Wealth Management and Independent Advice

Society has lived through historic and unprecedented times over the last few years. Economically, the markets experienced something the rest of the world did not quite understand. Back in March and April 2020, markets saw a crash with an extraordinary rally. Indices swung violently, and stocks experienced volatile price movements. Investors with significant capital invested in the markets could have let their emotions get the best of them. More recently, there has been an ongoing bear market. Investors may be making emotionally charged decisions during this time too. Managing wealth without a professional and their independent advice may have had a disastrous effect on long-term wealth plans.

Lots of money moved in and out of the markets during the previous few years. People with their life savings on the line did not know which way to turn. For this reason, they may have made mistakes during all the excitement. Furthermore, many of these investors will miss out on lucrative gains once the market fully recovers. Moreover, some high net worth investors lost money because they sold their securities in a panic. In this article, we’ll discuss how working with a wealth manager and obtaining independent advice can build your estate.

Benefits of Independent Advice

What is the value of independent advice? A good place to start is we’re emotionally attached to our savings. A nest egg means you can retire, start a business, or go on your dream vacation – all things that carry weight in our minds. Because we’re so close to the emotional meaning of our savings, it can be challenging to remain impartial. If these investors had a wealth manager with fiduciary responsibilities, the impulsive, emotionally charged decision-making would be eliminated.

Often, high net worth individuals entrust investment banks or run-of-the-mill financial advisors with their capital. However, these services can simply be large corporations looking for a commission or their next client. And, regrettably, not serving loyal, long-time clients. Furthermore, many of these investment banks and advisors have ulterior motives when it comes to pushing certain stocks and financial instruments. In other words, not every agent hired to manage your finances will provide independent advice and help you control your decisions.

Wealth managers with fiduciary responsibilities focus on serving their clients as individuals. As opposed to just another source of capital. Being a fiduciary means putting the clients’ needs in front of your own, or your company. Could you imagine how much better it would be to navigate the markets in Spring 2020 with a wealth manager acting on your behalf, from both a financial and psychological perspective? Chances are, a lot better! Building a relationship with such an agent is ongoing too. They can continue to help you navigate issues, such as the current bear market.

The bottom line is this: Wealth managers with fiduciary responsibilities focus on the individual client and what is best for them. While investment banks and other wealth managers can focus on numerous other things and hundreds of other clients at once. To stabilize your wealth and long-term financial goals, obtaining independent advice is wise.

What is a wealth plan?

A wealth plan is an individualized plan which structures a client’s wealth in a way to build and protect it. The component of building, protecting and passing on wealth involves a complex mix of investment strategies, tax planning, wealth protection, and estate planning. A wealth plan can include the following:

• Cash Flow Management: Advice and guidance regarding spending and expenses. Wealth management firms can bring awareness to unhealthy financial practices and protect from unforeseen expenses.
• Investment Advice: Impartial advice and recommendations regarding a client’s portfolio. Wealth management firms have more resources than the average person. This produces valuable investment advice an individual may not have gained insight into otherwise.
• Retirement Planning: Guidance on multiple scenarios to plan and protect sustainable paths towards retirement goals.  
• Education Funding: Guidance and strategies to minimize the financial burden that college and higher education funding can cause.  
• Tax & Estate Planning: Advance on protecting as much wealth as possible, both today and tomorrow, by understanding taxes and other smart practices. 
• Risk Management: Wealth management firms understand financial risks, and how to compile plans and strategies to protect from risk exposure. 
• Philanthropic Planning: Wealth management firms can help clients develop strategies to support causes they are passionate about. 

What is included in wealth management?

Wealth management refers to investment advisory services for individuals. The service offers independent advice and personalized solutions to sustain and grow wealth. These services can include personal retail banking services, estate planning, retirement planning, legal and tax advice, investment management services, and much more. Depending on the wealth management firm or institution, wealth managers offer a vast range of services that are customizable for the sole purpose of meeting a client’s specific needs.

What do wealth management firms do?

