When I have new potential clients in my office, I'm always interested to see what their current financial advisor is doing for them. Needless to say, I'm frequently disappointed with the level of service standards (many differing markedly from my own) which some advisors display with multi-million dollar accounts. For example, mutual fund ‘wrap' programs are very popular with the big brokerage firms. These are basically portfolios of mutual funds wrapped up in advisory platforms with annual fees. As popular as this platform is, I've shown clients how to reproduce a similar portfolio which strips out many of the fees and the actively-managed mutual funds. In my opinion, these wrap account platforms are often convenient and provide adequate diversification for many clients, but may not be the most cost effective way to invest. Obviously the money management business is competitive and for me, showing clients a potential method for reducing their costs and creating more efficient portfolios has generated considerable interest.
The first thing I do for my clients is focus on how I can help them achieve their financial objectives. Sounds obvious, right? Believe it or not, many advisors, even if they do so subconsciously, focus too much on the money management and not enough of the planning aspect. And while it would be nice to think that most advisors don't think of their own bottom line when giving advice, we've all got families to feed and reality is reality. A good piece of advice for clients is to inquire heavily into how your advisor get paid, whether it be through hourly fees, asset-based fees, commissions from mutual funds, commissions from insurance products, etc. Understanding an advisor's compensation structure can be an eye-opening experience. My personal belief is that using a fee-based advisor (hourly and asset-based fees) will often eliminate several important conflicts of interest.
Next, I show clients how to use individual stocks, bonds and exchange-traded funds instead of actively-managed mutual funds.* As I've written about in the past, I think mutual funds have their place in the investment world, namely in 401k plans and for small account balances looking for diversification, but I don't believe they are always right for large brokerage accounts unless the client is buying the funds at net asset value (without paying a front-end or back-end commission) and is buying funds with reasonable expenses (under 1% or 1-1.5% for an international fund).
My clients also receive comprehensive financial planning. Some advisors who I've spoken with assume that higher net-worth individuals need less financial planning because they already have sufficient assets to meet their long-term needs. I've found this isn't entirely the case.
