As an In-House Tax Strategist for a “Wealth Management” office, I had the unique perspective of watching and observing the gyrations a wealth advisory team will go through in order to “land a client”. My job, of course, was to bring useful services to the existing and potential clientele. Well, not exactly. I had the mindset of that purpose however in truth, it was just one more method for the Fraud to get in front of another new prospect. Actually, that one purpose “get in front of another prospect” was the driving force in every decision. Consider it this way. A Financial Advisory Firm will make thousands of dollars for each new client “they land” versus a few hundred dollars more for doing a better job with their existing clientele. You see, depending on how a financial advisory firm is made, will dictate what is most significant to them and how it will greatly affect you as the client. This is one of the many reasons why Congress passed the new DOL fiduciary law this past spring, but much more about that in a latter article.
When a financial advisory firm concentrates all of their resources in prospecting, I can assure you the advice you might be receiving is not really entirely to your benefit. Managing a successful wealth management office takes a lot of cash, especially one that has to prospect. Seminars, workshops, mailers, advertising along with support staff, rent and the latest sales training could cost any size firm hundreds of thousands of dollars. So, as you are sitting across the glossy conference table from the advisor, just know they are considering the dollar amount they want from the procurement of your assets and they can be allocating that to their own budget. Maybe that’s why they obtain a little ‘huffy’ once you make sure they know “you must think about it”?
Focusing on closing the sale instead of allowing for an all natural progression would be like operating a doctor’s office where they spend all of their resources how to bring in prospective patients; the best way to show potential patients precisely how wonderful these are; and the best way for that doctor’s office staff to seal the sale. Can you imagine it? I bet there would be less of wait! Oh, I could just smell the freshly baked muffins, hear the noise of the Keurig inside the corner and grabbing a cold beverage from the refrigerator. Fortunately or unfortunately, we don’t experience that if we walk into a doctor’s office. Actually, it’s quite the exact opposite. The wait is long, the space is simply above uncomfortable along with a friendly staff is not the norm. This is because Medical Service Providers spend all their time and resources into learning how to take care of you since you are walking out your door instead of in it.
As you are looking for financial advice, there are a hundred things to think about when growing and protecting your wealth, especially risk. You will find risks in obtaining the wrong advice, you will find risks in getting the correct advice but not asking an ample amount of the right questions, but most importantly, you can find perils of not understanding the true way of measuring wealth management. The most common overlooked risk is not really understanding the net return on the expense of receiving good financial advice. Some financial advisors believe that should they have a nice office using a pleasant staff and a working coffee machine these are providing great value to their clients. Those same financial advisors also spend their resources of time and expense to put their prospective customers from the ‘pain funnel’ to generate the feeling of urgency that they must act now while preaching building wealth will take time. So that you can minimize the potential risk of bad advice is to quantify in real terms. One way to know in case you are receiving value for the financial advice would be to measure your return backwards.
Normally, whenever you visit an agreement using a financial advisor there exists a ‘management fee’ usually somewhere between 1% and twoPer cent. In fact, this management fee may be found in every mutual fund and insurance product that investments or links to indexes. The hassle I observed over and over again as I sat through this carnival act, was that management fees, although mentioned, were merely an after-thought. When presenting their thorough portfolio audit and sound recommendations, the sentence used to the unsuspecting client was the market has historically provided an average of 8% (but we’re going to use 6% because we wish to be ‘conservative’) and we’re only going to charge you 1.5% being a management fee. No big deal, right?
Let’s discover why understanding this management fee ‘math’ is very important, and just how it could actually keep your asjoir. This may actually prevent you from going broke employing a financial advisor simply by measuring your financial advice in reverse. Let’s look at a good example to best demonstrate a better way to look at how good your financial advisor is doing.