Top Considerations Before Hiring a Private Wealth Manager

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1 Special Commentary Top Considerations Before Hiring a Private Wealth Manager Hiring a private wealth manager can seem like a complicated decision. This is especially the case for those who may not have a great deal of familiarity with the industry or investing. For anyone, it s a decision that involves a number of considerations and often affects one s entire family. So where do you start? How do you determine who is the right choice? What questions should you ask? What is truly important? I interviewed three of the most senior relationship managers at Brown Brothers Harriman to answer these questions. Here are the most cited considerations for high net worth individuals those with over million in investable assets though many of the points that follow are applicable to people with less wealth as well. Please note that the following list is not in order of importance, but rather in chronological order (though some considerations happen concurrently).. Trusted advisors or referral sources. Do you have capable, current advisors outside of private wealth management, such as a trusts and estates attorney or accountant? If so, consider using them as a source for creating a short list of private wealth managers to interview. Other potential referral sources could be family or friends who may be able to recommend an advisor with whom they have personal experience. It is usually good practice to identify multiple providers and interview as many as necessary to determine who the right choice is.. Capabilities needed. Do you just have investment advisory needs, or do you have others as well, like wealth planning, trust services or borrowing? A private wealth manager s core competencies should relate to investing and wealth planning, though some may offer other services that are also important to you. If an otherwise strong private wealth manager lacks a service that is important to you, consider finding a separate provider, especially if it is likely that another firm is better or more efficient at providing the service in question. Private wealth managers often offer an array of services aimed at high net worth individuals like personal concierge, aircraft leasing or art appraisal that are not related to investing or wealth planning. These offerings can sound alluring to some, but they should not be your wealth manager s core competency; they should be the focus of companies that specialize in these services.. Your goals. Goals may be the most overused word in private wealth management but it is an important one. Your goals determine risk tolerance, return objectives, income needs to support your current lifestyle, future liabilities, desire for liquidity and several other considerations. In other words, you must define success for yourself, given certain constraints specific to you and your assets. You may have a specific statement of your family s mission or, like most, may need some help in bringing your priorities into focus. Some private wealth managers will be better suited than others to help you and your family identify your most important objectives and carry out a plan to meet them, and you need to use your judgment to determine who those providers are. BROWN BROTHERS HARRIMAN / Private Wealth Management 1

2 . Investment philosophy. Investment philosophy relates to goals, but there is a distinction: goals generally refer to wealth planning (e.g., do you want to create a trust with certain assets to leave for your children?) and asset allocation (e.g., how do you and your advisors distribute assets between strategies with differing risk and return profiles to preserve and grow wealth or achieve income objectives?). On the other hand, investment philosophy relates to the manner in which investors select investments and strategies to offer to clients. For example, at BBH, we believe in ) performing bottom up fundamental research on all investments, ) purchasing securities at a discount to our estimate of their value and holding them over time until they realize their full value and ) only partnering with third party investment managers who think and invest the way that we do. No matter the investment, we insist on a consistent philosophy. The approach that your private wealth manager takes must be philosophically consistent with how you view the world. If you don t have a strong viewpoint or philosophy before interviewing private wealth managers, it is still worthwhile to ask about investment philosophy and then consider whether the response aligns with how you want to invest.. Service level. Determine how high your private wealth manager will prioritize his or her relationship with you by asking these questions: ) How many clients do you oversee? ) How often are you typically in contact with clients, and how frequently do you meet with them? ) How large (in asset dollars) is your total book of business, and what is the average relationship size? ) How many other professionals support you? The answers to these questions will provide you with a deeper understanding of how much attention you will receive. It is important to note three points, however. First, more attention isn t necessarily better it depends on the needs of you and your family. Second, sometimes very senior wealth management professionals have junior team members who oversee relationships on a day to day basis. For that reason, it is often important to meet the entire team that will work with your family and understand how the relationship will be serviced. Third, some private wealth managers will be better at servicing larger numbers of relationships than others, so the answers to the prior questions will not necessarily tell the entire story.. Involvement in investment decisions. At their core, private wealth managers provide investment advice. 1 Therefore, you should consider how involved you want to be in investment decisions. Some clients have a deep understanding of investing or a strong desire to be involved in how their accounts are invested. Others have limited knowledge or limited time, so they want a private wealth manager with full discretion 2 over investment decisions. These examples are the poles, however, and it is important to know where you fall in the spectrum within Figure. 1 The only caveat being that some firms bill themselves as private wealth managers but primarily provide non investment services like financial education and concierge services. 2 Discretion refers to how much control over investment decisions a private wealth manager has in comparison to his or her client. Fully discretionary relationships are those in which the private wealth manager and client agree to an investment plan, and following that agreement, the wealth manager has the ability to make investment decisions and portfolio changes that are aligned with the investment plan without permission from the client. Fully non discretionary relationships are those in which the private wealth manager needs permission from the client to make any investment decisions or changes to the portfolio. BROWN BROTHERS HARRIMAN / Private Wealth Management 2

