What Do Wealth Managers Really Do with Your Money?

It’s one of the biggest roadblocks for ultra high net worth families. No, not choosing a wealth manager to help you develop a financial plan that is attuned to your unique situation. That’s a big one too.

But an even bigger question is – do you have a clear understanding what that wealth manager will do with your money, and how they know their plan is the best course of action?

A little secret: When it comes to investments, most wealth managers don’t have adequate answers to these questions – especially those working at the large brokerage firms like Fidelity, Schwab, and Vanguard. They are relying on rosy computer models to project how well the investment plan they create for you will work. We’ll get to this ‘rosy’ stuff a bit later.

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But first, get our free guide, 7 Secrets to High Net Worth Investment Management, Estate, Tax and Financial Planning, and see what you’ll be missing out on if you choose to entrust your wealth and your future financial security to a firm that was built to serve the masses, not those with ultra high net worth of $20-30 million or more.

How Can You Really Know? Start with Mystery Shopping

To know what will happen to your money, you first need to be talking to the right person.

Whether you work with Pillar Wealth Management or not, we want affluent investors to have clear and thorough information about the very significant life and financial decisions they face. You need to know the facts so you can make intelligent choices with confidence.

To shed some light on this, we did what’s referred to as ‘mystery shopping,’ with the large brokerage firms Vanguard, Schwab, and Fidelity as our subjects. See the pros and cons of each firm.

We created a fictional high net worth persona with a unique life situation, and hired someone to go through the initial wealth management process with each firm to see how they attempt to serve people in situations that more closely resemble yours.

The whole process took several months. We held multiple calls with each firm, and received a proposal spelling out what they would do with our assets. This experience taught us a great deal about how typical wealth managers will handle your money, and how they assess the efficacy of your plan.

This article is one of many we will be writing based on that investigation.

We also produced a checklist detailing the similarities and differences between the three firms and Pillar Wealth Management.

Complexity Leads to Inertia

When things are complex, it’s easier to do nothing. Change nothing. Stay the course.

When it comes to the financial situations for ultra high net worth families, complexity is the name of the game, and this is why we frequently encounter affluent individuals in their 70s and 80s who have no estate plan and no clue what to do with all their wealth.

They’re hampered by the complexity, so they just keep doing what they’ve always done.

Some of them are even still working. Still following the same routines. And they have eight figures of wealth they’re not using for anything!

You don’t want to end up like that. (Or, if you do, then the large brokerage firms are probably a great choice for you – their service is great for people with few ambitions outside the norm).

Your First Step – Get a Wealth Management Proposal

To find out what a wealth manager will do with your money, the first step is to get a proposal from them.

In our mystery shopping investigation, this proved to be quite a bit more difficult than we expected from all three firms, and for different reasons.

But without a proposal, you can’t really make a sound and informed decision about whether this particular wealth manager is the one you want to work with. You have to know what they’ll do with your money, and you need to hear their reasoning behind it.

Here’s what happened.

Schwab

Schwab was reluctant to give a proposal, even when it was clear we wanted one. The stated reason was because they wanted to learn more about us first. And that makes sense – but when we finally got a proposal from them, the details were less specific to us than what we got from Fidelity, and we had basically the same conversations with all three companies. So, they knew enough to give more than they gave.

But because Schwab’s process for high net worth families is to farm you out to the Schwab Advisor Network, the real depth and substance you’re looking for from a proposal would likely not show up until you begin interacting with those external specialists. But this, as we wrote in another article in this series, is one of three reasons why large brokerage firms don’t serve ultra high net worth families at the level they need.

Fidelity

Fidelity also resisted the idea of giving a written proposal, and unlike Schwab, we actually never received one. However, what we did get was a verbal presentation of some options for how to deal with our fictional persona’s situation. And that ‘proposal,’ if you call it that, was quite a bit more relevant and specific to the challenging decisions we were facing.

But as for a written document showing how they would invest our wealth, we got nothing.

So, in comparing Schwab to Fidelity, Schwab delivered an actual written document that spelled out at least some detail of how they would invest our assets. But it was pretty general and did not address the specific challenges we brought forward.

Fidelity did not deliver a written document and never wrote out even a rough template of how they would invest our assets, but they did propose several ways of dealing with our specific situation, and this discussion was rich and helpful.

Put both of these together, and you would be approaching something closer to what we were hoping to receive from all three firms, as an ultra high net worth family.

Vanguard

Of the three firms, Vanguard was the only one that offered a proposal without even being asked for one. This was, therefore, the most impressive beginning of the three.

However, the proposal we received had about the same level of detail as the Schwab proposal, but was in fact even less useful because it dealt only in hypothetical amounts. In other words, the proposal did not reflect the actual amount of money we were bringing to the table, and said nothing about the complexity of where these various assets were located.

As a result, we were left to believe that this was basically a computer-generated proposal that they can churn out relatively quickly for just about anyone. It did not address our situation or the decisions we were facing.

What Do Wealth Management Proposals from Large Firms Look Like?

