Unlike many bloggers and financial influencers, I have kept my day job through the hype of the past few years. I potentially gave up a lot of money had I become successful but that’s a backwards looking mentality. The movement towards more financial literacy and self empowerment for the masses is only getting started. I am convinced we are at the beginning of a slow but steady movement towards more professionalism and expertise in the financial advice space as well.

Last year I wrote a post about how large financial firms tend to have their fee structure aligned for wealth managers in a way which is not in the interest of clients. Instead, they are incentivized to buy and sell your investments to garner commissions. Too much buying and selling is illegal and called churning the portfolio, but if the portfolio is left alone, advisors look as if they aren’t doing anything so most of them try to maintain a happy medium of being active but not too active, in order to earn a living.

A fiduciary on the other hand, is a financial advisor that is bound to act in the interests of their clients. Certain professional organizations and certifications require this of those holding their credentials. 2 examples of this in the financial space at CFA charterholders and CPA’s.

Yet the overwhelming majority of financial advisors at large banks and wealth managers are not fiduciaries, which makes me approach them with caution and shy away from recommending them for my friends and family. A notable exception to this is Fisher Investments but they tend to charge more than double the fees of other advisors. A recent sit down I had with a wealth team at a large money manager however, showed me that there were still great advisors out there and gave me a glimpse of what the future of wealth management and advisory may look like.

Starting With Credentials

The team led with their credentials. Each client was given 2 advisors, one is a CPA and the other is a CFA. The CFA makes the investment portfolio decisions and the CPA makes transactional tax and life insurance decisions. They work as a team to optimize the portfolio of the client from a tax standpoint as well as an investment standpoint. Not only does it give the client clear investment strategy and insight but it allows room for specialization of very specific and esoteric tax problems. This includes how to manage a windfall, a highly concentrated position and loopholes that allow them to literally save clients millions.

Yet this level of service isn’t for everyone. At the moment, they only take clients with $5 million or more. Yet this wasn’t always the case for the team and how they grew to become managers for the wealthy started with a very simple concept: being transparent.

How to Add Value

Rather than compete against other advisors by constantly turning over their portfolios to make commissions, this advisory group decided to go the fee model route. This means they charged a flat fee for advice. That fee could be for a block of sessions or could be a flat fee for the year.

For example, if a client had say, just $1 million and didn’t want to pay 1% of their assets but wanted advice throughout the year, the advisors would just charge them a fixed rate of $5,000. This enabled them to give unbiased advice on all the client’s assets and their taxes. If you have more complicated taxes prepared by a CPA or have specialized investment needs like restricted stock units then $5,000 can start to sound like a good deal for service you can call up at any time.

The word spread on this model among their clients to the point where the team didn’t have to do any marketing anymore. Rather they were able to grow simply off of their client referrals. A business that sells itself is always a winner.

Eventually the advisors explained that this model became so successful that the team was the second highest flat fee generating team within the entire institution, which is a large one. At this point, not only had some of their clients grown tremendously in terms of wealth but also they were starting to reach the capacity of their fee model given their manpower so decided to switch to a model based on fees by assets under management.

Investing Strategy

The wealthy have specialized needs which are different from the rest of us. Yet these advisors showed that there is no secret sauce for those with more money. Their investment philosophy was very simple: over the long run, the chances they have picked a portfolio manager that beats the index in equities is very low. Rather than try to beat indexes, they try to either replicate them for clients or place them in low cost and reduce their expenses as much as possible.

For the most part on the equity side this can be done with ETF’s. However, private and less liquid funds can offer higher returns. They pointed to privately traded REITs as one source of solid returns for their clients. Other private sources included hedge funds and private equity, balancing these with liquidity needs.

As for bonds, they had reduced their clients exposure to bonds in the short term due to the historically high prices. For the exposure they do have, thanks to the scale of their client’s wealth, they are able to replicate many indexes with the help of outside managers at lower costs than many bond ETFs with the added bonus of tax loss harvesting to offset gains and reduce taxes.

Trusts and esoteric tax laws also played an important part in maximizing after tax returns for their clients. The advisors were anticipating the changes to the tax laws that may come with Biden’s spending package. Trust that no matter what is passed, the wealthy will continue to do well due in part to experts like these.

More Than Money

I was also impressed by the behavioral psychology knowledge the team had. To illustrate how going beyond simply maximizing returns to tackle their clients relationship with money, an example they gave helps to understand why they have to have a psychological approach.

Many of their wealthy clients are in the tech field and they were either executives of tech companies or tech entrepreneurs themselves. Many of these entrepreneurs didn’t pay themselves a ton in the scale up of their companies. Most had net worths before their stakes were sold in the $1 million range. However,once their companies were acquired for huge sums, many suddenly had a windfall of amounts as large as $50 to $100 million.

This may sound great to most of us but as many lottery winners can attest, a windfall of money this size is so life changing it can launch some people into an existential crisis. What does my life mean if I don’t have to work ever again? How will it affect my children or spouse to not see me work and earn a living? The advisors claimed they were equipped to handle these sorts of issues for their clients and if necessary, kept therapists on call in order to counsel those who find their situation leaving them feeling less than satisfied.

Takeaways

Some may look at how an expert team caters to the already wealthy and despair that the rich will always have the upper hand and will limit social mobility for the rest. A more positive takeaway from this inside look at top their wealth managers may offer some hope for the rest of us.

Wealth advisors are an area that has long been overdue for professionalization on par with their peers in accounting and law. A more informed public through the internet is becoming more financially literate and better versed in risk, return, inflation and the time value of money. The days of the “insider” Bernie Madoff snake oil salesman may be winding down to be replaced by a no frills, well versed, client centric wealth advisor who approaches clients as an equal, not as someone to be taken advantage of. In that light, the industry should welcome the retail revolution in finance and show the old way the door before it gets brushed aside completely.

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