations, the amount of advice that we’re providing, etc. is at no cost and no obligation, and we do that because there’s no friction, there’s no sales approach involved or anything.  Anyone could decide at any point in time that they don’t want to go on to the next consultation, but that initial data gathering, getting to know the individuals, spending a couple of hours together, learning some of the real important points of inflection, everything that we do that I’ve seen Jim and his firms do and what we do at our firm, why we mesh so well together, is Jim had chuckled years ago when I mentioned the snowflake, you know, that every client is completely different.  You know, I’ve often referred to if we talk to a hundred individuals, if I went back to the last one hundred consultations, initial discovery consultations that I’ve sat in on, if I had asked a hundred individuals, ‘What does money mean to you?’, it’s a hundred different answers.  We can’t begin to describe how unique every household is and what your objectives are, what your goals are, what money means to you.

So, I have to go through a very thorough data gathering, getting to know you, and I emphasize ‘non-financially.’  That’s really job number one, then along with financially, covering all of these major areas that Jim mentioned: investments, pension information, Social Security, if you have annuities, I mean, unwinding those situations, going through assets, liabilities, income and expenses, and the folks that do like us, and I was always qualify that, like the attention to detail.  You know, Jim’s real great at qualifying.  You know, not, obviously, everyone likes us.  We’re not a perfect fit for everyone, but the people that do like us like that attention of depth and detail from going through things, so any recommendation that we’re making…well, my experience with us and with Jim is we provide a significant, tremendous amount of support, along with those recommendations.  Again, it’s not a sales process.  It’s not a sales procedure.  Our process is 100% consultative in approach.

At the end of that initial consultation, the discovery consultation, if the folks sitting across from us on the other side of the table like the way that that has progressed and the tenor and tone of the conversation, they like the progress that we made together, we schedule the second consultation, and that again is when we come back to our home office, and Jim has more professors from CMU and Pitt and Chatham and the other universities around Pittsburgh, they really gravitate towards Jim and his quantitative approach, so to speak.  It’s very unique.  And engineers, as well.  But the professors love it when I say that we’re going to go back and do our homework and take two weeks or three weeks so they’ve, like, given us a homework assignment, and we’ll go back and we’ll spend time.  We have seven wealth advisors at our firm, twenty-one team members overall, but seven wealth advisors.  We’ll do things in a group format.  We’ll pull in two, three, four advisors.  We’ve got different advisors that have different skill sets in the office: certified financial planners, charter financial consultants, certified public accountants (CPAs) look at the case and provide our best ideas, advice and recommendations for the next consultation.  So, I’m not sure, Jim, before I dive into the second consultation…?

Jim Lange:  Well, one of the things that you mentioned that I wanted to pick up on is some of the non-financial issues.  Of course, it’s interrelated, but that’s why I like to take extensive notes, and review them after the meeting, and I do it the same day as the meeting.  My memory isn’t quite what it was.  And also, while it’s fresh.  I’m taking notes during the meeting, but then I also write out notes of what the meeting said, and then what some people want.  So, for example, I have some people who say, “Hey, you know, my goal is to make sure that my wife and I are taken care of for the rest of our lives, and if there’s any money left over for the kids, that’s a bonus.  But that’s not our goal.  We don’t want to go out of our way to do that.  Now, we will certainly do what is appropriate if it’s not going to cost us a significant amount of money, but that’s not our goal.”  Other people might say, “Hey, no.  It is very, very important for me to leave a legacy,” whether that’s the way they were brought up, or whether that is just by the nature of the beneficiary.  Maybe the beneficiary isn’t in the position to make the same type of money that their parents made.  One of the changes in the country, unfortunately, is many of us are not going to make as much money as our parents made, and I don’t know if this is fair, P.J., but it seems that we have a lot of clients, they were not born with a silver spoon, but they were bright, and like you said, they were savers.  So, they got a job thirty-forty years ago, and they never made a ton of money, but they were working with, whether it’s a university or Westinghouse or PPG or some company that typically would have a 401(k) plan or a 403(b) plan, and they never made a ton of money, and it was hard to save because there was the car payment, there was the mortgage payment, you had to pay for the braces and then you had to pay for the college tuition.  But all these years, people are putting money into their retirement plan.  So now, they wake up.  They’re sixty-five, seventy, sometimes older, and they have a million, three million dollars in their retirement plan and sometimes not a lot more.  But even people with the identical financial position might feel very differently about their money, and people with the identical portfolio coming in could end up with a much different plan coming out.  So, for example, if somebody says, “Hey, gee, I have a child who is disabled and they’re never going to be able to make money,” or not even disabled, but they’re just not financially productive, “and I feel obligated to provide a certain level of support for that child,” and then, you sometimes, and we’ll get more into this, the combination of legal and financial, we might do a protective trust for that child on the legal side and invest that money differently.  But anyway, that type of person will have money invested substantially differently than if somebody says, “Hey, the goal is just for me and my wife, and if there’s any money left over, that’s a bonus.”  Is that fair?

