With wealth managers it pays to check, and check again
Paul Sullivan 04 October 2009
After all the turmoil in the markets, after Bernard Madoff and a bunch of other financial scandals, investors may well be questioning whether they have chosen the right financial adviser. It may be someone you like and trust, but is it someone competent to manage your money?
And even if they are competent enough, have wealth managers’ orientation moved along with your goals in the post-Lehman, post-Madoff world?
A recent PricewaterhouseCoopers survey of private banks and wealth management firms is not reassuring. “The economic crisis has presented client-relationship managers with challenges they have neither the experience nor the skills to deal with,” the study said. If quality of advice is the real differentiator, the study said, then wealth managers needed to make sure that their advisers had the relevant skills, tools and training.
The Asian leg of the survey further shows that last year’s market turbulence and the resultant impact on private bank clients hardly dented their wealth managers’ old ways. A fifth of the 40 private banks from Asia surveyed lost more than a quarter of their clients to competitors in the flight to quality in the past 12 months, and the survey found that poor investment performance was the key reason why clients left. Still, focusing on improving investment performance is not among the top five strategic priorities of chief executives.
Justin Ong, PwC’s Asia-Pacific private banking leader, said: “There has been a mismatch of skills to respond to client demands. If clients are most concerned about investment performance, this has not been a key performance indicator for remuneration.”
There is also a degree of variance between perceived and real competence levels. Although most customer relationship managers believe they have reached “trusted adviser” status, 20 per cent admit they do not completely understand client expectations and investment objectives.
What is disturbing in the study’s findings is that only now, after the crash, have wealth management firms realised they need to train advisers to do a better job.
“Does the person you’re talking to understand?” said Steve Crosby, head of PwC’s wealth management practice for the Americas. “It’s not going down a checklist and saying how many wives, how many kids, how many homes? It’s what wealth means to you.”
The survey paints a picture of the wealth management industry that may be different from what investors expect, particularly investors with substantial wealth.
Crosby said the survey questioned managers who advised clients with US$500,000 to US$20 million.
Of that sampling, only 7 per cent said they felt strongly they had received adequate training to complete their job to the highest standard. A little more than half said they felt they had received some training. What is shocking is the rest - 36 per cent of wealth managers surveyed - said they believed they were not fully qualified to do their job.
Why have not firms addressed this? The leading suspect is the focus on advisers who bring in clients with lots of assets as opposed to advisers who can actually counsel clients.
The survey noted that this model was being replaced by one focused on fiduciary responsibility. What this means is that the adviser is essentially required to invest with your best interest at heart as well as to raise issues beyond your investment portfolio, like life insurance and estate planning. Given the data on training, though, this may be a tall order.
“Generally speaking, and this is true across all wealth levels, people are dissatisfied with their advisers, but they’re still incredibly loyal to them,” said Bruce Holley, managing director at Boston Consulting Group.
In the past, clients have not left advisers, preferring the devil they know. But that is beginning to change in the wake of huge financial losses.
Tom Collimore, director of investor education at the CFA Institute, an association of investment professionals, said: “ “Historically, an adviser got fired not over a substantive issue. Now it’s, ‘Did you know what you were doing? When I said I wanted to be safe, you put me in auction-rate securities and said it was a seven-day instrument. A year later, I’m still waiting to get paid back.’ That adviser isn’t going to make it.”
But the burden of finding a competent adviser rests solidly on you. Even if you decide that the broker trying to sell you the latest offering does not have your best interests at heart, how do you pick someone better?
Holley said many people react by moving to a firm with a long-established brand. But that offers no guarantee of better results.
The more rational approach is to do serious due diligence on your adviser. This is not easy. It requires a lot of work, like checking an adviser’s credentials and contacting many references. And, as Collimore noted: “With Madoff you could have done that and you still wouldn’t have found anything.”
A more reasonable expectation is to make sure all the information adds up. Holley spoke about this process as a series of screens. “A reputable institution is a good screen,” he said. “Being presented with a financial plan is a good screen. If they’re good about understanding your risk profile, that’s another screen. What that starts doing is it puts discipline in the process and increases your chances of finding a good adviser.”
Just as important is your outlook. With a big chunk of your wealth gone, the natural reaction would be to hoard what is left or to double down and try to make it back. Both are wrong, but it is hard for investors not to think that way. “People are aware of it but they can’t help themselves,” said Dr Brad Klontz, a financial psychologist. “They’re asking themselves, does financial planning have any relevance in this world? Is ‘buy and hold’ right?”
One thing investors can do to calm their fears is to question what is presented to them.
What someone sells you and what you get, investors should realise by now, is not always the same thing. To that end, investors must understand what ratings on financial products mean. “An adviser says it’s S&P A-rated and there’s a silence in the room,” Collimore said. “The client doesn’t know what it means, but thinks it’s a great rating.”
But perhaps the most important test of your adviser’s competence is in the area of what is being called “transparency”. Crosby said the survey found that transparency was becoming more important to investors than an adviser’s brand, performance and pedigree.
But while an adviser may talk about transparency, investors need to figure out what it means. Where does an adviser keep your money - at the firm or with a third-party custodian who serves as a check? Does the firm have reputable auditors and lawyers? What is being outsourced and where is it outsourced to?
If you are not sure, ask for help. Crosby said he recently helped a high-net-worth client through this process and in the end recommended he pass on the investment.
And that is the moral of the past year: when you find an adviser you think you can trust, check and check again.
The New York Times, additional reporting by Staff Reporter
2 comments:
Is your financial adviser really up to the job?
