March 07, 2018

The last post I wrote dealt with assessing the potential cost of financial advice, the many forms that it could take and, ultimately, whether or not it’s worth it to you to pay for such advice. In this post I’m going to piggy back on the previous one, but take it a slightly different direction and discuss how some people view wealth management, how those perceptions may have been formed and why they may no longer apply to the industry in its entirety.

The easiest way to start this post is to ask a simple question: ‘What is wealth management?’ You could substitute ‘financial advice’ or other commonly used industry terms and the answers wouldn’t be dissimilar. I think the most common response you’re likely to get is something that revolves around engaging a person to help you invest your savings. While that particular response isn’t technically wrong, it represents a small (and getting increasingly smaller) piece of what constitutes wealth management today. At best it’s incomplete and at worst, it gives potential clients misguided expectations about what constitutes professional financial advice and what kinds of questions they can ask a potential advisor.

To be fair, such a reputation has been earned in the profession, even if unintentionally. Historically speaking, people tend to speak of financial advisors, stockbrokers, insurance agents, and wealth managers interchangeably – and still do. Some people who work in such professions enjoy this particular conflation because it’s a euphemistic description of jobs that are sometimes focused on sales before clients’ needs. The profession has never formally adopted any widely accepted professional standards, like the CFP® mark or professionals designations, leaving clients to sift through an alphabet soup of letters behind names, some earned at great cost to advisors while others were bought and procured on an afternoon with an open text book.[1]

Additionally, much of the value of advice was originally thought to be found in the knowledge gap that existed between client and advisor in finding investment options designed to fit a client’s needs and having access to and the ability to give that to clients. Consider that and current fee-based arrangements where clients are charged a percentage of assets under management and it’s not difficult to understand why some clients would think that an advisor’s only job and value would be in helping them manage money. Thanks to the internet, the knowledge gap is continually decreasing and access to money managers has been democratized. This change has prompted what I believe to be a significant (and positive) shift in what constitutes true wealth management – namely that investment advice no longer leads, but typically comes as a result of a comprehensive financial plan that can and often does touch on topics such as tax strategies, estate planning, cash flow needs, retirement income needs and strategies, education planning and myriad other topics that relate to the client’s whole financial picture.

It is this gap between perception and reality where opportunity exists today, for clients and advisors, alike. Knowledge for clients really is power in this regard and it has the potential to lead to significantly better relationships and a far greater alignment of interests between advisor and client – in short, it has the potential to make financial advice the honest profession that it’s capable of being when at its best. It’s akin to the moment when my wife, who originally thought me to be worth fairly little beyond token companionship, found out that I could cook and do dishes, what a wonderful day that was (for her).

Armed with that advice, what do you, the client, do? Well, the first thing you need to do is decide that that’s really the kind of help that you need and are looking for. In my experience the reasons people in general don’t engage advisors are many, but two of them are very predictable. First, many don’t know what they don’t know. If you don’t know the difference between a Roth IRA and a Traditional IRA, admit it. If you thought an IRA was the same thing as a 401(k), and now you know that it’s not, feel free to admit it. If you think that all asset types are equally fit to be held in retirement (tax-deferred) or taxable accounts, you’re wrong and now you can feel free to admit it. If you think Medicare pays for long-term care, now you know it doesn’t. If you didn’t know that the cumulative difference in Social Security claiming strategies could amount to tens of thousands of dollars (or more) over the course of your lifetime, admit it…and then ask someone for help.

The second reason I think people tend to avoid the profession is some combination of shame and a feeling of being unworthy. I don’t mean that in the sense that they have deep psychological doubts that they need to overcome, just that a lot of people tend to assume only those with a net worth that has seven figures need or are welcomed by financial advisors – that’s simply not the case and for most advisors, those people often represent the minority of their clients, not the majority. The shame part usually stems from the fact that they may not have saved what they view as a sufficient amount by a certain checkpoint in their lives, but the truth is that many get started late and most make mistakes at some point. The sooner you can try to correct those issues, the better your long run prospects may be.

Finally, there are those people that would climb K2 if summiting the beast would save them the expense of buying a lifetime supply of toothpicks and that’s fine, it’s always your prerogative to spend your money as you choose but you should be thoughtful about it. Just remember, true financial advice is no longer sales or product-based and investment management is simply a byproduct of financial advice – it isn’t the advice all on its own. If you find yourself paying an advisor for a financial plan and discussing nothing but which fund or financial product you should buy, try to redirect the relationship. If you can’t, realize that other options exist and if that’s what you want in an advisor, pursue it. If you don’t, the consequences of your decisions will be borne by your family and you, not the advisor, so choose wisely.

This is meant for educational purposes only. It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions. Investing involves risk, including the potential for loss of principal. (03/18)

[1] http://www.letsmakeaplan.org/why-choose-a-cfp-professional