M O N E Y M A N A G E R I N T E R V I E W

Holistic Wealth Management

P . J . D I N U Z Z O , D I N U Z Z O I N V E S T M E N T A D V I S O R S , I N C .

P.J. DINUZZO is Founder, President and Chief Investment Officer of

DiNuzzo Investment Advisors, Inc. He has always loved the
numbers side of the business, and knew from an early age that he
wanted to help people plan for their financial futures. His strong
educational credentials and years of experience enable him to
provide objective advice and serve his clients as their trusted
advisor. In October 2006, he was admitted as a 5-Star Advisor to the
Paladin Registry, a Web-based service that helps investors find,

Copyrighted material: For reproduction permission contact Kenneth Wolfrath (212) 952-7400
evaluate and select financial advisors. While admittance to the Registry is limited to the
top 10% of US financial advisors based on their competency, integrity and various risk
factors, the 5-Star rating is reserved for the top 3%. Mr. DiNuzzo attended Indiana
University and received his BS in Business Administration from Geneva College. His
graduate studies culminated in an MBA from the Katz Graduate School of Business at the
University of Pittsburgh and an MS in Tax Law from Robert Morris University.

SECTOR – GENERAL INVESTING Chief Investment Officer. We currently have 11

(ZDU501) TWST: Please start with an overview of superb team members working side by side in
your firm and its history. our practice.
Mr. DiNuzzo: Highlights TWST: What fi-
Our organization started P.J. DiNuzzo says his holistic approach to wealth nancial services do you
operations in 1989 as an management involves specializing in investment offer to your clients?
management, retirement planning, financial and tax
SEC-Registered invest- planning, risk management, education and estate Mr. DiNuzzo:
ment advisory firm. I planning. He manages money like institutional We are a holistic wealth
founded our fee-only investors on the principles of “smart money.” The management firm. We
difference from traditional portfolio management
firm by hanging a shin- comes from his close working relationship with specialize in investment
gle and opening our Dimensional Fund Advisors (DFA). He is, however, management, retirement
completely independent of DFA and he utilizes the
doors with zero assets firm’s research because he believes in the efficient planning, financial
under management. market theory of Professors Fama and French at the planning, tax planning,
University of Chicago Graduate School. On the
Today, we’ve grown equity side, he has a tilt toward value and smaller risk management, edu-
into a comprehensive cap companies. A typical portfolio would contain US cation planning and es-
wealth management large cap stocks, large value, micro-cap, small value, tate planning.
real estate, international large value, international
firm that manages over small value and emerging market positions. He also TWST: Who are
$200 million for our prefers to have a commodity position in every client your typical investors?
portfolio. He utilizes the fixed income side as the
clients. I presently anchor to lower the portfolio to standard deviation Are they mostly indi-
serve as President and and lower the volatility and risk of the portfolio. vidual?
 MONEY MANAGER INTERVIEW — P. J . DINUZZO