With wealth managers it pays to check, and check again
Paul Sullivan
04 October 2009
After all the turmoil in the markets, after Bernard Madoff and a bunch of other financial scandals, investors may well be questioning whether they have chosen the right financial adviser. It may be someone you like and trust, but is it someone competent to manage your money?
And even if they are competent enough, have wealth managers’ orientation moved along with your goals in the post-Lehman, post-Madoff world?
A recent PricewaterhouseCoopers survey of private banks and wealth management firms is not reassuring. “The economic crisis has presented client-relationship managers with challenges they have neither the experience nor the skills to deal with,” the study said. If quality of advice is the real differentiator, the study said, then wealth managers needed to make sure that their advisers had the relevant skills, tools and training.
The Asian leg of the survey further shows that last year’s market turbulence and the resultant impact on private bank clients hardly dented their wealth managers’ old ways. A fifth of the 40 private banks from Asia surveyed lost more than a quarter of their clients to competitors in the flight to quality in the past 12 months, and the survey found that poor investment performance was the key reason why clients left. Still, focusing on improving investment performance is not among the top five strategic priorities of chief executives.
Justin Ong, PwC’s Asia-Pacific private banking leader, said: “There has been a mismatch of skills to respond to client demands. If clients are most concerned about investment performance, this has not been a key performance indicator for remuneration.”
There is also a degree of variance between perceived and real competence levels. Although most customer relationship managers believe they have reached “trusted adviser” status, 20 per cent admit they do not completely understand client expectations and investment objectives.
What is disturbing in the study’s findings is that only now, after the crash, have wealth management firms realised they need to train advisers to do a better job.
“Does the person you’re talking to understand?” said Steve Crosby, head of PwC’s wealth management practice for the Americas. “It’s not going down a checklist and saying how many wives, how many kids, how many homes? It’s what wealth means to you.”
The survey paints a picture of the wealth management industry that may be different from what investors expect, particularly investors with substantial wealth.
Crosby said the survey questioned managers who advised clients with US$500,000 to US$20 million.
Of that sampling, only 7 per cent said they felt strongly they had received adequate training to complete their job to the highest standard. A little more than half said they felt they had received some training. What is shocking is the rest - 36 per cent of wealth managers surveyed - said they believed they were not fully qualified to do their job.
Why have not firms addressed this? The leading suspect is the focus on advisers who bring in clients with lots of assets as opposed to advisers who can actually counsel clients.
The survey noted that this model was being replaced by one focused on fiduciary responsibility. What this means is that the adviser is essentially required to invest with your best interest at heart as well as to raise issues beyond your investment portfolio, like life insurance and estate planning. Given the data on training, though, this may be a tall order.
“Generally speaking, and this is true across all wealth levels, people are dissatisfied with their advisers, but they’re still incredibly loyal to them,” said Bruce Holley, managing director at Boston Consulting Group.
In the past, clients have not left advisers, preferring the devil they know. But that is beginning to change in the wake of huge financial losses.
Tom Collimore, director of investor education at the CFA Institute, an association of investment professionals, said: “ “Historically, an adviser got fired not over a substantive issue. Now it’s, ‘Did you know what you were doing? When I said I wanted to be safe, you put me in auction-rate securities and said it was a seven-day instrument. A year later, I’m still waiting to get paid back.’ That adviser isn’t going to make it.”
But the burden of finding a competent adviser rests solidly on you. Even if you decide that the broker trying to sell you the latest offering does not have your best interests at heart, how do you pick someone better?
Holley said many people react by moving to a firm with a long-established brand. But that offers no guarantee of better results.
The more rational approach is to do serious due diligence on your adviser. This is not easy. It requires a lot of work, like checking an adviser’s credentials and contacting many references. And, as Collimore noted: “With Madoff you could have done that and you still wouldn’t have found anything.”
A more reasonable expectation is to make sure all the information adds up. Holley spoke about this process as a series of screens. “A reputable institution is a good screen,” he said. “Being presented with a financial plan is a good screen. If they’re good about understanding your risk profile, that’s another screen. What that starts doing is it puts discipline in the process and increases your chances of finding a good adviser.”
Just as important is your outlook. With a big chunk of your wealth gone, the natural reaction would be to hoard what is left or to double down and try to make it back. Both are wrong, but it is hard for investors not to think that way. “People are aware of it but they can’t help themselves,” said Dr Brad Klontz, a financial psychologist. “They’re asking themselves, does financial planning have any relevance in this world? Is ‘buy and hold’ right?”
One thing investors can do to calm their fears is to question what is presented to them.
What someone sells you and what you get, investors should realise by now, is not always the same thing. To that end, investors must understand what ratings on financial products mean. “An adviser says it’s S&P A-rated and there’s a silence in the room,” Collimore said. “The client doesn’t know what it means, but thinks it’s a great rating.”
But perhaps the most important test of your adviser’s competence is in the area of what is being called “transparency”. Crosby said the survey found that transparency was becoming more important to investors than an adviser’s brand, performance and pedigree.
But while an adviser may talk about transparency, investors need to figure out what it means. Where does an adviser keep your money - at the firm or with a third-party custodian who serves as a check? Does the firm have reputable auditors and lawyers? What is being outsourced and where is it outsourced to?
If you are not sure, ask for help. Crosby said he recently helped a high-net-worth client through this process and in the end recommended he pass on the investment.
And that is the moral of the past year: when you find an adviser you think you can trust, check and check again.
The New York Times, additional reporting by Staff Reporter
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