How much value do private wealth managers and financial advisors add?

Anyone can purchase exercise equipment.

But the goal is not to own exercise equipment. More likely you are trying to accomplish something, whether it be losing weight, training for an event, preparing for swimsuit season, or fill-in-the-blank.

Reducing that goal to a series of actions requires some preparation:

What specifically are your goals? What equipment (if any) are necessary to help you achieve your goals? Where do you buy this equipment? What are your sources of information? Which exercises will you do with the equipment? How often? Will you actually stick with your regimen? Should you add cardio, resistance training or something else, “cross-train” in the language of the industry? What does your doctor say about re-introducing exercise back into your life? Your significant other or friends and family who will ultimately support you in this endeavor?

I could go on, but you probably get the point.

Even a task as mundane as exercising – which on some level we all “know” how to do – can quickly become “complex” depending on how deeply one cares to look, as well as how committed one is to achieving success.

Financial goals – life goals really, expressed numerically – can be reduced to some money management principles and follow a similar path as exercising. Aside from the narrow discipline of investing – buy and hold is generally the right answer for most of us, and yet a surprising few are capable of over the longer term – money encompasses cash flow, taxes, asset protection, generational planning, and bigger life goals, to name a few. Competent wealth managers must consider these and more, and do so consistently and periodically, not unlike the exercise regimen physicians regularly ask us to engage in.

Sure, TDF’s and ETF’s are fine tools, as are dumbbells, as both can be inexpensive and relatively simple, but neither should be the starting point. Instead, ask “where are you going?”

Based on my experience those with a certain asset level, or aspirations to obtain an asset level, are often willing to pay to have experienced counsel help them answer this question, sort through the limitless possibilities and periodically re-evaluate and reassure them they are doing the right thing.

That said, fees are a real issue. Much of the financial services industry is built around a hefty, but largely silent asset management fee that serves to maintain the marketing and sales distribution of financial products. Market volatility and compound interest further mask the true impact to a future account balance. Most consumers have little to no appreciation of the real world costs, despite the well-tested notifications and legal disclaimers. As an aside – Adam Smith’s invisible hand tends not to work as well in opaque pricing environments (Exhibit A – the healthcare industry).

Even so, every experienced advisor has a story (if not dozens) where the client wanted to do something contrary to their long-term goals and it was the advisor’s counsel that stayed their hand (edit – customers likely have a similar number of opposite stories). Disregarding the converse case, whether the price of this financial catastrophe avoidance is appropriate is subject to debate, but as the customer rarely knows what he’s paying you can be sure it’s likely nowhere near efficient.

In the end it is hard to go wrong with additional knowledge of the financial world. But like most things for which you do not have the time, interest or patience to develop true expertise, financial advice can often be worth it’s weight in gold. Just make sure you know how and where you are being charged, as well as the true impact (hint – find the compound interest formula in your calculator).

(Credit: Aaron Benway, CFP, EA,)


Low cost target date funds (e.g. Vanguard) overall are a huge improvement over traditional mutual funds for retail investors.  But they are also mass produced, blunt instruments.  Much of the promise of software in investing, like in all other markets, is not just efficiency, but personalization.  So, in my view, services like Wealthfront and Future Advisor offer better models than target date funds, both because they include important additional asset classes and because they are tailored to your own individual circumstances around risk and liquidity.

The decision whether to pursue this strategy yourself with ETFs/Index funds or through the use of an outsourced service is really just a question of time and attention.  For me, 25bps (to use Wealthfront as an example) in fees irrespective of account size is very low compared to the other alternatives in the investment world.  I see it as a reasonable price to pay for the convenience of having someone else handle tax-efficient rebalancing, think hard about asset allocation, and ensure that I stay on course.

On the broader question brought up here – whether traditional financial advisors add any value – I would say potentially, but not with respect to investing.  Financial advisors market themselves as doing any number of things, which can be generally categorized as:

  • Provide investing and planning advice
  • Provide access to investment opportunities
  • Help manage taxes, estate planning, charitable giving, mortgages, and all kinds of other financial activities
  • Give you somebody to talk to
  • Shell out perks: exclusive dinners, sports tickets, invites to fundraisers… the whole shebang

Provide investing and planning advice
I do believe that there are thoughtful financial advisors out there who provide sound investing advice.  These kinds of advisors: do not put you into mutual funds or insurance products to earn a commission; help you plan your spending and encourage you to save money; urge you not to sell when the market drops; help you build a diversified portfolio of low cost investments that are tailored to your individual preferences; and do not push you into “hot” alternative assets.  However, most financial advisors are not like this, instead advising you in ways that are either misguided or conflicted.