P.J. DiNuzzo:  Yeah Jim.  That’s very fair.  And that’s the hard part, and that’s why you’ve been as successful as you have with your firms, it’s as much of an art as it is a science.  The science part, the legal skills, the CPA skills, financial planning and investment, but really identifying…we almost look at it as there’s sort of a code to crack, so to speak, with each household, family, partners that we meet with because they’ve never sat down and thought about these things before.  What does money really mean to us?  And as you said, you’ve been in thousands of consultations.  To be able to pull that information out and make recommendations to them, and then we both have the same philosophy regarding the extensive notes that we take.  So, we’ve got, sometimes it looks like a New York City phone book with all the financial information, and then the notes that we take, we’re both, I think, prodigious note takers when we’re in the meeting, then we call extensive dictations and notes.  You write yours out afterwards, so to add the color commentary, so to speak, the narrative to the consultation.  So, again, we’re doing everything humanly possible to get to know individuals as well as possible, both personally as well as financially, when we’re meeting with them.

3. The Stack Analysis

Jim Lange:  Well, let’s bear down a little bit on what happens between the first and second meeting, and I want to talk about the stack analysis.  All right, we were actually comparing two people that might have similar numbers in terms of portfolios, but different goals and objectives, or perhaps maybe one has a pension and one doesn’t have a pension.  So, what I’d like to do, rather than speaking in generalities, is to ask P.J. how he might treat two different people with the identical amount of money but maybe different ideas, maybe one with a pension and one without, and how he would use what he calls the ‘DiNuzzo stack analysis,’ which we think is just wonderful, and our mutual clients really love.  So, P.J., let’s say that we refer you two different people and they have identical portfolios going in, typically with a significant amount of money in a retirement plan, and let’s say that the first one, they are very interested in providing for the next one, maybe even the next two, generations.  And let’s assume that they worked for a company and they are now retired, and let’s assume that they do have a pension and they either are collecting Social Security soon or are taking advantage of some strategies because they read my Social Security book, which, by the way, I will put in a minor plug for to get our new free eBook, which really, by the way, every married couple between sixty-two and seventy, even single folks, but especially if you’re married, you should read that.  There’s a deadline coming up on that.  But let’s say whatever their Social Security strategy is, because certainly after they’re both seventy, they’re going to be taking Social Security, so let’s say that part is the same.  But let’s say one couple is interested in leaving money behind, and they do have a traditional pension, whether it’s from Westinghouse, or maybe they annuitized some money with TIAA-CREF versus a different couple.  They don’t have any pension, and they are mainly interested in making sure that they lead the best lifestyle possible, maybe they don’t have children, or they just genuinely believe that this is their time, they paid for their kid’s braces, they paid for their kid’s college, and now they want to drink the finest beer on the market.  How would you treat those two different couples differently?