3 There is also a spectrum of private wealth manager types, and ideally you want to match your needs with the right one. For example, some banks offer lending services and also have businesses devoted to providing fully discretionary private wealth management. Brown Brothers Harriman falls into this category. Brokerage firms provide both commission based transactional advice and/or investment advisory services that can be discretionary or nondiscretionary. Brokers as a firm type, however, can take trade orders from clients, 3 so typically these firms spend a substantial proportion of their time executing client directed trades. For that reason, they fall in several places along the spectrum depending on whom you speak to within these organizations. In addition, there are family offices, which manage assets for either one or multiple wealthy families, and generally fall closer to full discretion on the spectrum. Finally, there are registered investment advisors, which are often smaller, independent advisory firms. If you want to make trades and investment decisions yourself, then you should consider a personal broker or an account with an online broker. If you want a private wealth manager to invest most of your funds for you, but also want to call in trades from time to time, you may fit in the center category in Figure, or you could have a portion of your assets with a fully discretionary private wealth manager and a portion of your funds with a broker. Finally, if you want a private wealth manager to work to understand your financial goals, create an investment plan with you and your family and invest your assets with full discretion in accordance with that plan, then you likely should partner with one of the four firm types on the far left of Figure. 3 This is a legal/regulatory distinction established in the Securities Exchange Act of BROWN BROTHERS HARRIMAN / Private Wealth Management 3

4 . Fees. How does the private wealth manager earn fees? This question is related in many ways to the previous section, as different types of advisors earn fees in different manners. Some charge a flat advisory fee, while others earn commissions from trading. Not only is it important to find the right provider given your investment needs, but you also want to understand how that provider is compensated in order to gain insight into what may drive investment decisions. As brokers earn commissions on every investment, they are incentivized to trade, though they must also have a reasonable basis for believing that their recommendations are suitable for clients. 4 Fully discretionary private wealth managers, on the other hand, typically earn flat advisory fees, which are a percentage of the assets you invest with them. 5 The fee structure for such advisors is meant to incentivize these individuals to act as fiduciaries or in the best interests of their clients when making recommendations. The discussion of fees can become very complicated, but for purposes of this article, we will summarize fees at a high level. A broker s or private wealth manager s fee schedule, incentive structures and all in fee should be clear to you. If a private wealth manager is anything less than transparent about its fees, you should consider that a red flag.. Alignment of interests. Do the private wealth manager and senior principals within the organization invest alongside clients in the same investment vehicles? The answer to this question will help you determine if the firm s interests align with yours. Everyone interviewed for this article believed alignment of interests was one of, if not the most, important considerations. If private wealth managers aren t eating their own cooking, it must not be very good There are brokerage houses in which you can have an account with a flat fee and an account in which you pay trade commissions. BROWN BROTHERS HARRIMAN / Private Wealth Management 4

5 . Performance. It is typically a good idea to ask a private wealth manager for short and long term performance in the course of interviews. When you ask, be specific by requesting performance from a portfolio that would be similar to yours. That said, there are several things to consider. First, if you read any prospectus, you will likely see the following phrase or some derivation: Past returns are not a guarantee of future results. This is a true statement. Second, you should consider returns in the context of the private wealth manager s investment objective or philosophy. If, for example, you are speaking with a private wealth manager who believes in long term investing, then you should evaluate performance over full economic cycles. Third, finding a portfolio that exactly mirrors how you will invest or would have invested is nearly impossible, given that many portfolios are customized and that sometimes investment decisions are constrained by timing (e.g., the ability to invest in a fund at a given time). Therefore, ask about the timing of investments included in the performance and consider the model performance to be a proxy. Finally, you should ask whether returns are gross of fees, net of fees, or gross of some fees, like an advisory fee, and net of others, like mutual funds with embedded expense ratios. When selecting a private wealth manager, the decision regarding the right fit should not be based on performance alone.. Your intuition. At the end of the day, you are hiring someone to help manage your financial affairs, so you and any others involved in the relationship need to trust that person and his or her institution as well as believe that he or she will be responsive to your needs. During the interview process, candidates should be candid with you and answer all of your questions in a clear and understandable manner. It is important to identify someone who you believe is ethical and high quality and who has investment acumen. If you don t feel comfortable with the person across the table from you, you shouldn t do business with him or her. This is a person who you will be in contact with on a regular basis and who will likely be involved in personal aspects of your life. Use your intuition to determine the right fit for you. Conclusion I hope this discussion has equipped you with the tools necessary for interviewing and selecting a high net worth private wealth manager. Selecting a wealth management professional is a deeply personal decision, which should be based on your needs and ultimately your comfort level with the person and the firm you choose as your partner. While this article covers a lot of ground, it certainly is not comprehensive. If you have any questions or would like further information, please do not hesitate to reach out to me at jake.turner@bbh.com. Good luck! Jacob Turner Vice President, Private Banking This publication is provided by Brown Brothers Harriman & Co. and its subsidiaries ( BBH ) to recipients for informational purposes only. Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. This does not constitute legal, tax or investment advice and is not intended as an offer to sell or a solicitation to buy securities or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code or for promotion, marketing or recommendation to third parties. This information has been obtained from sources believed to be reliable that are available upon request. This material does not comprise an offer of services. Unauthorized use or distribution without the prior written permission of BBH is prohibited. BBH is a service mark of Brown Brothers Harriman & Co., registered in the United States and other countries. PB BROWN BROTHERS HARRIMAN / Private Wealth Management 5