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Seek the best advice

Tom Livergood is CEO of The Family Wealth Alliance in Oak Brook, Illinois, USA. The website address is www.FWAlliance.com

Private wealth management advice can be hit and miss. Thomas Livergood examines what family businesses need and how to prepare a shortlist of questions to tell if the firm is a goldmine of priceless nuggets and top services – or a minefield of expensive guff

What is a wealth management firm, and why is it important for private families to be able to tell a good one from a pretender?  Even when selecting from only the best-in-class firms, how can a family be assured that a certain firm is a "best fit?" Who has defined all of this in the industry, especially for high-end provider firms like Multifamily Offices (MFOs)? The sad thing is that until these issues are defined and clarified, private families will remain confused. The fragmented wealth management industry has not defined its role, thus sending mixed signals to the ­marketplace.

The easiest way to think about the wealth management industry is to ask four strategic questions about the various firms attempting to serve private families. These four questions are: (1) Whom do they serve? (2) What do they offer? (3) How do they deliver? and (4) Who are these firms? The answers to these questions provide the framework for clarity and standards for the high-end of the wealth management industry.
 
All private families, indeed all human beings, have delegation and self-selection tendencies. Wealth management firms have a personality that tends to favour certain types of clients. Consequently, natural selection occurs in the marketplace. The wealth management industry is therefore aligned and will continue to be aligned with the type of clients they best serve. Some firms – like MFOs – best serve a type of client that we call "delegators." Others cater to the "Do-It-Yourselfer" such as the big online firms like Chas Schwab here in the USA. Some private families prefer the depth and the promise of generation-spanning financial institutions, while others prefer the personal touch and the sense of "whatever-it-takes" attitude of an owner of an independent wealth management firm.
 
If your private family is looking for a new wealth management firm, then align your family with what feels natural. For instance, if you have always tended to conduct your business with independent firms, you are unlikely to be as comfortable with an institution that provides wealth management services. You also want to fit in. If your entire family is worth $100 million, you are not likely to be best served by a firm whose average client net worth is $10 million. While many financial institutions are good providers, they are not for everyone. But most families select them regardless of fit, because they do not know what questions to ask, and how to go about finding good alternatives, such as competent, independent wealth management firms.

Once you do find a potential firm, you will want to know something about them and compare them to what you value and require. According to our studies and that of many others, these are the six attributes that private families value most in best-in-class wealth management providers: objective advice; stability of relationship management; stability of ownership; open architecture for implementation; competency and consistency of delivery; and breath and depth of service offerings. Make certain that the wealth management firm that you select has these enduring qualities, and if they do not, keep looking for those who do.

The best firms offer a breath and depth of service offerings. As we have identified 10 service offerings provided by top, high-end wealth management firms such as MFOs. They are the following: (1) comprehensive financial planning; (2) portfolio management; (3) back office/consolidated reporting; (4) estate and wealth transfer; (5) tax planning, preparation and compliance; (6) risk management; (7) trustee services; (8) lifestyle management; (9) family consulting, governance, meetings, and education; and (10) strategic philanthropy and administration.

I encourage you to ask of your current or proposed wealth management firm exactly what they offer, what they do in-house and what is outsourced, and inquire how long they have been offering each of these services to private client families such as yours. If they do not start by and continuously offer the first service of comprehensive financial/strategic planning, you have saved yourself and your family a great deal of time now (and trouble later), because you have just ended your interview.

Judging how well a wealth management firm delivers their services is the toughest, most subjective part of any due diligence. For example, the issue of compensation is "a huge deal." This is because how a firm is compensated (we've identified four ­different ways) is one of the driving forces behind the giving of objective advice. Compensation also affects the degree of open architecture offered. Disclosure and transparency in all financial dealings is another attribute, as is compliance with all applicable local, federal, and international laws and regulations.

Delivering services in an integrated, co-ordinated fashion is another trait of top wealth management firms. So is delivering them in a competent, consistent, and replicable manner. What processes do they have in place, you should ask, for ongoing training and continuing education for their employees? What processes are in place to ensure checks and balances for privacy and security?
 
In the case of using outsource provider firms, can they demonstrate a definable process to identify, select, monitor and co-ordinate the work of even best-in-class outsource firms? If you get those all-too-familiar blank stares to these queries, you again know that your interview is over early.

High-end wealth management firms like MFOs can originate from single ­family offices, independent firms, and from institutions. We have found best-in-class firms from each of these origins. But it goes beyond from whence they came. Just because an MFO comes from a single ­family office, for instance, does not guarantee their success in delivering services on a consistent basis to outside families. Nor does the backing of a large institution ensure the the giving of objective advice. Finally, the independents struggle with handling growth because many are undercapitalised and cannot manage the type of growth they are experiencing.
 
Asking each type of firm to explain how they plan to handle consistency in their service offerings, the fact that they may have proprietary products in-house, or how they plan to manage their growth are reasonable questions to ask of these firms before they would ever serve your family.

What kind of professionals and support staff do they have? What ­designations or marks of professional competency do they have among their professional staff? What is their ratio of relationship managers to client families? How long have they been offering MFO or other types of wealth management services to their clients? Ask them about their three biggest challenges, as their answer will tell you a great deal about the firm you are interviewing. Finally, if the answers from your existing wealth management firm sound poorly thought out, it is probably their exit interview.

Common sense is a terrific guide to sound decision making. We agree, but it does not hurt to have some tools in place. It is critical to have both when evaluating and choosing a wealth management firm – especially one that represents a "best fit" in serving you and your family for years and generations to come.

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