P.J. DiNuzzo:  Yeah, exactly Jim, and that’s a great point.  I’ve often made the same point to individuals that they could be the same age, because, oftentimes, they’ll talk about their relative or their neighbor, and I made the same point that both spouses or partners can be the same age, they could’ve gone to the same high school, university, but their situation could be very different.  I would start off looking at the really big picture and drill down from there.  We’re typically planning for a thirty-year time horizon, once the last spouse is retired.  If we had to pick an individual age, we’d want to not run out of money before we run out of breath.  We’d use age ninety-five.  If we looked at the three large risks that we’re going to have to address entering retirement, the one that starts pretty much immediately is volatility risk.  As we can all understand, in investments, there’s volatility.  The second risk, which really initiates and starts at day one, but really you can start to notice it after the first decade, for the final twenty years of retirement would be inflation risk and the effect on how it erodes the purchasing power of your money.  The third one would be longevity risk.  Everybody sort of has an idea in their head how long they think they’re going to live to.  Just imagine if you were absolutely confident that you were not going to live past that age and you did live longer.  So, that’s longevity risk.  You don’t want to run out of money before you run out of breath.  And then, if you want to throw in a fourth, the fourth one is a testamentary or after the last spouse has passed away, the legacy risk and legacy sensitivity.

So, as you said, Jim, you could look at these on a piece of paper, and a lot of our clients come from exactly these situations, that they’ve been out there in some other situation, have what I would refer to as a ‘cookie cutter approach,’ or just a one size fits all.  They look the same.  They get treated the same.  But really, regarding these unique challenges, there’s two main types of risk whenever we take a look at a client’s situation, and Jim will refer to, we’ve trademarked it over the years, we call it ‘the DiNuzzo Money Bucket Stack Analysis.’  Really quick, we just want you to have enough money in the bank that you could sleep at night.  We would want twelve months times your monthly living expenses when you go into retirement, but it’s that first bucket (what Jim had referred to a little bit ago), the ‘needs’ bucket, that’s what’s referred to as risk capacity.  That’s a financial calculation that’s the same for every individual.  If you take all the guaranteed income coming into your household, Social Security, defined benefit pension, we’ve got a ton of professors from the universities across southwestern Pennsylvania, they have what we’ll refer to as a TIAA traditional annuity.  We love plugging that into the needs bucket for guaranteed income.  So, there’s that risk capacity solution, and then there’s a risk tolerance solution.

Then we can get into unique customization of how much risk an individual can stand to have in their portfolio that they’re going to take withdrawals off of over time.  So, as you had mentioned, Jim, you do run into an above average number of prospective clients who have a defined benefit AKA pension, and that is a huge benefit when we’re putting the plan together for satisfying that needs bucket.  So, if the audience can think that a typical household may need to put two or three hundred thousand dollars or five hundred thousand dollars or more in a conservative or moderate strategy to be able to satisfy that risk capacity, the needs bucket, and these individuals don’t have to.  So, you would typically see a lot higher level of confidence, or lower anxiety, I should say.  If someone has a big pension, defined benefit pension, what the audience needs to remember is for every thousand dollars that you have coming in from something, for example, from a defined benefit pension, from a TIAA traditional annuity, anything that’s in that guaranteed income category, that represents at least a quarter of a million dollars, actually more around the three hundred-thousand-dollar portfolio.  So, sometimes people will come in to us, and Jim will refer someone over and we’ll meet with them and say, “Ah, I just have this one hundred-thousand-dollar pension,” I’ll say, “Well, that’s the same as if you had saved up three hundred-thousand-dollars through your household as far as that’s going to last you the rest of your life.”

