Wealth Management – 10 Truths from Years of Experience

The wealth management industry in Ireland is consolidating rapidly with recent deals announced or imminent involving the likes of Investec, Goodbodys and Merrion.

This writer spent three interesting years working with a local wealth management division and would argue that the strategic change being forced upon the wealth management providers should also be replicated at the investing client level. Having witnessed thousands of interactions between clients and their advisors there are a number of outstanding truths which need to be emphasised for clients to get the best out of a wealth management service.  My top ten truths would be as follows:

  1. The Plan: For a long term sustainable relationship which will deliver optimum returns the client and advisor must agree a long term plan. And, then stick to it. In order to generate returns clients must stay exposed to market risk over the long term and avoid emotional short term chopping and changing of portfolios. Market volatility and emotions are a fact of investment life. The value of an advisor is to keep the client “on plan” and  provide reassurance that the investment portfolio is positioned long term to benefit from volatility and the compounding effect of growing income streams.
  2. The Fees: High fees will eat into the long term returns to clients. Total fees will be a combination of advisory fees and execution fees.  The advantage of putting in place an investment plan is that this will reduce turnover and additional execution fees which should be negotiated aggressively. The real value which is worth paying for is the advisory side where wise experienced counsel at times of turbulence will ensure the investment plan is followed. In a previous article we have highlighted that Fidelity’s best performing clients were those that actually were dead. Dead people don’t panic or trade.
  3. Trading: Clients should be absolutely sure they are an investor for the long term. Trading or timing the ebb and flow of market volatility is incredibly challenging, even for professionals. Time and income compounding are a client’s long term secret weapon. Timing trades for optimum exit and entry in the markets is expensive and in the vast majority of cases wealth destructive. Check out the disclaimers on most of the financial trading platforms and they will warn that circa 75% of clients will lose money. So, to be clear, that’s not a return on your capital – that’s not even a return of all your capital.
  4. Portfolios: It was soul destroying to listen to clients discussing their portfolio of 20 odd stocks with an advisor and seeking recommendations as to potential new stocks/ideas to buy and then which poor performing stock to sell and make room for the latest greatest stock idea. Let’s be absolutely clear that this kind of portfolio is not fit for long term investment purpose. It is not sufficiently diversified and therefore is prone to unnecessary emotional turmoil and decisions on the hoof. Academic studies would suggest a portfolio of a minimum 35 instruments will achieve 90% of diversification required and even then I would suggest the random assembly of 35 securities is sub-optimum from a cost perspective. From an advisor’s perspective it is also a regulatory nightmare, as any unique underperformance of this portfolio versus the firm’s recommended model can invite scrutiny and potential litigation risk.  For the vast majority of clients the optimum way to access the market is via funds or ETFs.
  5. Securities: As per the previous point there are real cost benefits to leveraging the market purchasing power of a fund or ETF. They can trade for almost no cost but individual stock trading will be far more costly to a client. Remember the key value is the plan and the advice. The instruments used to achieve the plan should be as low cost as possible.
  6. Asset Allocation: Often times I would hear clients query why they should pay advisory fees for a portfolio that uses instruments which passively mimic the market’s moves. Clients rightly should pay fees that are appropriate to an active management service but clients should also be aware the use of passive instruments can drive a very active strategy/plan. Think about the long term differences in performance of bonds/equities, Europe/US equities, Commodities/Real Estate, Startup Investing and one will understand that cheap instruments can power a very active strategy. The biggest driver of performance over time will not be a clients’ exposure to single stocks. The much more important consideration in terms of delivering the plan will be keeping asset allocation on track and rebalancing same periodically.
  7. The Advisor: A really good advisor will put in place a plan/strategy which can be explained easily and reviewed regularly to reassure a client that the portfolio constituents are delivering in line with benchmarks, comparable products. A really really good advisor will know that the value of a client relationship is long term retention of that client. So, a really really really good advisor may reward a client with his/her loyalty and adherence to the investment plan by lowering advisory fees in say year 4. For real thought leadership in this area check out the fast growing US wealth management firm, Ritholtz Wealth at ritholtzwealth.com
  8. The Family: A client who has a long term investment plan is more likely to share this information with family and offers the potential of a multi-generational relationship with the advisory firm. If a client is uncomfortable sharing investment arrangements with family it is often because the financial goals and plan are not robust. A client should reflect on that, and certainly before putting a succession plan in place.
  9. Risk Free: There is no such thing as a risk free proposition/product. Even if there was, the logical real returns outcome would be zero(or worse with inflation).  We often read reports of dubious investment schemes promising super-normal returns. However, there are real risks associated with supposedly low risk products in the current market. By an unusual conflation of circumstances the regulators/monetary authorities in current financial markets have created a vast market of supposed risk-free instruments (government bonds) which currently have negative yields i.e. the investor loses a small amount of money each year to own the bonds. Every wealth advisor is in the bizarre situation right now where these government backed securities are considered/instructed by the very same regulators/monetary authorities as low risk , much lower risk than say equities. For long term investors, a portfolio of these instruments would be a sure fire route to wealth destruction. Welcome to the bizarre world of Quantitative easing (QE) but clients should look to the long term and an investment portfolio’s ability to generate compounding income.  The only payments a client should make are to a good advisor.
  10. A prospective wealth management client should forget about the last 8 Truths if the 1st Truth is ignored.

Finally, Investors who may be interested in supporting new Irish start-ups can view equity crowdfunding investment opportunities on the Spark Crowdfunding website here.

Stay Connected
Latest News