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This chapter is from the book

Classic Approach to Wealth Management

Many people rush to retain wealth management advisors in whom they desire to place their trust. Clients are busy, and most are anxious to have professional oversight in place. They either look to an existing trusted advisor who helped them before (maybe with issues unrelated to current wealth management challenges) or they respond to inquiries from enterprising advisors who identify them as new business prospects. In either case, people often choose one firm immediately or decide to have multiple firms compete for their business before they really know what they want or how to assess accurately the characteristics and quality of each firm’s offering. During the course of the selection process, prospective advisors are asked to explain the strengths of their firm and their own background and to describe how they would manage the assets if the prospective client chose them. The prospective client tries to absorb this information with limited relevant experience and typically chooses the most attractive-sounding sales pitch without a thorough understanding of what they want to achieve or the likelihood of doing so.

After the new client chooses an advisor, both client and advisor are limited to solutions that the advisor can provide, whether or not they are advantageous to the client. Because most private wealth advisors don’t generate revenue from a client until they have sold one or more products, and because many clients want the security of knowing their assets have been invested, there’s often an unspoken urgency on both parties’ parts to consummate investment arrangements and to lock the client into specific solutions, often with long-term consequences.

When they rush to action, most clients have not thought deeply about their financial, personal, or family goals, how to realistically achieve them, or their comfort with financial risk before hiring their advisors. So their advisors end up driving the agenda. Most advisors inquire about the client’s financial situation and learn something about his/her goals, family situation, and personality. This classic approach leaves little incentive for advisors to explain the pros and cons of all the financial options available, especially low-cost, high-value ones. After interviewing a client, the advisor typically selects the firm’s investment policy that most closely matches the expressed need. He then chooses an asset allocation from among the available options. Assets are divided by major category or asset class—stocks, bonds, cash, private equity, hedge funds, real estate—and a target allocation is assigned to each category so that the total equals 100%. Then the advisor reviews his firm’s stable of available investment managers and recommends a subset that represents each asset class. The client then reviews the list, approves the recommendations, and invests the target amounts.

Within a month or two, and sometimes faster, the client’s strategy is set, the assets are fully invested, and the revenues are flowing to the advisor’s firm. From here on out, the advisor meets periodically with the client to review the performance of the portfolio, to offer suggestions for improvement, and to make any agreed-upon changes. This classic approach to wealth management (which, as you may already have guessed, I want you to avoid) can be broken down into five steps, as shown in Figure 1.1. This classic approach is standard across the industry, and it happens time after time.

Figure 1.1 This is the standard process used by most wealth management advisors.

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