An A.G. Edwards broker recently found himself in the midst of a competitive conversation of the sort that is likely to become more common among high-net-worth advisors.
The exchange began when the rep took a call from an advisor at a rival firm — a virtual stranger to the Edwards rep. Imagine, then, the surprise at the topic of conversation: the specifics of one of the Edwards client's mutual fund investments.
“I'm not even sure who this guy is, let alone what client he's talking about, and he's all on my case all of a sudden,” the Edwards broker says incredulously. “It felt like I was working for this guy, like he was my boss.”
In a way, he was.
As high-net-worth investors spread their assets around more liberally, often using a variety of firms and advisors for different functions, they are finding themselves in need of a traffic cop — a central advisor who can sit in the middle of all the financial activity and make sense of it all. Ideally, such a person acts as the go-between and director of all the other advisors, making sure no one is working at cross-purposes and, in general, to make sure everyone is working from the same script.
The Edwards broker says he figured out the situation after a minute or so and explained his investments and his responsibilities to the uber-advisor. The advisor coordinator signed off with: “You'll be hearing a lot more from me.”
And he's certainly not alone. “It's going to become more accepted,” says Barry Mendelson, founder and managing director of Capital Market Consultants, an advisor consulting firm. “The reason wealthy clients spread their money out is because they're trying to manage their decision-making risk. They don't want all their eggs in one point of view. But the wealthy have the same need for simplification as everyone else does, and this is an excellent way to have the best of both worlds.”
Not Just for Families
The concept of a manager of other advisors is somewhat similar to the family-office concept, where a wealthy investor puts together what is essentially a private business to oversee all affairs — sometimes even mundane tasks like making copies and setting up babysitting duties. Of course, in investing, the concept of a fund of funds — with a managing partner who oversees the various underlying funds — is considered a pillar of diversification. But those family offices can be expensive to set up, sometimes costing as much as $2 million a year. And in hedge funds of funds, each manager gets his cut, as does the managing partner. But the notion of an overseer of other advisors is cheaper and, sometimes, more effective. It essentially allows investors who are wealthy but not obscenely wealthy — down to those who even have less than $1 million in assets — still take part in the family-office concept.
“It's coming downmarket,” says Chip Roame, managing director of San Francisco-based Tiburon Strategic Advisors. “You used to have to build your own office, you needed like $200 million or something. Here, you're essentially renting a family office. It's a logical next step. The world is much too complicated in the investments market to believe that one individual person can manage money in every asset class.”
Head of the Class
The advisor ends up becoming the all-encompassing financial planner, overseeing other financial planners. But it can be a tricky concept. You have to not only be on top of every aspect of a wealth investor's business and asset allocation, but you also have to juggle the egos of professional advisors that often don't know who you are. It requires diligence, organization and clear diplomatic skills.
“They might not necessarily pool the assets, but they pretty much might have the same functions of a family office, from being a gatekeeper to doing their own investment services to doing tax returns to even managing properties,” says Ernie Doud, management consultant for DoudHausnerVistar, a family-office practice consultancy based in Glendale, Calif. “In that high market, you have a lot of national providers who would like to be in the catbird seat with these families.”
As will happen, some firms are starting to specialize in the concept, most notably Northern Trust, based in Chicago. The firm launched its “chief wealth advisor” program in 2002 and, currently, has more than 10 advisors working exclusively under the designation. They do not have their own books, not specifically; they simply make sure, in the words of one, “that the trains are running on time.”
A Northern Trust spokesperson says the firm emphasizes that the only role of the “chief wealth advisor” is to work as this kind of coordinator; they do not run their own books on the side. They would not go into details of how one becomes a chief wealth advisor, but a Northern Trust advisor says it's a “rigorous process…but it's worth it.”
To some, the practice is a logical progression of wealth management techniques. Originally you had advisors running pension plans, spreading out the work (and wealth) to qualified managers. Then you had the family-office concept. Now, this allows those in a lower asset class in on the fun.
Many observers feel the practice is more likely to experience rapid growth in smaller broker/dealers with an emphasis on high-net-worth investors but, as with all trends, it's only a matter of time until the wirehouses catch onto it. They also believe it's the type of practice that top-tier advisors might want to pursue, if they are more interested in overseeing accounts than the daily rigmarole of client retention and acquisition.
Affecting the Broker
One question many reps have about the practice involves, of course, compensation. Most models, says Mendelson, involve an asset-based fee for the money managed. Depending on how wealthy the clients, the chief wealth advisor will take a certain percentage. Others actually are on a nondiscretionary retainer, taking a hard-dollar fee that's in-line with the services they provide. Few go about the practice on a commission basis. “It's a custodial issue,” Mendelson says. “It really can become a stressful but lucrative primary role. Many top advisors would love a position like that.”
Becoming a chief wealth advisor is one thing; dealing with them is something else all together. Reps are protective enough of their books. Suddenly having to answer to a coordinator — particularly one who doesn't even work in their firm — can rankle many.
Butting Heads
“It's inevitable that there could be conflicts,” Mendelson says. “It's really for the client to make the decision with whose guidance plays what role. If they're going to have multiple advisors, the client needs to understand the role each plays. It's not dissimilar to the way an advisor might use different managers in one portfolio.”
That speaks to one of the potential pitfalls of the chief wealth advisor concept: A lot of the time, wealthy investors are the ones who have to explain the setup to their advisors, the exact opposite of what usually happens. No rep likes to think of anyone looking over his shoulder, and they certainly don't like one of their clients going above their heads.
And even though the concept is somewhat similar to an advisor picking different money managers, it doesn't always happen that a chief wealth advisor is hired and then picks his/her team. In fact, it's usually not like that at all. Usually a wealthy investor decides his situation is getting too chaotic and calls in a chief wealth advisor to organize matters as they currently stand.
Which leads to situations like that of the A.G. Edwards broker, who, while saying he now has a good relationship with the advisor, admits it took him a while to warm up to the concept. “I felt like the rug had been pulled out from under me,” he says. “Where did this guy come from?”
