3 Things EVERY Investor Needs to Know about Their Wealth Manager

Nick Hodges, CPA/PFS, MBA, CFP

You need to be careful selecting a wealth manager by title alone because everyone with a securities or insurance license is hanging out a Wealth Manager shingle today. Why? Because they want to capture the sales opportunities that are part of investors’ new demands for holistic, integrated financial advice.

To the financial and insurance industries, ‘holistic’ means more transactions from one investor: more trades, more advisory fees, and more insurance or investment commissions. More transactions from one investor means less work for them in securing another client or sale. They try to hide their excitement behind collecting your information and producing fancy reports designed to convince you to ‘invest’ in their recommendations. However, none of this changes the fact that their core business is to make a profit on investing your hard-earned financial assets in their products and services. Are they Wealth Managers? No. They have just repackaged how they present their offerings to you.

While “Wealth Manager” may seem to be the best generic description for providing holistic, integrated financial advice, most of the 'wealth managers' using that title today can be divided into three broad categories. You need to recognize them for what they are: financial salesmen.

Product Specialists
These financial salesmen focus on an investment niche that might feature specific products such as managed accounts, stocks, or fixed-income alternatives. You can spot them easily. If you have received an invitation to a dinner seminar, you have likely encountered a product specialist. They often represent themselves as wealth managers, but in my opinion, they are simply experts at pitching a product. They know their product inside and out, upside and down; they can be great resources of information. However, their “professional” opinion is that their product is the solution for whatever ails you – regardless of what it is that you really need.

Moreover, there is the stockbroker, pushing the “hot stock” of the day – the stock that will make all your dreams come true. In addition, there is the insurance agent who believes that all your investment needs can be solved with an insurance product – theirs. Know this, all of them are just looking to sell you their product, generate a transaction, and collect a commission. It is part of their business. It is part of THE business, the transaction-based business of the investments market.

Product specialists have the technical aspects of their products well memorized. What they don’t offer is a holistic perspective that identifies what situations are best served by their product, and what other solutions should also be considered. I’m not beating up on them; I just want to make the point that you need to be working with someone who is watching out for your best interests – all of them – across your financial, tax, and estate needs. It’s not that you’ll never need an insurance product or a certain investment vehicle – you just want to be sure that when you do, you’re working with a financial professional who understands which one is best for you, and can explain ALL of them to you with ease.

Investment Generalists
These financial salesmen offer a wide range of investment and insurance products. Because of the breadth of their approach, an investment generalist looks much like a wealth manager. They collect information on your entire financial situation, they offer a broad spectrum of investment and insurance products, and show you lots of details about each recommendation; in fact, you can implement ALL of your investments THROUGH THEM.

Investing is the focus of the investment generalist, not the overall needs and interconnectedness of your financial world and goals. Amidst all the information and recommendations, even the most sincere investment generalist is asking himself, “How can I get ALL of these assets invested (with me)?” They fail to ask, “How do we structure your assets to minimize tax, protect assets, and provide a cash cushion to help you weather the financial bumps that might come along?” Both perspectives are equipped to recommend a variety of investment strategies, but the subtle shift makes the difference between focusing on making a fee or commission on your assets and correctly positioning your assets for your unique goals and needs.

While investment generalists may have a broad view of the investment and insurance industries, they do not have a cross-industry orientation as part of their consultative planning process. Being technically competent on the investments side doesn’t always translate to the best tax strategy or overall estate plan for each client situation. Without the understanding of the interconnectedness of the tax and estate with investments and insurance, their recommendations often result in costly tax mistakes that cannot be corrected after the fact. Remember, an investment generalist is all about investing your money – not integrating your tax and financial worlds or planning your future.

Fee-based Managers
Fee-based Managers are the anti-commission salesmen in this mix. They will tell you that they are the most objective of all the financial salesmen out there because they don’t recommend commissionable products. They represent that the best way to manage your financial world holistically is through paying them a fee for their services, services that may include creating a financial plan for you. However, if they ONLY offer fee-based services, you need to know that they have effectively ELIMINATED many viable and appropriate investment solutions for you.

By limiting the financial services and investments they are willing to offer you, they cannot possibly provide you with holistic solutions to integrate your unique financial goals and needs. It’s not just how your advisor is paid, but whether or not they can offer you the most appropriate choices across your financial, tax, and estate needs, and implement them for you.

All of these financial salesmen may look like a wealth manager from the outside: they collect information, create a plan, and meet with you regularly to review it. However, unless they are actively involved across other interconnected fields such as tax planning and tax preparation, have a suite of financial services, and direct access to other specialized professionals; they really are just salesmen of one sort or another.

Smart investors are no longer looking for the salesman with the most knowledge of a single product or industry. They want a wealth manager that can integrate, educate, and coordinate their complex financial worlds. You need to make sure that the financial professional you work with has a broad foundation that covers your tax planning, investment goals planning, practical asset protection, and estate planning needs. In future articles, we will address what you should be looking for when you want just one financial professional to help you manage all the moving parts of your financial world.