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How to hire your go-to financial advisor

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.

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

It’s not just about performance.

Ultimately, here’s what you want to know: How well can the advisor help you pursue the goals you have set forth and communicate to you, in the most comprehensible way possible, whether you are on target for achieving them and whether any adjustments need to be made? This means more than simply providing you with a rundown of your percentage of return. Just about everyone can send you an investment report showing your performance for the last three months, year, or five years. Performance is a poor indicator of whether you are achieving the lifestyle and the objectives you have set out for your family.

Wall Street would like you to believe that performance can tell you those things. It cannot. How well your investments performed in the short term compared to the Dow or S&P 500 does not explain how well you are proceeding toward attaining your overall objectives. Ultra-high net worth families appreciate being able to discern clearly whether they are truly on target. You have heard all the fancy talk and seen the rates of return—and you know you can lose a lot of money when the market collapses. What you really want to see is whether, when everything is said and done, you are likely to accomplish your goals as a family.

The performance figures tell you nothing about the risks you had to accept to achieve those returns. Ultra-high net worth families know instinctively that chasing performance is folly. You do not want to put your wealth unnecessarily at risk—and you want an advisor who understands that. You want an advisor who understands the real meaning of success to you and the true path to securing your wealth.

Be Wary of Wall Street

Wall Street is a major manufacturing operation. That’s what it does: it makes products. And then the manufacturers hire people—they call them advisors—to go out and pitch their products to their clients and sell to them.

This is not to say, by any means, that we think most advisors out there are dishonest. In fact, we truly believe that most advisors are honestly trying to do right by their clients. But what they believe to be the case simply is not so. The house wins. Wall Street reaps the profit whether the client wins or loses. Many big Wall Street firms basically position themselves on both sides of the deal, and they make money no matter what happens. This is not the fault of the advisors. They have been given their marching orders, and they believe that what they are doing is the right way to work with their clients.

You should also be leery of high-margin proprietary and nonproprietary investment vehicles being pitched by Wall Street. While these may appear attractive, they are usually loaded up with fees and costs—and they don’t serve your best interest. Consider what some of those respected and renowned companies, some of which still exist, recommended in the lead-up to the Enron collapse, from March to November 2001:

  • Merrill Lynch, near-term buy
  • Goldman Sachs, on recommended list
  • J.P. Morgan, buy
  • Bank of America, buy
  • AG Edwards, buy
  • Lehman Brothers, strong buy
  • Prudential, hold
  • Goldman Sachs, market perform
  • Credit Suisse, hold

Despite those ratings, Enron’s stock value plunged to nearly nothing by the time it filed for bankruptcy on December 2, 2001.

One challenge that ultra-high net worth families have is with investment advisors changing firms. The firms view these advisors as salespeople who generate commissions or fees, and many times the advisors are lured away from firms by special compensation deals. Using a 100 percent fee-based fiduciary advisor who is independent is a good first step.

Be very wary of firms claiming comprehensive in-house advice. How likely is it that a single firm could have the human capital to represent the top minds of estate planning, taxation, and investment management? If you demand the best, then choosing an advisor or firm that utilizes outsourcing of specialized services such as CPA, attorney, real estate agent, M&A, pension consultant, and so on might very well be what is best for your family’s needs.

Above all, when choosing an advisor you want to know the advisor will provide you with honest, conflict-free advice (as much as possible) that is best for your family’s long-term needs. Registered Investment Advisors are held to a fiduciary standard toward their clients, but having the least-conflicted fiduciary is a good option. Truly independent professionals, be they investment advisors, lawyers, or CPAs, are not yes-men or women. What makes them special is their ability to act in the best interest of their clients.

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