The Informed Investor
Wealth managers are financial advisors or financial planners who specialize in building and maintaining their clients’ accumulated wealth. If you have significant assets, it is worth your while to make sure you are doing the right things to protect and grow your wealth.
The question is: can a wealth manager help you do more with your money?
The answer is: …it depends.
What is critical is finding the right wealth manager. If you do find a high-quality wealth management firm with an excellent reputation and relevant industry expertise they can be instrumental in helping you develop a strategy to preserve and build your wealth based on your needs and goals.
Fighting Natural Tendencies
Before looking at how a wealth manager might help, it is informative to first look at what individual investors can normally accomplish on their own.
The abilities of individual investors on average are not impressive – research suggests most of them underperform the market. And not just occasionally, but consistently.
According to investor research firm DALBAR, individual investors saw an average return of 3.69% annually over a 30-year period, even though the S&P 500 averaged three times that number, at 11.1%.[i]
So individuals left almost 7% in potential annual market returns on the table. Why does it happen? Well, managing your own money is not as easy as it seems. As humans, we all tend to fall victim to emotions, as well as several unconscious biases.
Wealth managers, on the other hand, are trained to manage the assets of others. They do not have the same emotional attachment that is often a disadvantage for individual investors. Quality wealth managers, then, can help you maintain a disciplined approach to investing that may improve performance and capture more of that “return gap.”
Have Access to Better Information
Wealth managers also have an advantage when it comes to information.
Even though there are plenty of free resources available on the internet, professionals rely on paid data services that show them more comprehensive information. Some of these services are simply too expensive for individual investors to afford, and few are willing to pay for even the lower-priced services that are available.
The major players—including wealth managers and institutional investors—are acting on a lot of industry information, and without those resources for timely, accurate, and relevant data, individual investors are at a disadvantage.
Counter Common Investor Biases
Individual investors frequently succumb to natural biases that influence their investment decisions. Biases such as loss aversion, confirmation bias, and social conformity can lead to chasing performance, buying when stocks are at their peak, or panic selling when economic indicators turn negative or the market falls.1
Wealth managers can serve as a counter to biases like these, providing an objective view against blind spots that may lead you astray. Put simply, a good wealth manager could be a buffer between you and expensive mistakes.
More importantly, quality wealth managers should work with you at the beginning to help you develop an Investment Policy Statement that will provide discipline to your investment process. By removing the emotional component, you can stay on track to realize more of the possible returns by not reacting to the daily news, fear and other emotions.
Overall, wealth managers often have a noticeable positive impact on their clients’ returns. While historical data does not guarantee future returns, and clients will not see a uniform result, two studies suggest that hiring a good, experienced wealth manager can help increase an investment portfolio’s performance.
One Vanguard study looked at 15 years of investment history and concluded that wealth managers can have a quantifiable effect on returns. The study found that financial advisors may increase returns by three percent when best practices are followed.[ii]
Another study from Russell Investments reached a similar conclusion. It found that a good financial advisor can potentially increase returns by 3.75%.ii
Formal Systems and Strategies
When it comes to developing an investment strategy, quality wealth managers can help by creating and maintaining discipline and structure and positioning your investments to weather market volatility. So instead of being subject to quick decisions and emotional mistakes, your portfolio will have the benefit of reasoned, balanced analysis.
In this area, a wealth manager can help you by:
- Working with you to develop a formal investment strategy (Investment Policy Statement)
- Selecting an appropriate asset allocation mixture
- Rebalancing portfolios when necessary so that you are not taking too much—or too little—risk
Helping you execute your chosen strategy with discipline can minimize hasty decisions and emotional mistakes, which can reduce your returns.
Working on All Sides of Your Balance Sheet
Wealth managers can add extra benefits simply because they are in the business of helping you increase and preserve your wealth.
High-quality wealth managers do this by providing:
- Comprehensive financial planning to make sure your wealth is protected from both unforeseen and expected events
- Tax strategies to help you save on taxes and increase your after-tax returns
- Advice regarding large financial transactions, such as the sale of a business or a highly appreciated property, so you have professional advice to make the most prudent decisions
- Planning charitable contributions
- Exploring approaches for multi-generation wealth transfer
You Must Choose Carefully
As you can see, wealth managers have the potential to give you access to many resources. But the caveat is that you have to choose carefully since not all wealth managers are alike.
Be sure to look for firms that have fiduciary investment advisors, a reputation for integrity and a demonstrated ability to help build and protect wealth. That usually means decades of experience, not just a few years.
Where to get started?
Here are previous articles to help you find a firm you can work with you to attain all that is important to you.
Once you narrow your list to a few prospective firms that meet your criteria, take your time in doing your research and evaluating a fit. Whatever time it takes is worth your while since the right choice can help you to better achieve your goals.
[i] Duggan, Wayne. Why Investing as an Individual Is So Difficult. MarketWatch, December 2019. https://www.marketwatch.com/story/why-investing-as-an-individual-is-so-difficult-2019-12-11
[ii] Moss, Wes. Is It Worth the Money to Hire a Financial Advisor?. The Balance, November 2018. https://www.thebalance.com/should-you-hire-a-financial-advisor-4120717
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