You know, the other one’s sort of funny, when you said have the last check clear when the last spouse is being lowered into the grave, so to speak.  So, we want to suck the marrow out of the bone of life-type of deal, but that’s great.  Each household’s customized.  A lot of folks have taken care of this.  They have taken care of the family.  We’ve got everybody in great shape, and as you said, we want to live life the way we want to live it, and that’s really the benefit that you should enjoy.  If you are a saver, you should have a very good idea of what the future’s going to look like, and one overlay that I would have regarding this conversation, I’ve always felt, and I’ve never seen a case myself, honestly, from thousands and thousands of cases, where someone hasn’t been successful.  And that’s why it’s been a blessing from the first time that we started to meet with Jim and his firms, with them having the estate planning taken care of, with them having the tax planning taken care of, and all the unique ways that Jim is sort of the mad scientist on how can you save money for a client.  I mean, he burns the midnight oil.  He comes up with some phenomenal ideas, but to be able to bring this all together and the anxiety this lessens with individuals and leads me up to my observation that I’ve always stated, and I think you’ve got about two dozen key significant forks in the road that you’ll approach, that you’ll have to make a decision.  Basically, am I going to turn left or turn right?  What am I going to do with this decision?  And from Jim, with his firms, the estate planning prowess, the tax planning, doing the full and thorough retirement planning and retirement income planning, and then the investments (which we can talk about later), I’ve never seen a case that if an individual controls everything that they’re able to control, that they haven’t been successful, and that’s really the biggest anxiety people have.  Am I going to be okay?  Am I going to run out of money?  Am I going to be able to live my life the way that I want to?  If you come in and talk to Jim, and I sort of look at it as like almost a conveyor belt or sort of a financial car wash where you come in one side and maybe it’s dirty, and by the time you go through all these different segments, you come out and it’s sparkling.  It looks like it’s brand new.  But you come in and have Jim go through all these steps with you, go through these four major financial corners in the house that we talked to you about, and it’s very comforting to the listeners in the audience to think that there are solutions available, that if I manage everything that I can, it will go well.  We can’t manage the stock market.  Nobody has tomorrow’s newspaper.  But we don’t need to manage the stock market.  We’re not investing for tomorrow or this week or this month or year.  This is a strategy for the rest of your life.  You couple all these positive decisions with all these forks in the road and you’ll be very happy at the end of the day.

Jim Lange:  Well, one of the things that you do when we talk about financial planning or retirement planning, you do the best job I have ever seen with what I would call cash planning, and I know that this comes from part of your CPA background, but you’re actually preparing an income statement, I mean, down to the cable bill on how much people typically spend, and you don’t do that because you don’t have anything better to do, but that will help you determine how much goes in each bucket.

P.J. DiNuzzo:  Mmm-hmm.

Jim Lange:  And if you could describe that process, because it is very labor intensive, and I don’t know any firm that, frankly, does anywhere near that level of detail, and we go back and forth because we look at things from a slightly different perspective, let’s say, for Roth analysis and there are tie-ins there.  But if you could tell us a little bit about your approach, because in your words, this is where the magic happens on the whether you call it financial planning, cash planning, but I don’t really know any other firm that really does an accurate income statement and a personal balance sheet, and then what you do to get that, and then what you do when you get that, because I think that that would help our audience really understand, by the way, that this is a really classy combination of our firm and P.J.’s firm, and I just feel so confident referring somebody over, assuming it is the right fit, and we’re not a right fit for everybody.  We used to have a 99% retainage rate.  One or two people, we were not the right fit on, and bad news, P.J. we went down to 98%.

P.J. DiNuzzo:  Yeah.

