We all use experts to make our lives better. Pro athletes have athletic coaches, students have teachers, and for those who want to optimize how they manage their money, there is wealth management.
Hiring a wealth manager is not a decision to be taken lightly. It doesn’t matter how large the size of your assets is, a good manager can generate great return from a small portfolio, while a bad manager can chip away at the largest fortunes, whittling them down to nothing (except fees in the bad manager’s account). Two questions you need to ask yourself before hiring a wealth manager are:
- What benefits do I get by engaging a wealth manager?
- How do they charge for their services?
We can step through some possible answers to these questions:
What benefits do I get by engaging a wealth manager?
A professional wealth manager can help make sense of confusing financial markets. It’s no secret that the big banks and brokerages rig investments for their own benefit, not yours. Wealth managers can help differentiate between good investments and bad.
A second benefit to professional wealth management is the multi-disciplinary set of skills a wealth manager can bring to the table. All wealth managers are generally good at allocating assets, but an exceptional wealth manager can help plan for tax optimization, savings goals, retirement, and passing assets to the next generation. The skills required for an exceptional wealth manager include investments, tax, and law.
The third benefit to engaging a wealth management professional is using the manager as a screen. No matter what level of assets you are at, there are probably friends, family, schools, and charities all pining for a slice of your money. For example, it can be hard to resist the empathetic pleas of a college alumni donations office staffer asking for ever-increasing funds to keep their schools in business (and the alumni office budget at a record high). With a wealth manager, all you have to do is give your instructions to the manager and tell everyone, “please consult with my wealth manager to see if this is possible.” Easy, guilt-free living.
How do they charge for their services?
Generally, there are three types of wealth management fee structures:
A commission based manager is the one who charges a commission or fee for each and every service they provide. For example, re-balancing a portfolio might be free of charge, but the manager has an incentive to churn as many assets as possible, because their compensation depends on how much volume (how many trades) you generate. This is not the best alignment of interests between the manager and you.
Fee-based managers charge a combination of flat fees and commissions. Fee-based managers may also collect incentive or marketing fees (sometimes called 12b-1 fees) for selling a product. While fee-based advisers present less of a conflict than commission based managers, this model is not perfect. For instance, what happens when an adviser, who charges a percentage of assets under management along with 12b-1 fees, loses interest in your portfolio (either because you lost money or aren’t trading very much)?..
Fee-only advisers work based on a flat fee. The fee may be based on hours spent managing assets or tied to a specific project. The flat-fee model may not always be the cheapest fee-wise, but it aligns the adviser’s interest with yours (and having an adviser who doesn’t work in your best interest can and will be expensive in the end).
Disclaimer: Alliance Law Firm International PLLC provides wealth management advice to clients on a fee-only basis. Brokerage/custody services are provided by outside firms who charge separate fees.