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This chapter is from the book

How the Wealth Management Industry Works

Why is it important to plan before engaging wealth management advisors to manage your assets? You need knowledge to protect your interests. Unless you are a proactive, thoughtful, and informed client, the structure of the wealth management industry today actually works against your interests in three ways:

  1. The wealth management goals of clients and their financial advisors can easily diverge. When conflicts of interest arise, advisors may put their own interests ahead of their clients.
  2. Advisors are unlikely to fully understand or appreciate your personal and family dynamics. These dynamics are key drivers of wealth management priorities, goals, and strategies in families, and they influence many business and investment decisions—frequently behind the scenes.
  3. Very few wealth management professionals have enough breadth of skill and experience to operate across multiple disciplines or to anticipate how advice offered by one expert can potentially affect that offered by another. The advice of one advisor should, ideally, complement and reinforce the value of another advisor’s input. But the siloed nature of professional fields such as estate and tax law, financial planning, investment management, and banking usually works against this desired outcome.

Wealth management firms that are waiting to make money (from your money) include brokers, mutual fund companies, life insurers, money managers and hedge funds, law firms, banks, independent financial planners, accounting firms, and multi-family offices. The organizational culture in most firms focuses on finding a balance between getting acceptable results for the client and achieving the firms’ profit goals. As with any market-driven business, the financial rewards and recognition that wealth management practitioners enjoy are based on the amount of business they bring in the door. There’s a premium placed on generating revenue. It’s easy to measure and is tied directly to firm profitability. But larger revenues and bigger profits don’t always mean better service.

By contrast, it’s not easy to measure the value added that a wealth management firm or advisor actually generates for a client. Thus, clients are often left in the position of having to trust their advisors without an accurate yardstick to measure their effectiveness. This is a big reason why studies of the wealth management industry show a high level of customer dissatisfaction.

This state of affairs hasn’t been in the long-term interests of either party. Fortunately, the problems are not insurmountable. That’s why America’s wealth management industry is in a state of dynamic transition, where old business models are competing with new ones in a struggle between service and profit. No one knows which will be the winner. There is no better system than a competitive marketplace to resolve industry problems, but the process is messy and clients can get hurt. For that reason, I say: "Buyer beware!" and "Keep reading this book!"

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