Jim Lange:  So, our retainage rate went down.  I want to get it back up to 99%.  But basically, what it means is unless either you or we made a pretty bad mistake in the beginning, we keep clients.  In fact, I would say, and I don’t know if this is fair, P.J., but this is kind of how I often see our challenge.  You know, so people read some of our books, and they know we know what we’re talking about.  You know, the books have testimonials from Charles Schwab and Jane Bryant Quinn and Burton Malkiel.  We have all this information.  We have all these CDs and DVDs, and when people come to our office, we literally give them probably like five or eight DVDs and CDs and books and articles and we have all these peer reviewed articles.  So, I don’t think that they wonder if we have the technical chops.  And the same thing, when they meet you and they see all this, they know that this is very legitimate, and they can certainly check out our records.  Both of us are squeaky clean, we’ve never had a complaint, etc.  But I think one of the challenges for people is actually the challenge of Lucy and Charlie Brown.  I’m going to talk about that for one minute and then we’ll get back to the stack analysis.  So, Charlie Brown comes up to Lucy and says, “Lucy, I’d really like to kick the football, but you’ve pulled the football away from me before.  Now, this time, you’re going to promise to hold the football down and then I’m going to kick the field goal.”  And Lucy says, “Oh yeah.  Don’t worry Charlie Brown.  That’s what I’m going to do.”  So, Charlie Brown steps back a couple of feet and he runs up and he gives a big kick, but, of course, Lucy pulls the football and Charlie Brown ends up on his butt.  So, he’s really upset, and she says, “Oh, I’m sorry.  I shouldn’t have done that, Charlie Brown, but I won’t do that again.”  So, Charlie Brown, ever optimistic, because he really wants Lucy to hold the football, he goes back, and, of course, she pulls it again, and this unfortunately is what has happened with clients.  They’ve heard good raps before, they have had reason to be optimistic, and then somebody pulled the plug, or somebody pulled the football and they ended up on their you-know-what.  So, we do not do that, and we don’t lose clients from that, and one of the reasons that we do all this, we do it for very substantive reasons.  But we want you to feel good that, yeah, we know what we’re doing.  We’re doing this the right way, and we are not going to pull the football.  So, P.J., why don’t you talk a little bit more about okay, so now, you’ve gone through, literally with painstaking detail, because I know how much time you spend on this, and both of us also agree that if we can’t keep a client at least a couple years, and preferably five or more, we’re going to lose money because we spend so much time upfront that the fees that we get for the first couple years doesn’t cover all our, let’s call it, set up time.  What do you actually do to prepare these statements, and then what do you do when you actually have them?

4. Preparing the Information and Putting the Stack Analysis into Action

P.J. DiNuzzo:  Yeah, Jim, that’s great, and I just need to harken back to the beginning because you made a great point just a couple of minutes ago, and you can see it in individual’s eyes.  You said, you know, that was a great story, the metaphor regarding Lucy pulling the ball away from Charlie Brown because the average folks that we’re meeting with, again, these are intelligent, successful individuals, and they typically have had at least one or two, sometimes two or three, other financial relationships, and they’re displeased or despondent to say the least.  The football’s been pulled away from them.  It wasn’t what they thought it was, and if there’s one thing unfortunately, and the listeners, I think, will definitely nod in approval when I say this, that the companies in our business are very good at is marketing, and unfortunately, there’s not a lot to back it up.  In a lot of cases, it’s sort of like a Hollywood movie set.  It looks great and it’s shiny from the outside, but you look behind and there’s nothing behind the curtain.

I grew up in the restaurant business, and I can say with 100% confidence, when you grow up in the restaurant business, there’s an old saying: you’re either selling the sizzle or you’re selling the steak.  We’re selling the steak.  It’s a lot of steak on the plate.  Again, you’ve got the workshops, multiple meetings with you, multiple meetings with us, not asking a client for anything.  They don’t write a check for us for one penny for getting to know them, and as you and I have said, we’ve both been in this for going on four decades, your businesses, my business, and we’re looking for a good fit for clients.  We want to help people.  We want to know that we can pay for ourselves, that we can add value and pay for ourselves, and there’s enough people out there that do and it works out well.  But again, we want it to be a good fit both ways.