Mr. DiNuzzo: Our typical investors are vestment maladies and problems, almost all of
primarily individuals, followed by corporations, which can be directly traced to a complete discon-
not-for-profits, trusts and pension plans. nect between how their portfolio was set up versus
an institutional “smart money” structure.
“Our investment philosophy has been one of the Our investment process starts with
cornerstones of our practice over the years. We in-depth research and analysis of our new
manage money based on the same principles as ‘smart client’s unique situation and circumstances,
money,’ meaning institutional investors. We tell our
which leads us to customized portfolio rec-
clients it benefits both of us to pay very close attention
ommendations. We start by establishing a
to how these institutional portfolios are structured.
These professional managers have a tremendous strategic asset allocation then diversify
long-term track record, averaging approximately 11% across all desired asset classes based on an
over the past 10 years versus approximately 6% for the efficient market theory in ultra low expense
average individual.” institutional mutual funds. Our aggregate
client portfolios are over $200 million and
TWST: Tell us about your investment resemble an institutional portfolio in every way
process and philosophy when it comes to deal- with approximately 65% in equity (stock) invest-
ing with the individuals. ments and approximately 35% in bond and bond-
Mr. DiNuzzo: Our investment philosophy type investments. Once we start off with these
has been one of the cornerstones of our practice strategic asset allocations, the next key is a full and
over the years. We manage money based on the proper diversification across the portfolio. Starting
same principles as “smart money,” meaning insti- at the top, we implement an efficient market the-
tutional investors. Institutional investors are pri- ory, and then we follow Professor Gene Fama Sr.
marily: corporate pension plans, public pension and Professor Ken French’s Three Factor Model,
plans and endowments. A $500 million portfolio allowing us to access and maximize the equity risk
would be considered a small institutional portfo- premium, value premium and size premium avail-
lio; thus we tell our clients it benefits both of us to able in the capital markets.
pay very close attention to how these institutional Then we have a tilt toward value and to-
portfolios are structured. These professional man- ward being slightly smaller cap in size. A typical
agers have a tremendous long-term track record, portfolio contains US large cap stocks, large
averaging approximately 11% over the past 10 value, micro-cap, small value, real estate, inter-
years versus approximately 6% for the average in- national large value, international small value
dividual. They focus incessantly on asset alloca- and emerging market positions. We also prefer to
tion, passive investments/indexing, and have a commodity position in every one of our
maintaining the lowest possible fee and expense client’s portfolios.
structure. They do not base any decisions on We utilize the fixed income side of the
someone taking them golfing or out to lunch. They portfolio as the anchor to lower it to standard devi-
have an enormous fiduciary responsibility to, in ation and lower the volatility and risk in a portfo-
many cases, thousands of stakeholders. All of our lio. That’s where there has been even more
new clients who come to us have had various in- development on the institutional front in the last
 MONEY MANAGER INTERVIEW — P. J . DINUZZO

decade, with absolute return strategies and the abil- appropriate index is for their portfolio and objec-
ity to index some key low correlation areas of the tives. Then they will allocate the residual $20 mil-
market. We have been able to add value by poten- lion into an actively managed strategy in an
tially having 1% to 2% — in some case 3% or 4% attempt to achieve alpha/active outperformance.
— additional alpha with virtually the same stan- The average client that comes to us has
dard deviation. So it’s a 65:35 mix, approximately 100% of their portfolio in an actively managed
the same as a typical smart money institutional ef- structure, whereas it’s commonplace for institu-
ficient market theory based portfolio. tional portfolios to have 50%, 60%, 70% or 80%
plus in a passive core and then just have a
“Our approach to efficient market theory and the minority portion of the portfolio trying to
indices is what’s commonplace for institutional outperform in an active strategy to provide
managers and is not really implemented at all for the the alpha.
average retail investor up and down the Street. So the
TWST: Your asset management
uniqueness would be that most of our research has
come out of the Graduate School at the University of approach to the index is slightly uncon-
Chicago through Dimensional Fund Advisors (DFA) ventional compared with a lot of other
with Professors Gene Fama Sr., Ken French and their passive managers.
entire research group.” Mr. DiNuzzo: Our approach to effi-
cient market theory and the indices is
The majority of the research that we follow what’s commonplace for institutional managers
has come out of the University of Chicago and and is not really implemented at all for the average
their numerous Nobel Prize winners. People as- retail investor up and down the Street. So the
sume the S&P 500 has been in existence since the uniqueness would be that most of our research has
Declaration of Independence, but the S&P 500 US come out of the Graduate School at the University
Large Cap Index was actually launched in the early of Chicago through Dimensional Fund Advisors
1970s. “Efficient market theory,” as identified by (DFA) with Professors Gene Fama Sr., Ken French
professor Gene Fama Sr. in 1964, has grown from and their entire research group. So yes, it’s differ-
zero dollars in institutional portfolios in the early ent from what the average person is doing or being
1970s to multiple trillions of dollars in smart instructed to do by the typical firm that you see ad-
money portfolios today. vertising on television.
When professional institutional managers TWST: What about your fixed income
go into an equity area of the market, their immedi- strategies? Do they also differ from traditional
ate question is — how much are they going to index firms’ work?
apply to beta? How much are they going to pas- Mr. DiNuzzo: The difference from conven-
sively invest in the index? How much alpha are tional indices would be that we have a very close
they going to attempt to achieve after the beta/pas- working relationship with Dimensional Fund
sive core has been established? For example, they Advisors. On the fixed income side of our portfo-
may allocate $100 million to US large cap stocks lios, we utilize a passive core approach as well. I
and maybe they are going to have 80% beta, so was one of the first 100 advisers in the United States
they place 80% and replicate whatever the most with DFA, back when they had under $10 billion —
 MONEY MANAGER INTERVIEW — P. J . DINUZZO

