Elizabeth Harris
01/01/2006
The number of ultra-affluent individuals in North America has grown by more than 7 percent each year since 2002. But the number of firms offering financial advice to the wealthy has ballooned by more than 13 percent per annum. There are now more than 8,600 advisory firms registered with the SEC, and thousands more are overseen by state regulators. A dizzying variety of institutions—among them insurers, brokers, banks, trust companies, multifamily offices and, increasingly, independent firms—are aggressively pursuing financial advisory mandates. So how does one choose?
This is an embarrassment—and dilemma—of riches. Locating a capable and trustworthy advisor in a field boasting some of the best—and, unfortunately, many of the worst—minds in the financial services industry often feels like hacking blindly through a dense jungle teeming with hidden perils. In the articles that follow, we attempt to shed some light on this thicket to help our readers navigate through it, and, with an investment of time and effort (and a bit of luck) to find a talented advisor with whom to build a strong long-term relationship.
It is the nature of the financial industry to attempt to gain
economic efficiencies by creating one-size-fits-all products and services. But
the advisory needs of affluent individuals can really be met only with bespoke
solutions. Finding the right match is therefore crucial. An individual like
Allan Avery, a pharmaceutical industry executive who needed to manage a large,
concentrated stock position, may have very different problems than entrepreneurs
such as Klaus and Jami Heidegger, who sold their cosmetics company, Kiehl’s,
several years ago. We recount how Avery, the Heideggers and several others went
about their search for that ideal advisory relationship, beginning on page
69.The first lesson to draw from their experiences is that affluent individuals should never settle for a one-size-fits-all relationship. “Look for an advisor specialized in working with people like you,” counsels Chris Dardaman, a certified financial planner with Polstra & Dardaman in the Atlanta area, who works with affluent clients. “There’s a big difference between planning for young doctors and retiring executives.”
Advisors’ skills must be commensurate with the challenges posed by the financial goals of their clients. These are becoming ever-more complex, and clients are becoming more demanding. The most satisfied affluent investors expect to hear from their advisor four times in any six-month period, says Jack May, senior vice president with SEI Investments’ Advisor Network, an Oaks, Pa.-based provider of wealth management systems to independent advisors. The quarterly client meeting is clearly a thing of the past. “There is really a growing gap between what advisors have historically done and what clients are looking for,” May says. “And this gap seems to be growing wider.”
| “People know their cholesterol levels really well, but if you asked them for their three-year return on their portfolio, few of them could provide that.” –Jack Brod, principal with Vanguard asset management services. |
The best advisors work hard to
bridge that gap, but the responsibility for finding them remains with the
client. Oddly, despite affluent individuals’ often-voiced dissatisfaction with
their advisors, many still do not invest the effort needed to find a good match.
Recent research by the Spectrem Group, a Chicago-based consulting firm, revealed
that most individuals with $5 million or more in assets do not spend the time to
conduct a careful search. “It seems ad hoc or random how some people choose an
advisor,” notes Catherine McBreen, a managing director at Spectrem. This
lackadaisical approach can leave individuals at the mercy of the worst elements
of the financial advisory world—mediocre firms seeking primarily to amass assets
under management.
These types of firms cannot meet the increasingly demanding
standards of today’s private investors. Spectrem’s research shows that clients
prize responsiveness and trustworthiness above all else: 42 percent of those
surveyed cited a lack of confidence or trust as the primary reason for seeking a
new advisor. The search for a trustworthy advisor leads many, like Avery and
Phil Strongin, a retired commodities executive, to rely on personal
recommendations. Indeed, nearly half of Spectrem’s survey respondents picked an
advisor based on a tip from a friend or family member.
Effort Rewarded
The first step is to evaluate what skills you really
need—a client with aging parents might seek a firm with expertise in elder care
issues, for example. Determine what problems you will face both now and in the
future. A senior executive nearing retirement, for instance, should avoid an
advisor who has little experience with concentrated stock positions. Do not be
your advisor’s tutor, or, worse, guinea pig.
Understanding your needs and
knowing what you want from an advisor is crucial to assembling a list of
prospects, whether that list comes from tips from friends or colleagues, Worth’s
Top 100 Wealth Advisors list (published in our October issue) or discussions
with like-minded individuals through groups such as the Institute for Private
Investors (IPI). (For more ideas, see “Remunerative Resources.”) It
will also help to ensure that you are not inadvertently swayed by the
increasingly aggressive marketing pitches many advisory firms make. Terrance
Odean, professor of finance at the University of California, Berkeley’s Haas
School of Business, studies investor behavior and cautions clients against
falling for pitches promising market-beating investment performance. “The
biggest mistake that investors make is chasing performance, whether they’re
chasing the hot stock, hot mutual fund or ostensibly hot advisor,” he
says.
Clients should treat advisors who court them aggressively with a
healthy dose of skepticism. When advisors present what amounts to a slick sales
pitch, consider it a red flag, says Charlotte Beyer, founder and CEO of New
York–based IPI, which provides advice and networking opportunities to affluent
individuals. “They are generally better at selling than strategizing,” she
says.
A thorough background check of both the individual advisor and the firm
is crucial. Those with credible professional credentials, such as a CPA, have
already been screened by a professional organization “Credible
Credentials”. This may provide some comfort. “It’s the same with other
professionals: Would you go to a tax preparer as opposed to a CPA?” asks Lauren
Prince, a certified financial planner with Prince Financial Advisory in New
York. However, it is best not to rely wholly on these credentials; even those
that reflect rigorous standards cannot take the place of in-depth research.
There are a host of free, often Web-based research tools offered by regulators
and professional organizations that allow individuals to check on an advisor’s
background “Remunerative Resources”. “A lot of problems could be
avoided if everyone did their homework,” says Mary Schapiro, NASD vice chairman
and president.
Finally, for your face-to-face interviews, assemble your
research and ask probing questions to determine whether or not an advisor meets
your individual needs. Compensation schemes should be carefully weighed. Ensure
you understand how fee-only, fee-and-commission and performance-based
compensation schemes work, and what the advantages of each are. (For a primer,
see “The Costs of Counsel,” November 2005.)
Find out whether you
will be working with an individual or with a team, and whether the firm has all
the professional expertise you will need in-house. How often can you expect to
hear from your advisor? Request a list of clients with whom you can speak. You
may be better off with an advisor who deals primarily with accounts of your
size, so ask for his average client’s net worth. Asking how the advisor suggests
you grade his or her performance is also revealing, says Jack Brod, principal
with Vanguard Asset Management Services, based in Valley Forge, Pa. “People know
their cholesterol levels really well, but if you asked them for their three-year
return on their portfolio, few of them could provide that,” he contends. “How do
I really know how I’m doing? If you can’t get straight, clear explanations, that
might be a signal.”
It is equally critical to establish a rapport. Clients
must bare their financial souls to their advisors. “Look for someone you think
you’re going to enjoy working with,” Dardaman counsels. A little due diligence
today may avert a disaster in the future.
Elizabeth Harris is a staff writer for Worth.
Illustrations by Jonathan Barkat.
Additional Information
Remunerative Resources Emerging from the Thicket Credible Credentials A Designation by Any Other Name