Ideally, a proposal that aims to explain how a wealth manager would invest your assets and plan your financial security for the next several decades should show you, at minimum, several things:

1. The asset allocation they recommend for you, with a rationale supporting it

2. Some detail about the investments within each component of your asset allocation (mutual funds, ETFs, equities, cash, liquidity, etc)

3. Your approximate risk tolerance

4. Your family’s financial situation – where your money is now

5. Your family’s life situation – what you want to do in the upcoming years and decades

6. Your work situation

7. Your real estate and property ownership situation

8. Your healthcare situation

9. A plan for how to manage your retirement accounts such as IRAs, pensions, 401ks

10. Recommendations for estate planning

11. Recommended strategies for tax minimization

12. Projections of the future performance and health of your portfolio

13. How they assess the likelihood of their proposal succeeding in your life

Schwab’s proposal included something related to items 1, 2, 3, 4, 8, 12, and 13.

Vanguard’s proposal included something related to items 1, 2, 3, 12, and 13.

Fidelity’s proposal, though unwritten, included something related to items 1, 4, 5, 6, 9, and 11.

Vanguard scored big on #2, because they actually listed out the specific mutual funds they would invest our money in. Even though the dollar amounts were hypothetical, we could see how the asset allocation was broken down into various types of funds.

Fidelity touched on a number of areas the other two did not address, but they did not address the ones that are more appropriate for a written proposal. Put another way, they gave us the meat, but neglected the rest of the meal.

To sum up all three firms, when we finally got a proposal, they were pretty scant on the details we needed, and this was after multiple conversations in every case.

How Do You Know a Wealth Manager’s Plan Will Work?

Every financial advisor is required to say, in all sorts of ways, that past performance is no guarantee of future results, and no success is guaranteed.

That said, every advisor nevertheless attempts some form of projection. This is represented in items 12 and 13 in the list above. Had we continued with Fidelity, they would certainly have gotten to that point eventually.

But what do advisors use to assess how well their plan will work?

All three firms use a tool known as Monte Carlo, which uses historically-based market performance simulations as a guide for projecting how well your portfolio will perform. In other words, they’re seeing how well your portfolio would have done in the past, and using that data to predict the future. With enough simulations (1000 is a typical number), the projection becomes more trustworthy.

Schwab describes it this way:

“Monte Carlo simulations are used to show how variations in projected rates of return each year can affect your results. A Monte Carlo simulation calculates the results of your Plan by running it many times, each time using a different sequence of returns. Some sequences of returns will give you better results, and some will give you worse results. These multiple trials provide a range of possible results, some successful (you would have met all your goals) and some unsuccessful (you would not have met all your goals).”

The problem, as we confirmed verbally with all three firms (but that oddly does not show up in any of the written materials), is that Monte Carlo excludes from its calculations the most extreme market events of the past 100 years.

So, while it’s running 1000 simulations based on past performance, it is excluding events such as the Great Depression and the 2008 crash.

The problem with that is… those events really happened!

So, built in to the very fabric of the Monte Carlo model is an inflated, rosy view of history. It removes the worst years of market performance from its calculations.

We consider Monte Carlo to be almost a sham for this reason. It presents an overly optimistic projection for your performance, because it is using a ‘rosy’ set of data from history.

Vanguard, to its credit, also uses what they call the Vanguard Capital Markets Model (VCMM) in addition to Montel Carlo, and they even list which market index data from history is used in these calculations. It’s not clear at this time if the VCMM also excludes certain periods of history.

How Pillar Wealth Management’s Process Tunes in to Your Situation

When you go through Pillar’s process, you will have a very different experience.

We will not resist or delay sending you a proposal. It’s the very thing we want to deliver most, because it’s the foundation of our discussions and gives you a clear idea of what we recommend for your specific situation.

Our proposal will be rich with details. It will touch on all 13 items listed earlier – assuming all 13 apply to you, as well as any others not on that list that are relevant to you.

In other words – our proposal is 100% customized to you. It is not a template. It is not a hypothetical cookie cutter plan. And once we’ve talked about your situation with enough depth, we’ll deliver a document that has little resemblance to what you’ll get from the large brokerage firms’ wealth management departments.

Ours is not a department. It’s our entire service.

Lastly, we do not use Monte Carlo, for reasons already stated. We have developed our own proprietary model that uses all historical data from the last 100 years, and that gives you the highest possible level of certainty and confidence that the plan we develop for you will succeed.

And on top of that, we re-run the model every three months, so you are continuously assured that your plan is on track to succeed, no matter what.

There is no higher level of security than this. And that’s why we call it financial serenity.

Want to see your fully customized wealth management proposal? Click below to engage with one of our founding wealth managers – Hutch Ashoo or Chris Snyder.

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Authors

Hutch Ashoo

Chris Snyder

To be 100% transparent, we published this page to help filter through the mass influx of prospects, who come to us through our website and referrals, to gain only a handful of the right types of new clients who wish to engage us.

We enjoy working with high net worth and ultra-high net worth investors and families who want what we call financial serenity – the feeling that comes when you know your finances and the lifestyle you desire have been secured for life, and that you don’t have to do any of the work to manage and maintain it because you hired a trusted advisor to take care of everything.

You see, our goal is to only accept 17 new clients this year. Clients who have from $5 million to $500 million in liquid investable assets to entrust us with on a 100% fee basis. No commissions and no products for sale.