I think they just crossed over $120 billion in institu- We look at a five-year type bond ladder
tional assets. Their experts are second to none in — all investment grade paper — and then we
identifying and setting the definitions for what truly further complement that. If you look at the
makes a US large cap value index, as well as the smart money at the institutional level and look
best approach to the fixed income markets. What are at what Yale, General Electric and other institu-
the criteria that uniquely capture the three factors of tions are doing to complement their portfolio,
the Three-Factor Model versus a lot of other in- once they’ve established their core in the port-
dices? That is what these institutional experts, our folio and their beta in the asset classes, the next
de facto research department, deftly accomplish. thing they’re doing is looking to add value. In
the absolute return strategy, we use ab-
“We’ve properly structured another entire layer through solute return strategies (ARS) on the
thorough diversification, with large stocks, small cap, fixed income side of our portfolios. It’s a
international, commodities and real estate. These are low
minor position relative to the actual
correlated asset classes. For the average individual that
bond, but that has added value over the
comes to us, most of it is in US large cap stocks, and
some may be in international. Over the last few years, history that we’ve had this low correla-
people have been overweight internationally, going tion investment included in our client
conspicuously overboard in international allocations.” portfolios. It has been a very good com-
plement. Other complementary institu-
Most other indices in existence are using a tional strategies include indexing managed
blunt instrument, whereas DFA is much more re- futures and merger arbitrage.
fined. If you look at DFA’s US small cap
index asset class versus a generic index “Risk management is very critical. In fact, most
such as Vanguard’s over the last 25 to 30 clients that come to us have had very bad experiences
years, there’s a dramatic difference, even in their portfolio to the point where they can’t quantify
it, but we do it through our investment strategy and
though they’re in the same area of the mar-
risk sensitivity analysis that we provide for all of our
ket and have a very high correlation. clients. If you look at the big picture, we’re mitigating
They’ve been outperforming it by approxi- a tremendous amount of risk, having approximately
mately 2% plus per year over the last 25 60% to 70% of equity exposure in our average
years. On the fixed income side, we believe portfolio, and the residual 30% to 40% in fixed income
that the cost/benefit relationship between type investments.”
the expected rate of return and risk/volatil-
ity drops off dramatically after five years. We keep TWST: Your fixed income outlook looks
our average term at a five-year maximum on the more at the yield curve than, for example, in-
fixed income side, averaging around two, three or terest rates.
four years of our weighted average on our bond Mr. DiNuzzo: Yes, it’s based on the yield
side of the portfolio. We want to index as much as curve, and that is literally what the DFA bond team
we can, buying bundles of investment grade bonds does on a daily basis. They’re doing the daily cal-
in institutional funds at the point of maximum ben- culation at the point of maximization of the yield
efit based on the yield curve. curve on a two-year basis — two and five years are
 MONEY MANAGER INTERVIEW — P. J . DINUZZO