So, while some financial advisors do provide sound, simple advice, you don’t need them to do this.  A bit of Quora/internet research or book reading can get you to the same place – and save you a bunch of unnecessary fees in the process.  Once you have decided (as I think you should) that “winning the loser’s game” (phrase borrowed from the title of Charlie Ellis’s book on this topic) as a personal investor is primarily about smart asset allocation and minimizing transactions costs and fees, you can either manage your investments yourself or use a service like Wealthfront to do so.

Provide access to investment opportunities
I will make some generalizations here, but I believe they hold in 99.9% of cases.  If a private wealth manager is providing you with exclusive access to an investment opportunity, it is a) not very exclusive and b) probably not a great opportunity.  This is not only because you are probably not at the very top of their Rolodex, though that is true as well.  It is because the best private investment opportunities – in all kinds of asset classes, from real estate to private equity to hedge funds – are usually offered first either to people with personal knowledge/relationships related to the investment, or to blue chip, professional investors.

To see how this happens, consider the market for venture capital funds.  Financial success as an investor in venture capital requires being invested with the highest quality, highest returning funds.  The reasons for this will be intuitive to most angel investors and entrepreneurs – limited number of great companies, tendency for deal flow to accrue to top branded funds, etc.  To see a detailed account of what this looks like – and why venture capital is not attractive as an asset class on the whole – I definitely encourage you to read the recent report written by the Kauffman Foundation:….  Who are the large investors in top funds like Sequoia, Benchmark, Kleiner, Accel, et al?  It’s primarily endowments, foundations, family offices, and well-connected individuals.  For the general partners at top funds, these investors are value added, prestigious, patient, and make them feel good for supporting worthy causes.  With limited fund capacity and excess demand, the best funds are certainly not clamoring for capital from the wealthy clients of private wealth managers.  While this phenomenon is most pronounced in venture capital, it is true to a large extent in every investment category.  Active management, especially in illiquid asset classes, is attractive when it’s good, but most of the time it is just an excuse to charge excess fees.

As far as exclusive structured products that some private wealth managers like to pedal – for example, complicated fixed income instruments promising high yields – hopefully the specter of collateralized mortgage securities and the 2008 financial crisis is still fresh in peoples’ minds.  If something sounds too good to be true, it almost certainly is.  And if it’s too complex to understand, it was almost certainly created to extract fees.

Note that in all of this I am ignoring a key question, which is how much money you have to invest.  Generally, until you have tens of millions of dollars, you will not even be in a position to invest in the top tier of alternative asset managers.  Consider a personal portfolio of $20 million.  Even with an abnormally large allocation (say, 25%) to an alternative asset class like private equity, real estate or absolute return, this is $5 million.  If you want to spread your investments amongst at least a few active managers in that asset class – a way of diversifying away the idiosyncratic risk of individual firms – you are now on the very lower end of investment minimums for most institutional firms.  For many top firms, the minimums can be $10 million or larger.  So, if you are wealthy but not superwealthy, and a financial advisor is promising access to top alternative asset managers, you might want to check their math.

If you want exclusive access to private deals, I think the tried and true strategy is to make friends.  Be a great angel investor and mentor.  Make useful introductions for friends. Like anything else, you get invited to the party because you work hard and add value.

Give you somebody to talk to
Thinking about your money can be emotionally draining, especially in times when the market is especially hot or cold.  As the market plummets, we all want someone to make us feel safe.  A good financial advisor can and will do this, and will help talk you off the ledge before you make the brash decision to sell low.  I actually believe this aspect of financial advising – the feeling comfortable that someone is watching out for you – is why most people hire a private wealth manager.  As a wealth of psychological research has shown, we just like to trust the guy in the white lab coat.

Putting emotion aside, the truth is that it is a lot cheaper to either a) write down your investment philosophy and revisit it when you need a reminder of what you are doing and why or b) find a good friend with whom you share a similar investment philosophy.  Admittedly, this is easier said than done, and I do believe that some great financial advisors have helped many clients in confusing, distressing times like 2008 (though most were scrambling to help themselves!).  In a world of increasing access to increasing amounts of information, it feels harder all the time to find the signal in the noise.  My hope is that services like Quora help us build a future where people can more easily identify and pay only for authentic expertise.

Help manage taxes, estate planning, charitable giving, mortgages, and all kinds of other financial activities
This, in my opinion, is where private wealth managers have the potential to help their clients the most.  If you have just made millions of dollars at Facebook, for example, you have a whole new set of financial questions that never occurred to you.  What is the best way for me to give money to charity?  How can I avoid making bad tax decisions when exercising my options?  When should I refinance my mortgage?  Financial advisors can be useful for these types of questions, and make your life easier in the process.

