In the first article of this three-part series we discussed the ambiguity surrounding financial planning, and how that can lead to a poor client experience and potentially poor outcomes. The performance you receive is dependent solely on whether your adviser is a skilled and holistic wealth coordinator, rather than just an investment planner.
Even if you are fortunate enough to have partnered with a professional who takes a holistic and strategic approach to managing, protecting, and growing your wealth there can still be a significant difference in needs when it comes to retail investment management versus investing for the affluent client or privately-held business owner.
Clients Don’t Know What They Don’t Know
Many affluent clients cannot tell the difference in services provided by one financial planner and the next. However, only a few financial professionals actually give comprehensive advice. This stems from the still lingering age-old model of a broker buying and selling stocks and bonds and getting paid a commission on the trade. Many affluent people have worked with financial planners who have sold them insurance or bought and sold them some product, thus reinforcing the perception that all financial planners are investment managers. We are here to tell you financial planning is more than picking stocks and bonds.
It has been our experience that most people with less than $10 million of investable assets have never had the opportunity to work with an advisor who is a fiduciary concerned with their well being. Generally only those with $50 million in investable assets even qualify to work with a multi family office that is holistic in their approach to the client’s wealth. But certainly those with less in investable assets, but still have a higher net worth or own a business, also have to be concerned with taxes, estate planning, and asset protection (just to name a few non-investment related topics).
Another way of looking at this paradigm is that the financial professional truly needs to be an advisor. They should not have any particular agenda except what they believe is best for the client; and as an advisor, should have no manager or company that dictates a sales agenda. Rather they should work in the best interest of the client, who is the ultimate arbiter.
Unfortunately, affluent families don't always know how to make certain their financial partner will help achieve their goals and work with them on an ongoing basis. You could be working with a “financial planner" that doesn't have your best interest at heart. It could be that the “planner’s” main concern is increasing sales and the only real obligation to you, as their client, is to make sure that the products they're selling you are suitable, if not necessarily in your best interest.
Retail vs. Affluent Investing
We define the high-net-worth population as those who have investable assets of between $2 and $10 million, and whose net worth is between $3 million and $50 million. In the brokerage industry, this affluent population may be given the same or similar services and investment products as clients with $300,000 to invest – or those with who could be considered good retail clients – and cannot support a more robust, and time-consuming, offering of services.
We see a distinct differentiation between the retail investment client who is usually placed into several investments of the broker’s company, versus a client with a net worth of over $3 million and who may have a diversified portfolio which may include her company, a 401(k) or 403(b), and real estate. This affluent client has a different and more complex set of needs when it comes to investing. The investment planning needed is very detailed, comprehensive, intricate, and idiosyncratic.
Going Beyond Investing
When choosing a financial partner it is important to understand the capacity in which they are serving you. Are they acting as a fiduciary, with your best interests in mind? Or, in the case of a stock broker or insurance salesperson, is it simply suitability?
Differentiating investing for the retail clients versus the high-net worth client encompasses an investment approach that is more than just stocks and bonds.
- A comprehensive review of any existing portfolio and discerning the client’s goals, objectives, and risk tolerance is incredibly important to begin any financial partnership.
- Protection of capital may best be achieved through an integrated, diversified, and tax-aware valuation-based approach.
- An investment portfolio should focus on multiple investment horizons, cash flow, and drawdown needs along with other tailored objectives.
- One approach could utilize the endowment investment philosophy and a wide range of alternative assets.
- Outsourced investments should be considered versus in-house, thus allowing for reduced conflict of interest.
- Searching for best in breed investments should be ongoing with consolidated investment reporting.
- For clients with more than $2 million of investable assets, an institutional platform should be available. These institutional quality investment managers tend to be less expensive and are chosen for their ability to beat their benchmarks, often with less risk.
The title on a business card gives you very little information on how the person will work with you. Are you working with a Personal CFO, or just another broker/planner? Hopefully the next time a financial planner gives you a call you are better informed.