the key points of analysis. So whatever bonds are just given the fact that with the enormous friction
coming due today, what’s the best point on the that those funds carry, they’ve got to outperform
yield curve? They’re going to buy bonds at that the market by 2.5% just to break even. It’s a very
level. It is amazing how fundamental it is, but how difficult, if not impossible task to accomplish and
hard it is to do, in that the two major criteria that maintain over time.
the institutional investment policy committees TWST: Would you tell our readers a bit
focus on are asset allocation and cost mitigation. more about DFA, since you were one of the first
So they’re spending a tremendous amount of time people to use their services and investors are
on that. Asset allocation is what drives the engine. starting to hear more and more about it?
That is what’s going to have the highest pre- Mr. DiNuzzo: DFA is a unique organiza-
dictability and the biggest effect on that portfolio tion. They are a testament to getting together a
over time. We would argue for strategic allocations group of enormously brilliant individuals who are
versus tactical. Tactical draws you into active man- completely objective. It’s amazing what they can
agement, and that does more harm than good for accomplish. When DFA made their investments
the average person over time. Thus, success is dri- available to the registered investor adviser com-
ven by strategic asset allocation. munity, you had to meet certain criteria in terms of
the size of the firm and your trading habits.
“Clearly, we have two core competencies at our practice You couldn’t be an active trader and you
— investment management and relationship management had to maintain the obligation that you in-
financial planning. With our average client who comes to dicated to DFA. Before I had access to
us for retirement planning, pre-retirement planning or life
DFA, I was crafting and cobbling portfolios
planning, we are building a net worth statement for them,
together with the available indices. I was
with their own personal balance sheet, assets, liabilities
and net worth. Not only are we building that, but we are using a lot of Vanguard in the late 1980s
also asking a lot of probing questions and making and early 1990s prior to initiating my rela-
recommendations to place them in a better financial tionship with DFA.
condition based on their own personal balance sheet.” Once Dan Wheeler, who’s now the
Director of Registered Advisor Relations
Number two, we’re firm believers in the with DFA, made the breakthrough and made the
absolute lowest possible expenses in managing the funds available to advisers such as ourselves,
portfolio. We would refer to it as the annual fric- things continued to blossom. Rex Sinquefield was
tion — how much friction do you have in your the co-Founder of DFA along with David Booth.
portfolio? One of the best predictors of future per- Rex arguably constructed the first S&P 500 fund
formance for mutual funds is how high their oper- that was ever built. He and Wells Fargo were doing
ating expense ratios are. Mutual funds that have independent work on it at that time, but they were
high expense ratios would be on the active side. literally there at the ground level.
They’d have expense ratios of 2%, 2.5% or even DFA has an annual continuing education
3%, especially adjusting for front- and back-end symposium that Professor Fama presents at every
loads and the 12b1 fees. They have a higher pre- year. Professor Fama in 1964 was the first individ-
dictive value that they’re going to underperform, ual known who coined the phrase “Efficient
 MONEY MANAGER INTERVIEW — P. J . DINUZZO

