Wealth Management and Independent Advice

Society is truly living through historic and unprecedented times right now. The markets truly knew something that the rest of the world did not quite know or understand.  Back in March and April markets had an unprecedented crash, with an unprecedented rally. Indices swung violently, and stocks had volatile price movements that were never seen before. During these unprecedented times, investors with significant capital invested in the markets could have easily gotten lost in their emotions. Handling this on your own without a professional may have had a disastrous effect on your long-term wealth plan.

Lots of money was being moved in and out of the markets.  People with their life savings on the line did not know which way to turn. Furthermore, many of these investors missed out on gains once the market experienced a furious rally and recovery.  Moreover, some high net worth investors lost money because they sold their securities in a panic.

Benefits of Independent Advice

Why is this? A place to start maybe that they did not have the right people supporting both their finances and their emotions. If these investors had a wealth manager with fiduciary responsibilities, they would have been well taken care of. Often, high net worth individuals tend to entrust investment banks or run-of-the-mill financial advisors with their capital. However, these services can simply be large corporations looking for a commission or their next client, regrettably not serving loyal, long-time clients. Furthermore, many of these large investment banks and advisors have ulterior motives when it comes to pushing certain stocks and financial instruments.

Wealth managers with fiduciary responsibilities are focused more on serving their clients as individuals, rather than just as another source of capital. Being a fiduciary means putting the clients’ needs in front of your own, or your company. Could you imagine how much better it would be to navigate the markets in March and April with a wealth manager acting on your behalf from both a financial and psychological side? How much personal service and counseling could you realistically get from a big multinational investment banking firm managing your millions.

Additionally, with a lack of research material and resources and poor individualized service, a wealth manager with fiduciary responsibilities would help high net worth investors that have no stable support system. These investors are jumping into risky waters with lots of capital and failing to understand what is really happening with their money and why. The bottom line is this: Wealth managers with fiduciary responsibilities are focused on the individual client and what is best for them, while investment banks and other wealth managers can be focused on numerous other things and hundreds of other clients.

What is included in wealth management?

Wealth management refers to investment advisory services for individuals. Wealth Management offers personalized and customized financial planning and financial services, to sustain and grow long-term wealth. These services can include personal retail banking services, estate planning, retirement planning, legal and tax advice, investment management services, and other specific services.  Depending on the wealth management firm or institution, wealth managers offer a vast range of services that are customizable and adaptable for the sole purpose of meeting a client’s specific needs.

What do wealth management firms do?

Wealth management firms are so much more than money managers. They are financial counselors who utilize every ounce of knowledge and access to information to grow and protect the client’s wealth. They offer advice and financial services for both the short- and long-term. Wealth management firms also serve as impartial and independent consultants. The best wealth management firms also look beyond finance and forge deep, personal relationships with their clients. They also have no outside interests and cater to their clients’ every need, and offer complex personalized guidance. The best wealth management firms are also responsive, transparent, and attentive. Oftentimes, wealth managers are more sought after as behavioral coaches rather than strictly financial advisors.

Wealth managers are so valuable as behavioral coaches.  This is because they understand some of the mental nuances that wealthy individuals go through.  Wealth managers often are the first people outside of the immediate family to understand problematic financial behaviors such as reckless spending practices and erratic decision-making. Behavioral finance is a concept becoming increasingly adopted by the industry.  It states that people make costly mistakes with their money due to emotional biases, cognitive errors, and lack of discipline. Wealth managers with fiduciary responsibilities understand this and are becoming increasingly sought after due to their expertise. Outside of simply saving a client from losing money, in some instances, they can even save their lives.

What is a wealth plan?

