The Two Types of Financial Advisors & Which Is Right for UHNW
There are two types of financial advisors, but only one type is right for high net worth and ultra-high net worth investors like you.
The good news is, when you meet with a prospective financial advisor, you’ll be able to tell which type you’re talking to in the very first meeting, once you’ve read this article and understand the difference.
And make no mistake – the difference is massive. Choosing the wrong type of advisor can cost you hundreds of thousands, if not millions of dollars over your lifetime, not to mention add unnecessary layers of stress and frustration to your life. Yes – this is a very big deal.
The two types of financial advisors are transactional advisors and consultative advisors.
Before we get into any details, let’s give away the answer so there’s no ambiguity. As an ultra-high net worth investor, you want the consultative type of advisor. Keep reading to see why.
To meet a consultative advisor, schedule an initial call with CEO and co-founder Hutch Ashoo.
STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION
7 Secrets To High Net Worth Investment Management, Estate, Tax and Financial Planning
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.
Table of Contents
- 7 Secrets To High Net Worth Investment Management, Estate, Tax and Financial Planning
- Transactional Advisors Make Recommendations
- For that level of planning, you need a consultative financial advisor.
- Consultative Advisors Make Customized Plans
- What do you want to do, and how much do you want to spend doing it?
- How Do You Build a Fully Customized Plan Around My Goals?
- Foundation 1: Use Historical Data Going Back 100 Years
- Foundation 2: Test Your Portfolio against 1000 High-Stress Scenarios
- Foundation 3: Re-Run the Simulations Every Quarter
Transactional Advisors Make Recommendations
Transactional financial advisors focus on products and general investment strategies, such as annuities and life insurance.
A transactional advisor may recommend you lock up some of your assets in annuities. There are many different types of annuities, such as immediate annuities, variable annuities, fixed annuities, and several others.
There’s also a particularly hideous one called an indexed annuity. See how a wealthy client of ours nearly got trapped into an indexed annuity, and what it could have cost them.
As each type of annuity gets exposed for what they usually are (a really bad deal), the insurance industry keeps coming out with new ones that sound terrific at first. The details of these are not the point of this article.
The important thing to understand is the reason a transactional advisor may recommend annuities as a viable option for you.
They do this because that type of advisor is not as concerned about the fulfillment of your long term plans and lifestyle dreams as they are about processing your investments and adding you to their client rolls.
More generally, the transactional advisor is less likely to recommend against any particular strategy or investment product. They leave it up to you to decide, and merely explain how each ‘thing’ works. Thus, they give you the illusion of empowerment.
They answer your questions, explain the details, and give you knowledge you may not have had before. But they mostly withhold sound judgment – even if a particular strategy is against your best interests.
Life insurance will likely be treated in much the same manner as annuities. There are many types of life insurance, such as term, whole, universal, variable, and other more specialized types. Some of these may actually be very much in the best interests of an ultra-high net worth investor.
But like annuities, the transactional advisor is more interested in you choosing something, anything, rather than nothing. And, if their compensation is tied to any particular products in the form of commissions or higher percentages, they will probably try to steer you to those.
Transactional advisors are rarely, if ever, fiduciaries. Your best interests are not always the same as theirs.
Again, the goal of the transactional advisor is to get you to sign up. Once you’re a client, they will consider the hardest part of their work as ‘done.’ They use a more hands-off approach to long term investing.
If in your initial discussions, you agreed to an asset allocation of 70% equities and 30% bonds, the transactional advisor will likely not question the wisdom of that, even as your life and the world around you may change dramatically over the ensuing years. They’ll continue to maintain that allocation until you tell them otherwise.
If you’re noticing the pattern here, the transactional advisor’s approach has the appearance of customer service. They’re putting you in the driver’s seat. Giving you control. Doing according to your wishes. Until you tell them to change something, they will just keep running your plan as agreed.
But is that the best way to plan an investment approach that needs to grow and sustain your wealth for the duration of your life and beyond? Is that the best process for ensuring you get to live out the lifestyle of your dreams that your hard work has afforded you?
Do you actually know all the best decisions to make with regard to investment planning, asset allocation, estate planning, tax planning, and retirement planning?
Do you have a process that you have used for thirty years, with data to show how well it works for people like you?
Do you know how to plan in advance for unexpected life and world events, such as medical surprises and economic crises? Do you know how to adapt your plan as circumstances change? Most of our friends in the affluent community do not.
For that level of planning, you need a consultative financial advisor.
With a transactional advisor, when life throws a curve ball, you’ll be in reaction mode. With a consultative advisor, you’ll be in adjustment mode. And there’s a world of difference between reacting (panicking) and adjusting (problem-solving).