Market Theory.” The research mostly coming out or very close to it. So we’ve mitigated a tremen-
of the University of Chicago sliced the market into dous amount of risk with the asset allocation and
10 deciles. Some of the initial research he noticed asset class diversification.
was that the top two deciles’ return in the market We’ve properly structured another entire
— the largest 20% of the stocks in the market on layer through thorough diversification, with large
average over time, depending on how you slice it stocks, small cap, international, commodities and
over five- to 10-year rolling periods — was com- real estate. These are low correlated asset classes.
ing in at 9%, 9.5% or 10%. For the average individual that comes to us, most
Once that research was presented to the in- of it is in US large cap stocks, and some may be in
stitutional community, they went back immediately international. Over the last few years, people have
and looked at what their large cap managers and been overweight internationally, going conspicu-
small cap managers were doing respectively to the ously overboard in international allocations. Very
correct benchmark. They noticed that about two out few people have a strategy, and even fewer have
of three active managers were underperforming the discipline to stay with their strategy. Having a
that benchmark. The body of this empirical re- world class empirically sound strategy and main-
search came to fruition in the early 1970s. You’ve taining an unwavering discipline is the key.
got two out of three chances of underper-
forming if you’re 100% active, and since “We perform a risk sensitivity analysis in a typical
that first dollar — I think it was New York scenario for both the husband and the wife, which
allows us to then customize the portfolio structure.
Bell in 1973 — was placed institutionally,
Our average client has five accounts with our firm,
the smart money has approximately over $3
and there are often different asset allocations
trillion invested in passive investments in because of different goals and time horizons in the
their portfolios. various portfolios.”
TWST: What about risk manage-
ment, since your investors are mostly concerned TWST: How often do you rebalance
with protection of capital? your portfolios?
Mr. DiNuzzo: Risk management is very Mr. Dinuzzo: We rebalance our portfolios
critical. In fact, most clients that come to us have once every quarter. At the end of the last quarter of
had very bad experiences in their portfolio to the our entire client base, we were approximately
point where they can’t quantify it, but we do it 99.4% invested.
through our investment strategy and risk sensi- The average individual comes to us with
tivity analysis that we provide for all of our at least 10%, usually averaging about 10%/15%,
clients. That’s taken care of. If you look at the in a cash position in their portfolio. Remember,
big picture, we’re mitigating a tremendous we’re 99% plus invested; they’ve got 15% in
amount of risk, having approximately 60% to cash. Our average portfolio returned over 18%
70% of equity exposure in our average portfolio, after all fees and expenses last year. So last year,
and the residual 30% to 40% in fixed income we did approximately 18% on a fraction of 15%
type investments. The average new client that in cash of a client’s portfolio, and they had a hard
joins our firm has 100% in stocks and in equities, time averaging 5% sitting in cash. That difference
 MONEY MANAGER INTERVIEW
between 18% and the 4% or 5% of 15% in their
portfolios sitting in cash is a tremendous value
added benefit, just from our diligent attention to
cash management.
TWST: You’ve been with this firm for a
long time. What is the long-term performance?
How have you done in good markets and bad?
Mr. DiNuzzo: Bad markets separate the men
from the boys. I believe our firm has enjoyed tremen-
dous growth and success in our investment manage-
ment discipline because we truly play defense first. If
you’re down 10%, you have to make 11% to get
back. If you are down 20%, you have to make 25%.
If you’re down 50%, you have to make 100%. A lot
of folks are still feeling the effects of that from 2000,
2001 and 2002. If you look at 2000, 2001 and 2002,
the market from approximately the end of the first
quarter in 2000 (at the high point) to around October
2002, the S&P was down 50%. The NASDAQ,
which was the investment du jour of the average in-
vestor in the late 1990s, was down approximately
90%. Our average portfolio — our drawdown — was
approximately 14% during that period of time when
the market was down over 50%. We made money in
2000 and 2001 and were down approximately 6% in
2002 when the market was down 22%.
We were able to dramatically mitigate that
downside when the market was down, and that was
the worst bear market across most of our lifetimes.
The last time the market was down three consecu-
tive years was back during the Great Depression.
This was truly a massive bear market. If the mar-
ket’s down 50% and you are down 14% with 65%
to maybe 70% in stocks, that’s about as much as
you can soften that risk in a portfolio.
TWST: What is your firm’s tax manage-
ment philosophy?
Mr. DiNuzzo: The tax management
process and capability has been dramatically im-
— P. J . DINUZZO
proved over the last decade, in that there has been
a large development of tax-managed investments.
So where a lot of individuals would go and buy
high cost investments such as annuities, you are
able to have a very high degree of tax-managed re-
sults over the entire portfolio that DFA launched a
number of years ago. We use tax-managed passive
asset classes for US large cap stocks, US small cap,
large value, small value and international. For our
clients’ non-qualified taxable portfolios, we use
those almost exclusively.
TWST: You mentioned some alternative
investments. Are your clients becoming more in-
terested in alternative investments these days?
Mr. DiNuzzo: That question is posed to us
from about every individual from every point of ref-
erence. At some moment in time, whether it’s in our
first initial meeting with clients or our second or
third, it surfaces that what our clients really are
