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How to Find the Best Wealth Manager

When most investors hear the term wealth management, they immediately think of an ultra-wealthy family like the Gates or the Rockefellers and a service designed for investors with hundreds of millions of dollars or more. This is unfortunate, because wealth management is simply a term that should mean a holistic approach to solving all of an investor’s wealth concerns—investing, retirement, cash flow as well as income taxes and estate implications.

Said differently, wealth management can be extremely valuable not only for the ultra-wealthy, but also for investors of more modest means who have meaningful long-term wealth aspirations and want professional help with coordination and implementation.

At least that’s how the wealth management industry was designed to work. The reality, unfortunately, is much different. Wealth management has simply become another moniker or title that is used today in leu of stock broker or account executive. The old-school wealth management process is little more than a cursory attempt to learn about customers enough to enable wealth managers to sell financial products for which their firm has a vested interest.

Most wealth mangers today do not even operate according to a fiduciary standard, which is a commitment from an advisor to put their clients’ best interests first. (For related reading, see: Don't Buy What You Don't Understand.)

Meet the Modern Wealth Manager

There’s a happy ending to this sad story, however. The industry has been changing for some time, and there now exists a vocal minority of financial advisors that can be considered modern wealth managers. And investors are starting to wake up to this reality with a documented trend of assets leaving the old-school approach in favor of modern wealth management.

What is this modern wealth management approach? While no two advisors or firms are identical, there are three primary elements that tie modern wealth managers together:

  • They are completely independent, objective, fee-only financial advisors who work for or manage registered investment advisory (RIA) firms. RIA firms, by law, have to abide by a fiduciary standard and disclose any conflicts of interest with clients. This is very different from traditional brokerage firms and trust companies. RIA firms don’t accept compensation from product sales or preferred investment providers who pay for shelf space on the firm’s recommended list. They don’t earn hidden commissions on individual stock and bond trades, or mark ups from trading desks looking to double dip their clients out of their funds. An RIA firm, in most cases, charges an ongoing fee that is in direct relation to your assets. RIA firms and investors work together, sitting on the same side of the table in an effort to help the client achieve their long-term goals.
  • They are experienced in a range of different financial disciplines. When we think about financial advisors, the first thought that comes to mind is that they will invest your money for you. That much is true, and I’ll elaborate on that in my next point. But there are other financial matters to consider besides investing well. Can you—and how will you—reach your retirement goals? Once retired, how will you generate the ongoing income you need from your portfolio to live a comfortable life? Taxes are a major consideration for investors; what steps will you take to minimize the amount of your wealth lost to Uncle Sam? And many investors would like to transfer their wealth to their heirs during and after their lives in the most efficient way possible. How can this be accomplished within the context of a well-designed, tax-efficient retirement and income plan? Old-school wealth managers were particularly adept at selling financial products that generated significant revenue for their firms. Modern wealth managers are experts at designing and managing simple solutions to the complicated issues surrounding investment, planning, tax and estate dimensions of wealth accumulation, protection and transfer. 
  • They don’t pick managers, they own markets. Many old-school wealth managers prize themselves on their ability to pick winning stocks or in finding other investment managers who can do it for them. Others opt for a tactical approach, promising to know when to get into and out of the market or particular asset classes at the right time. All of the evidence on these efforts finds that they don’t work very well. (For related reading, see: 5 Investment Mistakes You May Be Making.)

According to a study by Dimensional Fund Advisors, only 17% of actively-managed mutual funds that existed in 2001 beat their index. And 57% did so poorly they went out of business! Sure, a handful did manage to outperform, but it’s never the same group in subsequent periods. From 2001-2010, only 20% of actively-managed mutual funds beat their index; over the following five years, only 37% of these past winners managed to duplicate their feat (63% underperformed).

How Effective Advisors Work

An alternative approach, which many modern wealth managers employ, is to diversify broadly across global stock and bond markets in accordance with client goals while avoiding unnecessary fees and taxes. This doesn’t mean blindly owning market indexes—those are fine products, but their low expenses are often overwhelmed by the fact that they don’t explicitly target securities that we know have higher-expected returns. 

For example, according to research from Dimensional Fund Advisors, an index of small stocks has outperformed an index of large stocks from 1928-2015 by 2.3% a year. An index of low-priced value stocks beat an index of high-priced growth stocks by 3.4% a year from 1928-2015.  An index of higher profitability stocks beat an index of low profitability stocks by 4.4% a year from 1964-2015. Similar results have been found in non-US markets over shorter periods. Basic market indexes that have become quite popular in recent years are agnostic to these results, but you don’t have to be.

Clearly, structuring a highly-diversified investment portfolio to hold greater-than-market allocations to small stocks, value stocks and highly profitable stocks has the potential to earn higher-than-market returns over time with enhanced diversification. This isn’t traditional selection and timing active management; it’s a more modern approach to owning investment markets and consistent with modern wealth management.

I point each of these characteristics out because they represent a dramatic departure from the wealth management industry that has existed and that you probably think of today. As word spreads about this new, client-focused, long-term approach to working with investors, I believe the industry will change and the model for working with clients will improve.

You can do your part as an investor—if you are in the market for a financial advisor or wealth manager, seek out an independent RIA firm. Demand that they have a broad range of financial expertise. And demand that they invest in markets instead of trying to pick market-beating money managers. You’ll help to accelerate the progress in the wealth management industry, and more importantly, your own personal wealth will be better for it. (For related reading, see: How to Cut Back on Spending Like a Billionaire.)