A wealth plan is an individualized plan which structures a client’s wealth in a way to building and protect it. The component of building wealth while protecting wealth to transfer it to future generations involves a complex mix of investment strategies, tax planning, wealth protection, and estate planning. A wealth plan can include the following:

• Cash Flow Management: Advice and guidance regarding spending and expenses. Wealth management firms can bring awareness to unhealthy financial practices and protect from unpredictable or unforeseen expenses.
• Investment Advice: Impartial advice and recommendations regarding a client’s portfolio. Wealth management firms have infinite knowledge, and access to information providing valuable advice specific to their financial situation and goals.
• Retirement Planning: Guidance on multiple scenarios to plan and protect for sustainable paths towards retirement goals.
• Education Funding: Guidance and strategies to minimize the financial burden that college and higher education funding can cause.
• Tax & Estate Planning: Advance on protecting as much wealth as possible- today and tomorrow- by understanding taxes and other smart practices.
• Risk Management: Wealth management firms understand financial risks, and how to compile plans and strategies to protect from risk exposure.
• Philanthropic Planning: Wealth management firms can also help clients develop strategies to support causes which they are passionate about.

What is a fiduciary duty and why is it important?

Fiduciary duty is the highest standard of client care and is relevant to any industry. Fiduciary duty is a legal term that describes a relationship between two parties where one party is legally obligated to act solely in the best interest of the other party. What this does is protect the client legally and binds the fiduciary, which in this case would be a wealth management firm, to knowingly utilize their expertise and discretion to act in the client’s best interest – even if it is contrary to their own interests.

Why is this important in the case of wealth managers with fiduciary responsibilities? For one, not all wealth managers are fiduciaries nor are they required to be fiduciaries. A wealth management firm must be held to a fiduciary standard.  This means that they will always serve their clients, based on their client’s best interests rather than their own. This means that they will always do what’s right for their client without being tied by outside interests or influences such as specific stocks or funds. This also means that they may give certain advice that results in no compensation for themselves.

Is a wealth manager worth it?

Having a wealth manager with fiduciary responsibilities is absolutely worth it. Clients deserve to be treated with the utmost respect and individualized service and deserve to know what is happening with their money, and why. They also deserve to understand what is happening with the markets, and they deserve to be counseled. With larger investment banks, clients are more likely to be seen as nothing but a number, with their best interests not necessarily put first. For independent wealth managers with fiduciary responsibilities, if you do well, they do well. They look after your best interests, both short and long-term.  While many banks simply want the commission fee, or to push a certain stock. Wealth managers with fiduciary responsibilities are not only looking after clients’ retirement plans, insurance plans, estate plans, and taxes, they are also looking after their emotions as human beings.

What are the incremental benefits of wealth management?

Wealth managers have also been seen to improve the returns that clients experience. Studies have shown that clients significantly outperform when using a wealth manager. According to a 2019 Vanguard Funds study called “Advisor’s Alpha,” clients with a strong wealth manager receive on average a 3% increase in the value of their portfolios annually. Vanguard analyzed three key services that a wealth manager may provide: portfolio construction, wealth management, and behavioral coaching. Of these services, portfolio construction advice, including asset allocation and asset location, may add up to 1.2% in additional returns.  Wealth management, including rebalancing and drawdown strategies, could add up to 1% in additional return.  Moreover, behavioral coaching, including sticking to their plan and not making emotional investing decisions, could add up to 1.5%.

The study also showed that due to the positive impact that wealth managers have on behavioral coaching, much of the gap in returns between using a wealth manager and not using a wealth manager is due to periods of heightened greed, fear, and volatility. The study essentially showed that wealth managers are even more beneficial as a behavioral coach or therapist than as an actual financial coach. Human beings are emotional by nature. The data clearly indicates that wealth managers, due to their expertise and knowledge, provide the most valuable assistance during periods when investors are more likely to react with their emotions and impulses instead of logic.

Morningstar performed a similar study.  They found that investors that used professional advice witnessed returns of 1.82% higher per year than those who did not.  Additionally, the Investment Funds Institute of Canada released a report in 2012 that revealed that clients who paid for financial advice had a 1.5 times higher probability to stick with long-term financial goals than those who did not. The study also revealed that those who utilize financial advice also enjoy a higher quality of life.  Likely they can be secured with the knowledge that someone is looking after their money and best interests.

The answer to the question – is a wealth manager worth it? Resoundingly, yes.