How much money should you have before hiring a wealth manager?

There are several important factors in deciding when to use a financial planner, investment consultant, wealth manager etc.

  1. What is your level of financial knowledge? Many choose to manage their own accounts until the complexity of the number of investments & other considerations become too time consuming. People want to enjoy retirement or concentrate on their businesses not have another full time job as their own financial manager.
  2. What are your financial goals? Wealth Creation or Wealth Preservation? If someone just wants basic wealth preservation and they have sufficient assets where they can be set up with sufficient dividend and rental property income that meets or exceeds expenses they can set up a few brokerage accounts with dividend income sent to them monthly or quarterly and utilize a property management company to oversee their rental properties this will allow them to minimize the time necessary to manage their assets with just occasional assistance from their tax attorney, real estate attorney, property manager and online brokers.
  3. Do you have a large portfolio of passive income streams, active investments, multiple businesses and other partnerships? Residential & Commercial properties and other assets? This is when you need to have a good team of advisors working together. Attorneys, accountants, consultants & managers that are assisting you in every way from asset protection services, wealth creation & preservation, tax avoidance strategies, and allowing you to have confidence in the professional staff you’ve hired so that you can enjoy the wealth you’ve worked hard for.
  • Long before needing a financial advisor, I suggest everyone employ a good tax attorney. Not a CPA or tax advisor from H&R Block. You can have a book keeper or accountant handle keeping the books for your business etc, but employ a tax attorney to prepare your tax return. Most people with under s million dollars in assets self manage their investments. However, the above factors have a greater bearing than a dollar amount.
  • As an investment consultant that specializes in both asset protection services for high net worth clientele as well as wealth creation strategies for those clients looking to join the former group, I deal with a large variety of different financial goals and circumstances and I enjoy my work very much, especially seeing how perseverance and preparation enables people to live the American dream. (A close tie with the occasional use of a rich clients Ferrari or boat for a weekend so I don’t have to make those big monthly payments 🙂

(Credit: Nick Falcone)

I like Nick’s answer and as the former CFO of a financial guidance software company (acquired by Morningstar) thought I would add my perspective.

As I’ve described elsewhere in Quora, as well as to family, friends and colleagues over the years, wealth management is similar to exercising:

Just about all of us could benefit from periodic expert financial advice. Whether you are a casual, weekend walker or an Olympic hopeful, while the specifics might change, the value and potential “performance” improvement will not.

And similar to exercising, wealth management requires knowledge, effort and time. Financial advisors and wealth managers, like personal trainers and coaches, can make your effort much more efficient, boosting your performance and accelerating you towards your goals, whatever they are.

Further, and as in both areas, there are technical details, “know-how” short cuts, and periodic changes to the rules and best practices that few, save the true professionals, know. And unless you are the recreational die hard it’s unlikely you will dedicate the time to learn these outright, much less keep up with.

This is the purpose behind “Continuing Education” requirements of CPAs, CFP’s, Enrolled Agents (tax experts) and other professional designations. So if you replace the term “wealth manager” with “consultant,” you have the basic idea and potential value proposition for the broad field of financial advice.

From my personal observation, as well as my role as HelloWallet’s CFO, which provided a front row seat to basic money management and savings allocation for thousands of employees – Google and Walmart were customers – even minor financial decisions can matter. Seemingly small contributions invested over a handful of years can make a large difference to one’s overall wealth and financial security.

As others have written, in many ways “wealth” is simply “habit” by another name.

An example, with some math:

Start with an investor contributing $10,000 per year to their 401(k). This equates to $833/month, often a combination of employee contribution and employer match, and a reasonable investment amount for many who will be reading this.

Now let’s look at two scenarios, assuming the employee/investor continues this behavior for ten years:

1) Portfolio A allocation mix generates a 4% annual return, resulting in a $123,000 balance at the end of ten years.

2) Portfolio B allocation mix generates an 8% annual return, resulting in a $153,000 balance at the end of ten years.

This $30,000 difference between these two portfolios after 10 years grows to become a $220,000 difference if left in the market for an additional 25 years while continuing to earn an annual return of 8% .

Who might this apply to? Suppose you are a relatively new employee, 25 years old, just starting your career. You spend 10 years in the work force before deciding to return to school. However, following the advice of someone knowledgable in these things, you keep your money where it is, never withdrawing it from the market or even rolling it over from your former employer’s 401(k) into a higher fee IRA many financial advisors might tempt you into.