looking to do is make as much money as possible
with as little risk as possible, given their unique cir-
cumstances. That’s what some of the alternative in-
stitutional smart money type investment strategies
allow us to do.
The absolute return strategy we mentioned
earlier is adding an additional 1%, 2% or maybe
3% per year return over and above bonds, and is
complementing it very well with the cross correla-
tion coefficient being low, helping to lower the
volatility/standard deviation in the portfolio.
TWST: Tell us about your research
team.
Mr. DiNuzzo: At our firm, I am the Chief
Investment Officer. I have served in that capacity
since 1989. Mark DiNuzzo, EVP, is on our
Investment Policy Committee, as well as Mike
Davis, SVP, and Joe Caufield, Director of
Research. Primarily, the research has been gener-
ated out of the University of Chicago, but more so
 MONEY MANAGER INTERVIEW
from DFA. They serve as our research department.
They have a tremendous track record that is second
to none in delivering value-added institutional
level research.
What’s unique is that DFA doesn’t spend
one penny on advertising, and I believe they have
actually invested more money in the US market
than Fidelity Investments over the past couple of
years. Fidelity is a household name, and most
people have never heard of Dimensional Fund
Advisors. There’s a reasonably sized army of reg-
istered investment advisers who are utilizing this
type of institutional investment strategy. We have
access to the exact same investments that DFA is
providing themselves directly to over $120 bil-
lion in institutional portfolios to corporations,
public pensions and endowments. The beauty of
being a member of NAPFA is that we maintain
the highest fiduciary standards in the industry
with no inherent conflict of interest. There is no
monetary quid pro quo with DFA and us. We are
efficient market theorists. We invest according to
that premise, and we feel that Dimensional Fund
Advisors is the premier provider of efficient mar-
ket theory passive investments.
TWST: How are you compensated?
What is the fee structure?
Mr. DiNuzzo: We work on a fee-only basis
based on the assets under management with our
clients, and that includes the comprehensive finan-
cial planning services that we provide. Our maxi-
mum fee for assets under management is 1%, or
100 basis points. Our average client is approxi-
mately right around 0.7%, due to larger client man-
agement discounts. As the value goes up,
multimillion-dollar clients will pull that average
down off of the maximum 1%.
TWST: What differentiates your com-
prehensive wealth management approach at
— P. J . DINUZZO
DiNuzzo Investment Advisors from that at
other firms? What do you bring to the table that
others might not?
Mr. DiNuzzo: Clearly, we have two core
competencies at our practice — investment man-
agement and relationship management financial
planning. With our average client who comes to us
for retirement planning, pre-retirement planning or
life planning, we are building a net worth state-
ment for them, with their own personal balance
sheet, assets, liabilities and net worth. Not only are
we building that, but we are also asking a lot of
probing questions and making recommendations to
place them in a better financial condition based on
their own personal balance sheet.
On the more frequent data — the monthly
and annual income statement — we analyze and
compile for our clients an income statement that
shows all income in their household and all of their
expenses. We bifurcate the expenses into fixed ex-
penses and then variable expenses, and we are able
to provide a tremendous amount of value with the
recommendations that we can make in helping our
clients achieve their goals, while enjoying their
daily life and being able to buy and enjoy the items
that they want to.
We perform a risk sensitivity analysis in a
typical scenario for both the husband and the
wife, which allows us to then customize the port-
folio structure. Our average client has five ac-
counts with our firm, and there are often different
asset allocations because of different goals and
time horizons in the various portfolios. We know
if the client is retired with the amount of tax with-
holding, we are going to make a recommendation
and process for them. We know what their mar-
ginal and effective tax rate is. So we have it all
encompassing, where we will get into making an
estate planning recommendation.
 MONEY MANAGER INTERVIEW
Clients do not want financial plans — they
want financial planning. We provide analysis re-
garding tax planning, but we don’t do tax prepa-
ration. We have taken a look at all the major
tenets of their financial plan, along with their in-
vestment management plan. Those two are mar-
ried together. We perform a quarterly phone
review with clients. We additionally prefer to
have an annual face-to-face client review. Some
of our clients want to come in every six months,
and there’s no additional fee for that. We have no
surrender charge products, so there is nothing
with a redemption fee, no front-end loads and no
back-end loads.
Getting back to DFA, we have the majority
of our assets, both business and personal, in DFA
investments, and that is why we love them. The
most attractive feature is that we are completely in-
dependent of DFA. We utilize them because we be-
lieve in efficient market theory and they are superb
in delivering the equity, value and size premiums.
— P. J . DINUZZO
There is no front-end load, no back-end load and
no 12b1 fee with DFA. The average operating ex-
pense ratio with DFA is a little bit over one-third of
1%, where the average US mutual fund is close to
1.5%. That 1.2% or 1.1% difference per year over
time is a tremendous benefit. So we are following
the financial plan along with the investment plan.
We are staying in close contact with our clients on
a quarterly basis, with a face-to-face annual meet-
ing. If you take care of the small things, the big
things take care of themselves.
TWST: Thank you. (PS)
Note: Opinions and recommendations are as of
2/26/07.
P.J. DINUZZO
DiNuzzo Investment Advisors, Inc.
1501 Third Street
Beaver, PA 15009
(724) 728-6564