Wealth management firms are so much more than money managers. They are financial counselors who utilize every ounce of knowledge to grow and protect the client’s wealth. They offer advice and financial services for both the short- and long-term. Wealth management firms also serve as impartial consultants, giving independent advice. The best wealth management firms look beyond finance and forge deep, personal relationships with their clients. They have no outside interests and cater to their clients’ every need, and offer complex personalized guidance. The best wealth management firms are also responsive, transparent, and attentive. Oftentimes, wealth managers are sought after as behavioral coaches rather than strictly financial advisors. This is because of the emotional aspect behind financial decision-making.

Wealth managers are valuable as behavioral coaches. This is because they understand some of the mental nuances that wealthy individuals go through. Wealth managers are often the first people outside of the immediate family to understand problematic financial behaviors such as reckless spending and erratic decision-making. Behavioral finance is a concept becoming increasingly adopted by the industry. It states people make costly mistakes with their money due to emotional biases, cognitive errors, and lack of discipline. Wealth managers with fiduciary responsibilities understand this and are becoming increasingly sought after due to their expertise. Outside of simply saving a client from losing money, in some instances, they can even preserve their lives. 

What is fiduciary duty and why is it important?

Fiduciary duty is the highest standard of client care and is relevant to any industry. Fiduciary duty is a legal term describing a relationship between two parties, where one party is legally obligated to act solely in the best interest of the other party. What this does is protect the client legally and bind the fiduciary. In this case, it would be a wealth management firm knowingly utilizing its expertise and discretion to act in the client’s best interest – even if it is contrary to their interests. 

Why is this important in the case of wealth managers with fiduciary responsibilities? For one, not all wealth managers are fiduciaries nor are they required to be fiduciaries. A wealth management firm holds itself to a fiduciary standard. This means they will always serve their clients, based on their client’s best interests, rather than their own. Moreover, they will always do what’s right for their client without being tied by outside interests or influences such as specific stocks or financial products. This also means that a wealth management firm may give certain advice that results in no compensation for themselves.

What are the incremental benefits of wealth management?

Wealth managers tend to improve the returns clients experience. Studies have shown that clients significantly outperform when using a wealth manager. According to a 2019 Vanguard Funds study called “Advisor’s Alpha,” clients with a strong wealth manager receive a 3% increase in the value of their portfolios annually on average. Vanguard analyzed three key services a wealth manager may provide: portfolio construction, wealth management, and behavioral coaching. Of these services, portfolio construction advice, including asset allocation, may add up to 1.2% in additional returns. Wealth management, including rebalancing and drawdown strategies, could add up to 1% in additional return. Finally, behavioral coaching, including sticking to the plan and not making emotional investing decisions, could add up to 1.5%. 

The study also showed that due to the positive impact wealth managers have on behavioral coaching, much of the gap in returns between using a wealth manager and not using a wealth manager is due to periods of heightened greed, fear, and volatility. The study essentially proved wealth managers are even more beneficial as a behavioral coaches or therapists than as an actual financial coach. Human beings are emotional by nature. The data indicates wealth managers provide the most valuable assistance during periods when investors are more likely to react with their impulses instead of logic. 

Morningstar performed a similar study. They found investors who used professional advice witnessed returns 1.82% higher per year than those who did not. Additionally, the Investment Funds Institute of Canada released a report in 2012 that revealed clients who paid for financial advice had 1.5 times higher probability to stick with long-term financial goals than those who did not. The study also showed those who utilize financial advice enjoy a higher quality of life. 

Is a wealth manager worth it?

Having a wealth manager with fiduciary responsibilities is worth it. Clients deserve respectful treatment and personalized service. They also deserve to know what happens with their money and why. They should be privy to information about market fluctuations and related counseling. With larger investment banks, clients are more likely to be seen as nothing but a number and their best interests are not necessarily put first. For independent wealth managers with fiduciary responsibilities, if you do well, they do well. They look after your best interests, both short and long term. Many banks simply want the commission fee, or to push a certain stock. Whereas wealth managers with fiduciary responsibilities are not only looking after clients’ retirement plans, insurance plans, estate plans, and taxes, but they are also looking at where emotions intersect with money.  

Read More: How to Choose a Wealth Management Firm