Getting back to the details on the cash flow, we’ve always had the position, I’ve always had the position from when I started the practice in 1989 that we’re not just going to put our good name on anything.  It’s not horse shoes and hand grenades.  We’re not going to make guesstimates.  We’re not going to try to sell someone something to hit them over the head for a commission.  We’re going to work through and have support.  We don’t ever want to be asked…in fact, we’re proactive about it, but we would never want to be asked by a client “How did you arrive at that and why are you recommending that?” and not have a reason.  It’s not like you’re the parent and they’re the five-year old child.  “Well, listen to me.  You’re living under my roof.”  No, you have to give an adult answer from an estate planning, tax planning, financial planning or investment planning reason why we’re doing what we do.

So, we take a lot of time, as you said, Jim, on the cash flow, unlike some other firms, and we have to be very careful not to mention names.  Not a firm from Pittsburgh, a big, enormous national firm, great reputation, and there’s a lot of firms with lower fees out there.  Now, we talk about this all the time.  It’s sort of in that category of ‘you get what you pay for,’ and there was an individual we met with just about a month or two ago, and they were leaning very heavily towards this organization.  The organization who offered their retirement planning was off by almost fifty percent on their cash flow expenses in retirement.  So, just think if you thought from working with someone that your retirement cash flow, your expenses per month, were going to be $6,000 a month and they were $10,000 a month, and the entire plan was not worth being recycled for toilet paper.  I mean, it was completely useless.  So, you need to be real careful regarding…there’s no shortage of gee whiz-bang software out there that you can plug a few numbers in and it’ll print off a big, thick report that if you’re in college, it sort of feels like an A.  It’s a big heavy report.  But we get into the details, and, as Jim said, we get every reasonable expense in the household, some of them down to ten or twenty dollars a month, because, again, we don’t want to be off by five hundred dollars a month.  We don’t want to be off by a thousand dollars a month.  We’ve done this thousands of times and we’ve heard time and time, I mean, hundreds and hundreds of times, we meet with clients who say, “I’ve got recommendations from other firms.  They’ve told me I can retire.  They don’t know what my car payment is.  They don’t know what my property taxes are.”  There’s huge differences in property taxes around Pittsburgh.  It could be thousands and thousands of dollars of difference per year.  So, again, we’re not making guesstimates.  There’s no cookie cutter.  It’s very customized for each individual situation when we’re working on the cash flow analysis, because if we think, again, we’re building the footer and foundation of your personal financial house that we talk about all the time, and that footer and foundation has to be rock solid.

Jim Lange:  All right, and before we break, why don’t you also tell us about the personal balance sheet?  Because that is somewhat unique, and this is something that, of course, we, as CPAs, love.

5. The Personal Balance Sheet

P.J. DiNuzzo:  Yeah, and as Jim said, really this grew out of the soil of myself being a CPA.  The two primary documents you would have as an accountant, as a CPA, would be a balance sheet, and then you would have a cash flow statement, with income and expenses.  So, I’ve always looked at a household, husband and wife, partners, individual single members of a household, as their own corporation or organization, and we’ve always felt we can’t give the highest level of educated decision recommendation if we don’t know their specific assets, liabilities, income and expenses.  And really, as you mentioned before, Jim, that’s where the magic starts to happen, in that once we’ve accumulated all this detail, it takes four or five meetings and ongoing meetings if someone comes onboard as a client, and one of our seven wealth advisors is in contact with one of your handful of estate planning attorneys, or handful of CPAs, on a daily basis.  The listeners in the audience would know that they just don’t have…the average individual does not have that type of power for that personal financial house we talked about, with your tax advisors talking to your estate planning advisor talking to your financial planning retirement advisor versus your investment manager on a regular basis.  We’re doing that on a daily basis, and it seems so subtle but it’s so powerful that I can just pick up the phone and talk to any one of Jim’s CPAs who are experts at what they do, talk to any one of his estate planning attorneys that are experts at what they do, and often we’re sharing these financial statements on our joint clients, and that’s one of the first things your estate planning attorneys will look at will be, ‘What is their unique blend and recipe or formula of assets and liabilities?  Where are they regarding income and expenses?’  Because we all know that households can look exactly the same, but their spending habits are completely different, and again, that’s the art part of the business married together with the science part, getting all four corners of your personal financial house working in harmony and talking with each other.