Speak with a consultative financial advisor – call our office to schedule a no-risk consultation
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Consultative Advisors Make Customized Plans
A far better approach for ultra-high net worth investors is the consultative approach. Consultative financial advisors focus on your long range investment planning, and the fulfillment of all your greatest ambitions, deepest desires, and lifestyle dreams.
We do this by creating fully customized plans – unique to every individual. Where as a transactional advisor will toss you a few options such as a conservative allocation, a moderate allocation, and an aggressive allocation, and expect you to simply pick the one that feels right, a consultative advisor will build a customized investment plan around your unique needs and desires.
This begins with the initial discovery meeting. Here, we begin the process by assessing the current state of your finances. What do you have, and where do you have it?
Next, we’ll explore your short and long term financial goals. Do you have children who intend to go to college, or are your kids already grown? Do you have real estate goals? Passive income goals? Business sales or acquisition goals? Travel or other lifestyle goals?
What do you want to do, and how much do you want to spend doing it?
Next, we’ll incorporate your current thoughts regarding estate planning. This may include philanthropic goals, as well as the many other ways you might be thinking about using your wealth in the coming decades and after you’re gone.
Then, we’ll consider some unpredictable major life events that could come your way, such as medical events. Do you have a history of any particular illnesses in your family? How long have your relatives typically lived, and in what condition? Were they fairly independent all the way to the end, or did they require extensive in-home or assisted living care?
How many other people are in your extended family? What role, if any, might they play in how you use your wealth in the coming decades?
You see – there is a lot more to this than a transactional advisor will probably be interested in talking about.
How Do You Build a Fully Customized Plan Around My Goals?
Pillar Wealth Management has developed its own proprietary process for building historically-backed, stress-tested, high-confidence customized investment plans for high net worth and ultra-high net worth investors.
Our approach relies on three foundations, three pillars without any one of which, the process would fall short of what you deserve. Here are the three foundations:
Foundation 1: Use Historical Data Going Back 100 Years
The last 100 years have seen tumultuous change on the global and national scale. Some change has been destructive, such as wars, depressions, and periods of extreme inflation. Other change has been more positive, such as technological change, increased lifespans, and globalization.
With all these and many other changes, markets and economies have risen and fallen. We’ve seen periods of strong growth, disastrous decline, and everything in between. The value of this data, for you, is simply that we have it – from all these periods of history.
Pillar Wealth Management’s process is built upon these 100 years of performance data. What we do is, once we’ve created your customized plan, we can measure how it would have performed during these periods of history.
If your plan would have achieved all your goals throughout these various periods of history, that’s a strong indication that it will do well in the coming years as well.
Foundation 2: Test Your Portfolio against 1000 High-Stress Scenarios
Using the real historical data, we have created 1000 unique, high stress, ‘what if’ scenarios. Some of these are similar to events from history. Some are not. The data for these scenarios is extrapolated from the real historical data.
With these scenarios prepared, we then run your portfolio through all 1000 of them, and see how it performs over its expected lifetime.
We do this because history is unlikely to repeat itself. Much more likely is that events will unfold in ways never seen before and not predicted by ‘experts’.
For instance, what if the Middle East makes peace with Israel? What if a global cyberwar upends many of our bedrock institutions? What if a new technology renders some major industries obsolete?
We don’t know what’s going to happen. But when events unfold as they will, previous attempts at projecting market performance – which is what transactional advisors depend on – will quickly become meaningless.
That’s why we use 1000 possible high-stress scenarios. If your portfolio still achieves all your goals in highly unlikely political and economic scenarios, then you can have great confidence in its integrity.
Foundation 3: Re-Run the Simulations Every Quarter
100 years of data and 1000 what-if scenarios form the foundation for creating and testing your financial plan. Asset allocation, investment strategies, index funds – all those details emerge once we have your goals and lifestyle plans in place. And we test it to be sure it will succeed.
But what happens five years later when something in your life or the world around you changes in a significant and unexpected way? What if you switch careers, or retire, or have to care for an aging relative? What if you sell your business, or start a new one?
Even the best plan in the world will be obsolete within a few years. Transactional advisors rarely, if ever, even think about that. This is why we rerun your portfolio through all 1000 stress test scenarios four times per year.
If your projections are less secure than they were before, we make minor adjustments to put them back on solid ground. This ensures your plan never becomes outdated, and never falls short of meeting and exceeding all your goals.
With these adjustments, your customized portfolio will continuously project to exceed your goals in between 750-900 of the what-if scenarios. That’s what we call the Comfort Zone. There, you can relax.
You would be hard-pressed to find a more reliable or data-backed, fully customized investment planning process.
Which Plan will Put You in the Comfort Zone?
Which asset allocation will secure your future and your lifestyle dreams for the rest of your life? Talk to consultative wealth manager, CEO, and co-founder Hutch Ashoo by clicking here