That said, you can also grasp the key points on any of these topics by doing a bit of research on the web or outsource your questions to a tax advisor, banker, and/or lawyer.  Financial advisors are intermediaries on these issues; if you are really worried about estate law, you need an estate lawyer, not a financial advisor.  So, while a good financial advisor will give you the broad strokes and help coordinate advisors, you should think about what it’s worth paying for this.   And, if you want to maintain control over your own affairs, you can interact with tax, legal, and other advisors (the real experts) directly.

Shell out perks: exclusive dinners, sports tickets, invites to fundraisers… the whole shebang
If your private wealth manager is giving you free or discounted things – whether its tickets to the open or a preferred rate on a personal line of credit – you better believe it’s because they are making money on you in some other way.

In Summary
I don’t mean to knock private wealth managers and financial advisors as a whole; as I mentioned above, some are incredibly talented and thoughtful, and fees are becoming more reasonable, especially on large accounts.  I think financial advisory is like any other service – just like you pay a babysitter to buy you time to go out with your husband, you pay a financial advisor to buy you time to do other things you love.  This is why a lot of very smart business people and investors continue to have a financial advisor.  But too often Wall Street takes an oversized bite out of the pie by convincing smart people with less experience in finance that there is something magical or complex about investing.

This is why I think it’s worth disaggregating what a wealth manager does and asking hard questions.  Private wealth managers make a lot of money in fees: if you don’t believe me, check out this 18-page (18 page!) disclosure from UBS (UBS 18 page report on fees:…).  Imagine you just made $10 million on the Facebook IPO; 1% of that is $100,000.  In my opinion, that is a lot of money to pay someone for tax advice, tickets to the U.S. Open, help with your mortgage, and a few meetings in a mahogany paneled office.  So, if you are going to hire a financial advisor… watch the fees and make sure you know what you’re paying for!

(Credit: Nick Shalek)


The simple answer is yes, or wealth managers and advisors wouldn’t exist and have thriving businesses. However, the level of expertise and ability to add value varies widely within the industry. For anyone with a substantial asset base, and particularly for founders, engineers, and venture capital professionals, there is not enough interest in, time, or scale to do a good job of managing all of the aspects and responsibilities that come along with accumulating, maintaining and growing the wealth. The scope of the job for sophisticated investors and family offices goes well beyond constructing portfolios of stocks, bonds, and ETF’s.  Some examples of how wealth managers could add value on the investment side and elsewhere are listed below:

* Advise on concentrated equity positions, including: when to sell the position, liquidity & tax planning, hedging the position, generating cashflow from the position via options trading, etc.
* Become a partner with clients by investing side by side in the same strategy & investments
* Provide the overall structure for holding, protecting, and investing assets, of which Trust & Estate Planning and Structuring is a key component
* Protecting your assets from creditors and predators
* Optimize Balance sheet, taking advantage of the interest rate environment and leverage when appropriate
* Get clients access to Lines of Credit, Lending, etc. which may not seem important today, but can be critical in times when Credit dries up and asset levels move down
* Analyzing, evaluating and highlighting investment opportunities in more niche markets, and identifying when the timing is right for allocating capital to a particular asset class or strategy
* Helping clients avoid bubbles, Hedge against systematic risks, and gain institutional level exposure to trading strategies and instruments
* Serve as an “outsourced family office” for those who do not want to spend the time and money to build out their own family office
* Help manage and coordinate the client’s relationships w/ Tax Planners, Accountants, Tax & Estate Attorneys, Lenders, etc. to ensure that everyone is on the same page, and nothing falls thru the cracks
* Help to source and evaluate Private Company, Hedge Fund, & Private Equity investment opportunities as well as Advisory & Board opportunities.
* Ensure that clients are not living larger than their asset’s cashflow generation ability
* Ensure that the assets are positioned to generate cashflow, protect in down markets, and participate in up markets
* Serve as a sounding board and reality check for investment ideas in the public, private and real estate markets
* Vetting the multitude of “investment opportunities” that an investor / family will be pitched, and identifying and getting access to the top tier Venture Capital, Hedge Fund & Private Equity funds
* Leveraging one another’s networks
* Help clients establish Charitable Trusts, Foundations, etc.
* The amount of data out there is immense, the key is having someone who can help you sift through it, filter most of it out, analyze it, and deploy an investment strategy to take advantage of it
* the asset classes included in a Target Date Fund are pretty limited, and are not typically where you would find the best opportunity for outsized returns
* Serve as a general confidant for all things financial, and someone to tell the client “NO”, because most other people in their lives are “Yes” men & women.

The answer to the question, of “can wealth managers and advisors add value”? is a definite “Yes”. You just have to find the right person and also know what to avoid.

(Credit: Jay Casey)

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