Jim Lange:  Okay.  As a quick wrap up, and we didn’t really cover the first two houses all that well, but our office, as the estate attorney…again, whether we’re drafting the documents or not, I believe we are providing enormous value, strategies, even things like which dollar should go where.  So, for example, we see charitable bequests and wills all the time.  They don’t belong in wills.  They belong in IRA beneficiary designations.  I think Matt Schwartz is the best estate attorney in the city, and he is supported by Karen Mathias, who is wonderful and second-to-none in terms of attention to detail.

Then we also crunch the numbers.  How much of a Roth IRA conversion should you make?  When should you make it?  What’s the best Social Security strategy?  What’s the synergistic strategy between Social Security and Roth IRA conversions?  How much money can you afford to spend every month or every year?  Can you afford to retire?  Can you afford the second home in Florida?  Can you afford to help your grandchildren with their education?  If so, what is the best way to do that, both while you’re alive and after?  Again, that’s what we have been doing.  We’ve been doing it for a long time.

But then, when I wanted more or less a one stop shop, if you will, or at least where somebody could get multiple services and have the right hand talk to the left hand, and after I really became convinced that Dimensional Fund Advisors was the best set of index funds on the planet, and I’ll save the story, but I went through a lot of steps to become one of their providers, and finally, after I succeeded, I had another problem is that our firm doesn’t have the money management skills, and we don’t have anywhere near the capabilities of P.J.’s firm, and we didn’t want to develop that internally.

So, I went back to DFA and I said, “Well, who is the best financial advisor in western Pennsylvania?”  And there was zero doubt about it.  It was P.J. DiNuzzo, and I went to P.J. and said, “P.J., here’s the deal.”  We knew each other, but not well.  I said, “Here’s the deal.  We have all these clients and they are looking for” (although I didn’t use the terminology at the time) “the four corners, and we can do two, but we need somebody else to do the other two.  But we want to cover all four of those corners, but we only want the person to pay one fee, which means the way it would work is that you would get half and we would get half.”  So, neither P.J. nor I get a full fee when we are working with somebody.  We get half a fee.  But it’s a magical win-win-win because we get to do our part that we’re good at, he gets to do his part that he’s good at, and the real win is the client who gets all four corners for one price.  But anyway, before we wrap up for tonight, I do want to talk a little bit about the investments themselves, about Dimensional Fund Advisors, asset allocation and investment choice.  So, maybe P.J., in the next maybe six minutes or so, maybe if you could talk a little bit about DFA in general and how you work with DFA and what you do for both investments and asset allocation and diversification?

6. Dimensional Fund Advisors

P.J. DiNuzzo:  Yeah, Jim.  We’ll keep it brief here to wrap up before we run out of time.  The key is, and I think that’s just the beauty of the show that you do in the way that we operate.  Most firms that come on here start talking about investments the very first thing, and here we are, we’re just going to talk for a couple of minutes.  But the executive summary would be from all the financial planning that we’re doing, all the work that you and your team do and hand off to us, then from the two, and sometimes three, consultations that we do, we developed that DiNuzzo Money Bucket Stack Analysis so the most important decision to make is the asset allocation.  How much you should have in stocks versus bonds.

