Boutique advisor or a big bank? Be very careful when choosing a wealth manager

Investors need to remain involved even if they seek professional advice

Tue, May 7, 2013, 06:00

Most of us make financial mistakes. At times, we fail to research companies before we invest. We also make errors with pensions and occasionally pick the wrong mortgage. The growth in complexity of the financial world isn’t making life easier. Neither are complex tax implications and other worries that some have, such as when passing on the family business etc,situations which are also prone to errors. Many professional advisors regularly face the wrath of regulators for incompetence or advise that is deliberately misleading.

Fortunately, for most of us the losses are small but, for the wealthy, one act of carelessness could prove fatal.

For this reason wealth managers advise the wealthy to put their funds in professional hands. A World Wealth Report report by Merrill Lynch Global Wealth Management and Cap Gemini reported that, in 2010, there are approximately 19,000 individuals in Ireland with more than $1,000,000 to invest. Most investors these days prefer low-yielding but safe assets like cash because confidence in banks, industry watchdogs and regulators has been so damaged by the events of the past five years.

The flip side is that many worry about their ability to maintain their wealth in real terms – particularly as inflation begins to rise again.

Others are simply looking for some guidance on how to help ensure that the next generation, which may not have the ability to manage an inheritance themselves, is taken care of.

For all these reasons, despite the prolonged recession that Ireland has suffered many small boutique wealth advisor firms have appeared in the market in recent years. The services they provide range from simple consultancy and advice to investing on their clients’ behalf. Often, they can negotiate mortgages, address other borrowings, facilitate tax planning and even manage the private art collection that some clients may have.

The irony is that, even at the advisor selection stage, you may need to consult an independent advisor. It’s a big decision and getting it wrong can prove expensive. And just because a firm has done well for a friend or acquaintance is no guarantee that it will be right for you - everyone’s circumstances are different.

Should you go for a large bank that offers wealth management services or a small boutique firm? Whichever you choose, you need to pay close attention to how they charge their fees and whether there might be any conflicts of interest?

Many wealthy customers tend to go for big names. The large global investment banks, for instance, have access to many experienced and streetwise bankers who know the markets and can give invaluable advice.

There are a few practical problems however, It has not been unheard of in the past that some investment banks, offload onto their clients the financial products that they cannot sell elsewhere.

Suppose an investment bank has 1,000 structured bonds it purchased for €1,000,000 each which are currently worth say €800,000. The bank could get its wealth management arm to buy 10 of these structured products for €1,100,000 each on behalf of clients. This allows the bank to record a profit of €100,000 on each of the structured products they sell and a further 990 x €100,000 on the remaining 990 structured products not yet sold but apparently worth €1,100,000.

Most investment banks have structures in place to avoid this abuse but with the rewards so high, an investor over-trusting wealth managers should be cautious.

Many novice investors may feel intimidated when they first meet wealth managers and fail to bring up the sensitive subject of fees. Research by MyPrivateBanking* says that wealth fund managers are often reluctant to disclose publicly data on fees and performance. This makes it difficult to compare them in terms of value for money, with the result that customers could expose themselves to bad management, poor performance and misguided advice, and pay heavy fees for the privilege.

Myprivatebanking also warns that some fund managers receive “kickbacks” from investment product providers creating unidentified conflicts of interest. Small firms which offer wealth management advice will claim that they are not exposed to the same conflicts.

Fortunately, most investors today who use the internet regularly can free themselves from most of these problems. There is an abundance of data on investment, internet trading has become a lot cheaper and an explosion of investment products such as Exchange Traded Funds and derivatives make it possible for individuals to manage their portfolios a lot better than even investment banks could do a few years ago.

If you have a lot of spare cash, it does make sense to seek professional advice. A good independent advisor will, obviously for a fee, tell you what to look out for, helping you to avoid the mistakes that novice investors can easily make.

His advice, however, needs to incorporate your investment horizon, tax situation and succession plans for your wealth.

Trusting your wealth manager to invest on your behalf is a step that can go well but could also go disastrously wrong. For the unwitting novice, the risk of being overcharged, exposed to poor advice and suffering from hidden kickbacks remains.

For this reason, try and take most investment decisions yourself – or at least take the tie to inform yourself fully on the choices presented to you and possible alternatives – and use your wealth manager as an advisor rather than an investor/manager. Keep to simple products and always ask about the fees and conflicts of interests that your advisor faces.

An honest advisor will understand your concerns and keep you informed. Complex products, even those designed for the wealthy often contain concealed commissions.


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