Choosing the right wealth advisor is almost as important as accumulating wealth. Presumably, the wealth accumulation part is done, which is why you are now on the lookout for an advisor with whose help it can be managed. This decision will not only impact you but also your family and successors, hence best done with care.
While the process will be evolutionary, with suggestions coming from the advisor you choose, it is always a good idea to have your thoughts clear in terms of your investment objectives.
Here is how you can go about the process of selecting an advisor, including the six questions you must try to get answers to before you settle on one.
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- 1 Generating a list and trimming it down
- 2 Detailed investigation and interaction
- 3 Trust Chemistry
Generating a list and trimming it down
A logical starting point is to generate a list of prospects, which leads to a shortlist based on some initial research, which, upon more detailed investigations and interactions, then yields the advisor you seek.
But, how does one get hold of such a list?
For services like wealth management, taxation/ accountancy and legal are two others that spring to mind which falls in the same bracket, personal introductions can form a deep source of potential contacts. In fact, attorneys and CPAs you are connected with professionals can also be a source for such referrals.
With the increase in the wealth bracket you are situated in, the importance of personal introductions rises, as the number of people seeking similar services decreases. Linda Erickson of Erickson Advisors in Greensboro, North Carolina goes a step further and advised clients with significant wealth that “it’s imperative to seek out an advisor with a long history of working with similarly wealthy clients.”
The closer to you the circumstances of the person you are seeking a referral from are, the greater is the likelihood of the referred person possessing the knowledge and skills relevant for you.
If you’d prefer a broader database to search from, you can look up professional directories made available by The Certified Financial Planner (CFP) Board of Standards and the Financial Planning Association.
Once you have a list to work with, you may want to validate their credentials and eliminate the obviously unacceptable ones. We could call this the ‘narrowing down’ step.
Do they have an industry-standard qualification like a CFP or CFA? Both these have rigorous examinations to be cleared, as well as defined education levels before they can join the program. Possession of these qualifications also demonstrates a basic commitment to their industry and work.
What advanced qualifications do they possess? According to Tom Geoghegan of Beacon Hill Private Wealth in Summit, New Jersey, “The CFP designation is table-stakes, but UHNW (ultra-high-net-worth) families need advisors with advanced post-CFP planning credentials, such as the Certified Private Wealth Advisor (CPWA) or Certified Investment Management Analyst (CIMA), which are attained by fewer than 3 percent of advisors.”
Are any violations listed against the shortlisted advisors? A visit to the BrokerCheck website of the Financial Industry Regulatory Authority (FINRA) should clear that out. It will also tell you how the violations, if any, were settled.
If the advisory firm you are intending to work with has more than $25 million in assets, it needs to file information about its assets, fee structure, etc. in form ADV. This filing can be accessed by the public and will provide you with a better idea about the firm. It will also highlight discrepancies, if any, between their filings and proposal to you.
At this stage, you should have a trimmed-down list of advisors who you would like to interact with and know more about.
Detailed investigation and interaction
This is the time for asking the right questions and clearing your doubts, before committing to one.
Don’t know what to ask?
Here is a set of suggested questions:
What is their operating model?
There are many operating models adopted by advisory firms, and it is important to know the one adopted by your target firm. Some models can create a conflict of interest. For example, if the firm also has its own financial products which it offers to clients, they may have an interest in promoting them before any other similar or suitable investment, creating a conflict of interest.
HNW and UHNW clients tend to have unique needs and require a high level of service. What is the firm’s process in working with clients of this caliber?
What is their fee structure?
Knowing the manner in which fees are charged as well as the quantum, is important, as it is for any product or service you buy. You don’t want to end up spending a sizeable portion of the wealth you are trying to manage, in a financial advisor’s fees.
It is also important to know how their advisors, in the case of firms, get compensated. Is it commission-based or flat-fee-based? Or a percentage of assets under management (AUM)?
The advisory firm is also a business and needs to create a strong bottom line for their business too. Getting information about their fee structures will help you understand whether the relationship will bolster their bottom line more than yours.
Are they fiduciaries?
A fiduciary is one who is bound by law to act in the best interest of the client. Hence, it is important to ascertain this fact before proceeding. A fiduciary will choose only the investment options in the best interest of the client.
A registered investment advisor (RIA) is bound by law to act as a fiduciary. CFP and CFAs owe allegiance to the code of ethics of their respective associations which binds them to act in the best interests of clients.
Do they have liability insurance?
There are human beings involved on both sides. Errors are possible. Do they have a mechanism in place to reimburse clients should a mistake occur?
What other needs can they support?
Needs of Ultra High Net Worth (UHNW) clients can be complex and often need multiple skill sets together, such as taxation, accounting, and law, among others. Does the firm have access to this basket of services that may be needed from time to time? Is it in-house? What will be the charging mechanism in case these services are needed?
What is their investment philosophy?
While it is understood that detailed plans and recommendations will emerge only after the advisor has been engaged, they must demonstrate their comfort with handling such clients and have some generic opinions on how it would work, what their views on various investment options are, etc.
It would not be out of place to request written submissions, at a reasonably high level, in the form of a proposal. You may need to disclose details of the wealth that you seek to manage. You may want to sign non-disclosure agreements (NDAs) before this step is taken.
Certain decisions can never be completely objective. An element of you and your likes and dislikes will be a part of many of them. Selecting an investment advisor is perhaps one of them. It will not only affect you and your life but also that of your family and successors.
Whether you liked the science subjects in school or not, this is one time you may have to rely on chemistry. The chemistry between you and the advisor. Discussing money and wealth is a deeply personal conversation. Hence, a dash of personal rapport with the advisor will not hurt the conversation.