Our typical individual who is retired has three strategies, one for the needs bucket, which would be conservative to moderate, one for the wants bucket, which would be in the balanced category, and then another one in the dreams and wishes, which is where your favorite Roth IRAs reside.  A lot of growth there, intergenerational, the best investments tax-free known to man.  Then, once we come up with the asset allocations, which takes a while, but to make this short, once we identify what we consider to be the ideal asset allocations, and a glide path, which is another story for another day, then our question is, ‘How are going to populate these portfolios?’  And again, as Jim mentioned earlier, we’re the largest, oldest pure index mutual fund index manager in the city of Pittsburgh, been doing this since 1989, started with Vanguard, and when DFA made their funds available, started working with them around 1994, and we believe with every fiber of our body that the stock market is very efficient, especially over time.  Again, the audience members have to remember, we’re building at least a thirty year plan.  I don’t know anywhere else right now…we’ve got an eighty-eight year track record on the Fama/French indexes out of the University of Chicago, the benchmarks which Professor Fama and Professor French built decades ago, an eighty-eight year track record.  We know what U.S. large has done, U.S. large value, small, small value.

So, you take these extensively long track records and take all the brilliant people that are participating in the market, which is what makes it so efficient.  These individuals who manage money for active mutual shops?  They’re brilliant individuals.  They’ve got a lot of firepower, research capability, but with millions and millions of very intelligent people looking at the price on a second by second basis, be it for Google, Johnson & Johnson, Microsoft, Facebook, whoever it may be, the price discovery is at an extraordinarily high level, and the market, again, is very efficient, especially over long periods of time.  So, we take this market efficiency, we apply an index strategy, we work with who Jim thinks is the top index management firm, Dimensional Fund Advisors, and we concur.  You know, we believe that they are, they have been, and they remain, in their dedication and research, at the top of the pyramid for index management, and if I could just mention why do we think that.  You know, these are the individuals that identified the efficient market theory decades and decades ago, it started in 1959, and built the first indexes.  Currently, DFA is the largest pure index manager mutual fund company on the planet.  They are around $400 billion, 100% indexes, no active management.  So, we take all that firepower from Nobel Prize winners, the research and development department at DFA sort of sewn at the hip with the graduate business school at the University of Chicago.  That’s a pretty good research and development team to have at our backs as far as how our individual indexes are structured and how to maintain them on a daily basis.

Jim Lange:  Okay.  And the other thing that, frankly, I think that you’ve done just such a good job at is integrating the investments with what is going on in people’s lives, and sometimes, for whatever reason, sometimes you’re not managing all their money and you sometimes have to have a work around.  So, for example, let’s say somebody is still working and they have a substantial amount of money in a 401(k), but then they have other money that can be managed.  I know that you really like to take a really holistic look and to be able to, even if you’re not charging them for the money that you’re not managing, to have a say in the entire portfolio.

P.J. DiNuzzo:  Yeah, and that’s the benefit.  Most people just concentrate on the investment corner from the personal financial house we’ve been discussing during tonight’s show.  We really want to look at all four of those rooms, and a lot of firms are sort of like separate account managers.  They have a strategy, they run that strategy, they don’t do any of the planning work, but it order for us to help our clients be as successful as possible, we want to proactively look in all four rooms and in all the dark corners in those four rooms, and as you said, oftentimes, we’re managing a small amount of money for an individual for a number of years until they have their wealth event and they retire and they have access to their 401(k) or 403(b), but we want to make sure that everything that they’ve busted their butt saving this money for decades and decades and decades, that all of these assets are singing from the same sheet of music and that everything’s moving forward in the manner that it should.

Jim Lange:  Yeah, and the other thing that you mentioned when we were actually having a private conversation, which I thought was really good, is that it’s extremely rare to have this level of communication, and certainly for anybody that has a portfolio of less than $10 million.  It just really doesn’t happen in the marketplace.

P.J. DiNuzzo:  Yeah, it’s almost a family office structure that we’ve developed with your two companies and our one company, and the communication back and forth on a daily basis.  Usually, you’d have to have at least $10 million to have this type of service at your fingertips.

Jim Lange:  I am afraid that we are out of time, but thank you so much, P.J.

P.J. DiNuzzo:  Thank you, Jim.

Jim Lange:  And I’m going to do a ten second little commercial. for a great, free Social Security book.