When interviewing potential advisors to work on your family’s behalf, you should ask a number of pertinent questions, beyond just getting basic contact and bio information, education, and credentials. You want to hire an advisor who is familiar and capable of dealing with someone of your net worth.
One of the first questions you’ll want to answer is: “Does the advisor present any conflicts of interest?” Conflicts of interest can arise in many different forms. For example, does the advisor receive any commissions on products recommended or sold? How about referral fees? Is the advisor the manager of the investment(s) they are recommending? these are all red flags that suggest a conflict of interest—and in a perfect world, you want to avoid that entirely.
You want an investment advisor who is a fiduciary. A fiduciary is required to disclose conflicts and to serve you objectively at all times. Many who call themselves financial advisors must only meet the standard of “suitability”—and advising based on whether an investment is suitable is not the same as acting in your best interest.
Some of the major financial houses are notorious for selling both ends of a transaction and pocketing money from each side. It’s hard to see how that is working in the best interest of the client. And yet that is what broker-dealers do. they sell and they buy and they make a profit, whether it’s on the commission or on the spread between the purchase and sales prices. For the client, it amounts to a conflict of interest. Major broker-dealers make money on the spread between the purchase and sale prices. this happens a lot with municipal bond purchases. Broker-dealers don’t work for free!
Noncommissioned fiduciary advisors might recommend you buy insurance, but they would not receive any commissions or indirect compensation. they are not advising you to buy so that they can make money but rather because it’s the right thing to do and is what is best for you. Since the commissions don’t influence the advisor, he or she may be able to find low-cost policies saving you fees upon purchase and/or redemption. The advisor’s only goal should always be your best interests—not to support the sales and marketing team or the fat pockets of the insurance company.
Strategies For Families Worth $25 Million To $500 Million
The Art of Protecting Ultra-High Net Worth Portfolios and Estates
The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.
Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.
Some advisors serving in a fiduciary capacity might still be working on commission. Always look a little deeper, and don’t be afraid to ask the question: “Is the advisor receiving any compensation other than his or her fee for services?” You must be vigilant for conflicts of interest at all times. You may not be able to eliminate all of them, but smart investors will always be aware of them.
You also, of course, need to understand the advisor’s fee and fee structure. The fees can range from as low as .25 percent if you have half a billion or more invested—or, if you are investing with a money manager, the fee could be as high as 2 percent plus 20 percent of profit. It depends on what the advisor is doing for you.
Fees Fees Fees its always about the Fees.
When one of our new ultra-high net worth clients brought in his investment statements for review, we noticed several million dollars were invested in hedge funds—so we began to ask questions: When did he invest in these funds? Who was the manager? What was their performance, and was he happy with the funds?
The answers were shocking. It turned out his investment advisor managed the hedge funds. So that investment advisor—who has a fiduciary responsibility to provide independent advice in the best interest of the client—was recommending that his client invest in the same funds he managed.
Not only was the advisor earning a 1 percent advisory fee, but he was also pocketing 2 percent as a hedge-fund fee, plus 20 percent of the profits. We made sure the client understood this was a major conflict of interest, and we explained the amount of fees the advisor was generating on the accounts.
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