What is the real world impact of this decision?

This $220,000 balance differential you accumulated, now at the ripe age of 60, could generate ~$750 per month in perpetuity (using the 4% withdrawal thumbrule). Were you to wait until 65 to begin drawing down (again using the same thumbrule)y our monthly income could be $1,100 per month. This incremental amount is just based on an allocation decision, not the initial amount contributed, nor, for that matter, the total investment.

Such is the power of appropriate investment allocation coupled with time. Most of us don’t walk around thinking about the value of these small things, compound interest applied to our daily lives, yet most financial consultants/wealth advisors do. From my perspective, a quarter million dollar difference (I’ve rounded up for conversation) is worth a discussion with a consultant.

If you think this is far fetched, Dalbar, an investment research firm, reports this phenomenon, albeit expressed in different language. With more or less the same difference, each year investors underperform comparing market returns to individual investor returns. When it comes to our own investing behavior, there appears very little new under the sun.

Indeed, one particularly pernicious stumbling block is what behavioral economists call hyperbolic discounting. In brief, the cumulative difference of these small things is so far off into the distance we tend to not recognize their importance.

In our example, I suspect most would view a $10,000 a year investment as hardly worth the effort to seek out professional advice. Yet as a calculator or smart phone can demonstrate, the right allocation over an appropriate length of time can make a tremendous difference compared to the sum of the original investment.

Beyond portfolio allocation, another detrimental decision to future wealth is active trading. We move in and out of stocks, bonds, funds, sectors and other investment vehicles and market segments way too often. As a result individual investors generate for their accounts a return that is only half what the overall market produces. And this is before the negative tax impact is factored in.

Think about this. HALF.

If that doesn’t frighten you, someone who is focused on the long term, then re-visit the preceding example. If all a competent wealth manager does is prevent you from making ill-advised buy and sell decisions then their counsel could be worth its weight in gold (depending on the price of gold at the time. Ha.).

So to complement Nick’s list, I would add the following:

1. How disciplined are you to study and periodically monitor the changing investment landscape? Can you comfortably look out 10 and 30 years into the future and discount back to the differences decisions today could make for your future you? Would you rest easier knowing you have a second set of eyes, someone both educating you as well as holding you accountable for your own performance? One piece of advice in behavior books is when setting a goal, make sure you tell someone, as the mere fact of going public creates a trail of accountability. Advisors can hold you accountable to your goals.

2. How capable are you aggregating lots of sometimes disparate information? Can you easily flip between a retirement savings strategy with your 401(k)/IRA combination and your children’s education fund? What about the impact of your current mortgage and perhaps that of a second home? How much retained earnings should you leave in your business to fund these and other financial goals? What is your stock option strategy with your employer? How do you manage trust distributions? The list of discrete decisions, each sometimes requiring more than conversational knowledge, can be long. See the CFP list of knowledge topics tested on the exam.

3. How are your assets and income protected? How much and what types of insurance do you carry? Why? What level of “self-insurance” is appropriate given your level of wealth attainment and future goals, including estate planning? The trial bar (“ambulance chasers”) is willing to take on more collection risk against a defendant who has a greater level of assets.

4. Do you know how much financial advice and wealth management costs?No, really. You can buy good, quality financial advice buy the hour, meaning wealth management for a $100,000 nest egg may only cost you $2,000 initially, and perhaps half of that ongoing on an annual basis. Alternatively, I routinely see people pay $60,000 and more in annual fees for a $1MM balance, exclusive of the tax liability. Fees matter, as they directly impact the rate of return (see example above). Unfortunately, and because they are not reported the way, say, your cable bill is sent to you, most investors have no idea how much they are actually paying their advisor, nor the impact in their overall return.

I wish I could simplify this further. However, after years of practice and study, you begin to realize some things can only be reduced so far. Instead, it is far more important to find someone you not only trust, but also whose skills are verifiable and fees transparent. This, by the way, may be the hardest decision of all, but for those who can find it has the potential to make a lifetime of difference.

(Credit: Aaron Benway, CFP, EA, ABFinancialPlanning.com, Fmr – SW CFO (now Morningstar), Carlyle Group)

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