The Informed Investor
It would seem that hiring a financial advisor to manage your assets should be relatively simple. Unfortunately, that’s far from reality.
Why? Because you have an entire industry — Wall Street — that benefits when you stay confused.
Let’s say your investments have grown and you’re ready to get help. Be careful who you hire. You probably want an asset manager, but it’s easy to end up instead with someone else we’ll refer to as an “asset gatherer.” To keep you guessing, both probably use the same title, maybe “financial advisor” or “wealth manager.” But once you look past the titles and examine what they actually do and how they actually work, you’ll find little similarity between an asset manager and an asset gatherer.
What’s an Asset Manager?
When you hire someone, you’re probably hoping they will be an asset manager. This person’s goal is to give you the best risk-adjusted return on your investments, meaning they will strive to help you build wealth safely. Their goal is to help you achieve your financial goals. You are both sitting on the same side of the table, with the same objectives.
What’s an Asset Gatherer?
First, we realize you’ve probably never heard this term. There’s a reason for that. In many of the large Wall Street firms, advisors may not be compensated according to the results they achieve for clients. Instead, they are often measured by the total value of assets they gather. So, their goal can be to simply add clients and encourage those clients to invest more assets with them.
“Producer” of the year
Of course, their business cards won’t say “asset gatherer.” But inside the company, among corporate levels, these types of wealth management firms specifically award the best gatherers. Or they may refer to these individuals as “producers.” Look around and you may see awards such as “producer of the year” for an advisor at an insurance company or large Wall Street brokerage firm.
Even worse, up until recent legislation has frowned on it, it has been commonplace for these firms to even go so far as to hold regular sales contests.[i] Here the best “gatherers/producers” are rewarded with all-expense-paid luxury trips. The winners are the advisors who bring the most investments through the door; not necessarily the ones who best serve their clients or help them achieve their financial goals.
Different Skill Sets are Rewarded
Let’s look at the skills required for each type of financial advisor. An asset manager whose goal is to help you build wealth needs the skill set to accomplish that. So that means financial planning, investment allocation, and investment management. In addition, this person probably also has other skills (or teammates who possess them), such as tax planning and estate planning.
The successful asset gatherer probably has a totally different skill set. To attract more clients, what works best? Great sales skills. The focus is up front, getting people to sign on.
As a result, asset gatherers sometimes will lose clients more frequently, but it’s probably not that disruptive for them because they are aggressive salespeople who bring in new clients all the time. They know what to say at the right time to convince clients to let them manage their money. The unfortunate thing is that the relationship they develop may be superficial, as they don’t have the time to invest in the clients they have, as their focus is on adding new ones.
Who is Sitting on the Same Side of The Table?
As you probably can see, one type of financial manager is more aligned with your interests. Unfortunately, many people end up with an asset gatherer without knowing it. Often these advisors are skillful salespeople, and as a result, are often referred to friends and family.
But that’s why you need to hire a financial advisor very, very carefully.
How can you avoid the asset gatherer?
Here are two quick tips to avoid them.
Only consider financial advisors who are full-time fiduciaries. Ask if the financial advisor will act as your legal fiduciary. And be sure to ask them if that’s all the time, not just part of the time. A legal fiduciary needs to put your interests first, at all times. If they don’t, you have legal recourse.
Then, when they answer, ask for it in writing. (If you get pushback on that, that’s a really important clue that you should look elsewhere, since financial advisors with your best interests in mind are usually impressed you ask these questions and willing to show you that they are fiduciaries).
Look for a fee-only financial advisor. That means he or she gets compensation only from you, the client. Their motivation isn’t tainted by commissions or third-party perks from selling you one thing over another.
Again, ask for it in writing. Be sure it says “fee-only” and not “fee-based,” as “fee-based” means you’ll sometimes be charged fees, but can still be charged commissions, as well.
When you pay a financial advisor on a fee-only basis, you’re paying for one thing: advice, more like how you pay your accountant or lawyer. This is very different from a financial advisor receiving commission for selling you products.
Also, it’s common for financial advisors to charge you an asset-based fee. This is usually some percentage of the assets under management. In this situation, the advisor is motivated to help you grow your assets, as that is the only way to increase their fees.
This puts you clearly on the same side of the table as your advisor…which is usually the safest one.
[i] Wenik, Ian. “SEC Best Interest Rule Will Stop Sales Contests, Clayton Says.” Citywire USA, Citywire, 7 Aug. 2018, citywireusa.com/registered-investment-advisor/news/sec-best-interest-rule-will-stop-sales-contests-clayton-says/a1144851.