This article presents four reasons you should strongly consider before engaginglarge wealth management firms. But there are actually 7 reasons in total that you should be aware of, and we explore them all in our signature written work, 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning. You can request your free copy pf the book right here. You’ll find the seven reasons to avoid large wealth management firms in the 4th section of the book.
Table of Contents
- 1. Large Firms Can Obliterate Your Growth on Avoidable Taxes
- 2. The Abundance of Wealth Managers Dilutes the Expertise
- 3. Assets Under Management (AUM) Is a Misleading Indicator
- 4. Large Firms Have Fewer Specialists
- Want to Meet an Elite-Level Specialized Wealth Manager?
- Find out what you’ve been missing.
But is bigger necessarily better?
When it comes to ultra high net worth individuals, who have far more to lose (and to gain) based on which wealth management firm they choose to work with, great consideration should be given in weighing the importance of the size of the firm.
Consider these four reasons why a larger ultra high net worth wealth management firm isn’t necessarily your best option.
1. Large Firms Can Obliterate Your Growth on Avoidable Taxes
As Forbes puts it, a wealth manager might think he’s performing exceptionally well with 15% gross returns, but new rules “could make that initial awe-inducing number closer to 3% after factoring in total management fees, fund expenses, and” taxes.
Costs and taxes like these can eat away at performance gains in far bigger chunks than you might realize. These costs and taxes aren’t just chipping off fragments from your gains. They could be splitting them in half, or worse. Here’s a more in-depth look at 6 hidden and avoidable investment costs.
Are large firms better than specialized ones at tax minimization?
In all likelihood, they’re worse at it in part because they have such large staffs (Morgan Stanley has 15,500 wealth managers). The chances are low that all of them operate at the high level required to stay on top of the ever-changing tax strategies needed to maximize growth and minimize losses for each of their individual clients.
In reality, only a fraction of them do.
Plus, they typically will have larger caseloads, and therefore less time to devote to the unique scenarios facing each of their ultra high net worth clients.
Which of their wealth managers will you end up with? Will you get to keep the same person for the decades you’ll depend on them? Or will you get switched around with all the inevitable turnover that also occurs at large firms?
At a large firm, you have a greater chance of losing money to avoidable costs and taxes.
2. The Abundance of Wealth Managers Dilutes the Expertise
Expertise cannot exist across an entire industry. If you take the time to look, you can always find high-performers operating at levels exceeding those of the masses, within the same industry. The same holds true in ultra high net worth wealth management firms.
At the top you have elite performers and industry savants who exist above and outside their industry. They define and redefine wealth management, as the global and market picture continually evolves.
The larger group of less experienced wealth managers beneath them are followers. Doing what they’re told. Checking off boxes. Following pre-written sets directions and procedures. Written by the elite performers.
At the large firms, you can find a handful of elite ultra high net worth wealth managers. But with tens of thousands of wealth managers on the global staffs of the big firms, what are your chances of nabbing the diamond in the rough?
In contrast, at specialized wealth management firms, the expert is usually also the owner/partner. He is directly involved with each client. He’s not passing the work off to subordinates and ‘employee advisors’. He is directly and intimately involved with each investor’s portfolio. He knows their names. He knows their kids’ names. He knows their pets’ names. And he knows what colleges they went to. The pets too.
More than that, he knows their business situation, mortgages, investment performance, and short and long term life goals and dreams. He builds a customized plan that looks unlike any other plan out there, because it’s been so precisely aligned to that person’s needs.
At large firms, many ultra high net worth individual investment plans look eerily and disturbingly similar. That’s because those plans don’t receive the customized attention they would have experienced at the more specialized ultra high net worth wealth management firms. That’s the inevitable result of having to ‘hire down,’ as the large firms must continually do to fill their wealth manager pipelines as demanded by constant growth.
One survey found that the financial advisory industry now employs more non-owner professionals than owners. ‘Employee advisor’ has taken over as the most common job title for workers at financial advisory firms.
You don’t want someone learning on the job while managing your ultra high net worth portfolio. At the large firms, the likelihood you’ll end up with such a person is much higher than at a specialized firm. It’s simple probability.
3. Assets Under Management (AUM) Is a Misleading Indicator
Charles Schwab’s Investor Services (their wealth management division) saw net revenues increase 14.6% in 2017 compared to 2016. Wells Fargo’s net revenues were up just 4.9% in the same period.
So is Schwab doing “better?” Well, yes, but not in the way you might think. According to Investopedia, that revenue growth was due mostly to “increases in asset management and administration fees.”
In other words, they made more money, but that doesn’t mean you did.
Simply looking at revenue growth, income growth, amount of assets under management, and other indicators at various ultra high net worth wealth management firms doesn’t tell you what you really need to know.
For a deeper look at the seven warning signs that matter most when choosing an ultra high net worth wealth manager, see the Ultimate Guide to Choosing a Financial Advisor for Investors with $10 million to $500 million in Liquid Assets.
We consider this a fairly obvious point – bigger doesn’t mean best for you.
Revenue growth simply doesn’t tell the whole story, because you don’t know how much money is being made from fees, taxes, and other costs paid by their investors.
4. Large Firms Have Fewer Specialists
The idea of ‘one-stop shopping’ has proven wildly appealing at big box stores. But when it comes to ultra high net worth wealth management firms – one-stop investing is the last thing you want. Why?
Because as an UHNW person, the level of additional service you require exceeds that of the vast majority of other people.
You don’t just need another estate planning attorney. You need the one who has sat through dozens of high net worth estate administration meetings and seen countless scenarios unfold.
You don’t just need another mortgage and real estate advisor. You need the one who has handled properties for celebrities and moguls.
You don’t just need another tax accountant. You need the one the courts call as the expert witness in the cases making headlines. Actually, you need the one who turns down the courts because she’s too busy working with more important clients – like you.
The point is, none of these elite-level, ‘category-of-one’ experts work at large banks. They operate their own specialized firms. Why? Because they are specialists. No estate planning elite specialist works at Wells Fargo. So yes, while big banks and large wealth management firms may offer these other financial services as part of their high net worth wealth management packages, those services are not represented by the best of the best in those respective fields.
You will not find the best team all in one place.
You will find the best team only by searching for the most experienced and specialized experts running their own elite-level, and smaller, firms.
And just as this is true with estate lawyers and accountants, it’s also true with wealth managers.
Want to Meet an Elite-Level Specialized Wealth Manager?
One way to identify an elite-level manager is to look at how they define performance, and the plan they use to achieve it.
When you talk to Pillar, you’ll discover what this looks like at the elite level. And if you’ve only been to big banks and large wealth management firms before this, what you’ll hear from us will stop you in your tracks.