VOLATILITY IS THE NEW NORM, POLITICAL GAMESMANSHIP HAS BEEN SENDING THE MARKET INTO a tizzy, and the job market is barely limping toward recovery, giving many a reason to consider—or reconsider—getting professional help to protect their money. This is especially true in Seattle, home to six of Forbes’s 400 richest Americans, and an abundance of first-generation wealth created by high-growth companies (think tech, software, gaming) that concentrate stock in the hands of employees. Wealth managers aren’t exclusively for the very wealthy, though. They often work with people who hope in the not-so-distant future to be where their more well-off clients are today.
Ken Hart, CEO of Cornerstone Advisors, 21st on Forbes’s list of the 2011 top 50 fee-only registered investment advisers, shares tips on how to choose a wealth manager. Leonard Feldman, an appellate attorney at Stoel Rives with expertise in securities litigation, gives advice on how to vet your selection.
- 1. Use your social network.
Typically a large life event—the sale of a business, a marriage or divorce, an inheritance—spurs people to seek professional financial advice, and your friends and peers can help find that right person or firm.
- 2. Query your lawyer, accountant, or other professional adviser.
Most of Hart’s clients are referred by their friends and peers, but more than 20 percent come on recommendation from a tax adviser, estate lawyer, or other professional. Investment firms often act as a great aggregator, helping to manage relationships with a range of service providers.
- 3. Define what you need.
Are you looking for a boutique money manager to administer $1 million of your portfolio with a specific strategy, or do you want your own personal CFO? The industry, says Hart, is divided into three models:
Consultants or planners work well if you need to solve a specific problem. They help decide on a plan or investment strategy, then leave it to the consumer to execute. This relationship tends to be episodic and is billed by the hour.
Brokers or dealers offer a product-centric model, typically developing an investment fund, for example, then surrounding it with a suite of services, such as insurance or trust management. Most such firms are held to a suitability standard and have a responsibility to make sure their products perform as promised on the day sold, but no enduring responsibility to make sure they fit or perform as hoped on an ongoing basis.
Investment management advisers typically build a strategy with the client—they’ll help with planning, portfolio design, and more, and are held to a fiduciary standard, acting as if the client’s money were their own throughout the relationship.
- 4. Understand the fees.
Once you’ve found your service providers, it’s important to understand how they are compensated, which tells you what motivates them. A flat advisory fee is based on assets the firm is entrusted with, regardless of what the portfolio is made up of. Advisers may develop proprietary investment products—such as a private mutual fund or a limited partnership—for which the firm gets paid an additional fee, an enticement for the adviser to recommend that the product make up a larger part of your portfolio. Most registered investment advisers are paid a management fee made up of a percentage of the assets held for a client.
It’s worth knowing how your personal money manager—your connection within the business—gets paid. “If they are saying they are aligned with you, are there to be your advocate, and yet they get paid a commission to see you do a certain thing with your money, well that’s not alignment,” says Hart.
Lastly, discuss whether there are additional fees—for a tax adviser, say, or for outside money managers to manage the portfolio.
- 5. Know what kind of firm you’re working with.
Are you looking for a large, national firm or a local, family-owned firm? “If you know who owns the firm and who really holds the reigns over the organization, that will give you a good feel for how you’ll be treated,” says Hart. While one may offer big name recognition and a broad range of resources, the other may offer a more customer-focused, personalized experience.
- 6. Determine how much control you want.
Decide whether you’re best served by someone who will act on your behalf or someone who will call every time he or she has a new idea about rebalancing your portfolio. “Do I want to have someone who helps me develop a strategy that I can then hand off and say ‘go,’ or do I want to really be down in the weeds making day-to-day decisions with the adviser?” asks Hart.
- 7. Choose a firm with clients who look like you.
Ask prospective advisers to describe their ideal clients and their actual clients. Do they serve people whose income and assets are close to yours in size, who accrued their wealth in similar ways, who share your dreams? Make sure you fit into the group they -actually want to serve and do serve.
- 8. Evaluate results.
While results are important, they should be a last consideration, not first. “When you hire a firm and you look at the historical track record, it’s great, but remember, you don’t get to buy those results,” says Hart. With proper disclosure a firm can answer the results question in three ways: with composite results, using actual clients over a past period of time; model results, built out of a synthetic client with an artificial portfolio; and actual results, which show the performance of clients like you.
- 9. Look for checks and balances.
Compliance and transparency are key. Inquire whether the adviser welcomes independent or third-party auditors and if there’s an internal structure to provide checks and balances.
“One reason the Madoff scandal occurred is that the adviser’s auditing firm did not do enough to verify the authenticity of trades,” says appellate attorney Leonard Feldman. “If you’re investing a lot of money, ask for the name of the auditor and then investigate the auditor to make sure it’s licensed and reputable.” And know the warning signs, such as statements mailed to the wealth adviser instead of the client and requests for checks written directly to the adviser.
- 10. Cross-check the answers.
Due diligence is more than asking a few well-informed questions. Feldman suggests asking advisers about their background, just as a prospective employer would, then verifying the answers. The Financial Industry Regulatory Authority’s website (finra.org), can be used to determine if there have been formal investigations, disciplinary actions, or customer complaints against a wealth manager. Ask for references from present and prior clients, then use those clients to get even more references—who weren’t chosen by the wealth manager.
“Lastly, if it sounds too good to be true, it probably is,” says Feldman.