Advisor Alignment: The Emerging Choice of Wealthy Families
By Michael Zeuner, Senior Executive Partner and Steve Barimo, Chief Marketing Officer

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Figure 1: Wealth Management Activities

It does not take very long for a family that has recently come into significant liquidity to learn what more experienced families have known for a long time: managing family wealth is complex and time-consuming {Figure 1}. It is several businesses rolled into one with the average family having more than 25 different providers¹. At a minimum, successfully managing wealth requires that a handful of activities be done well, including:

• Identifying the best investment managers in the world
• Negotiating the best fees for all products and services
• Monitoring, reporting on and periodically reassessing all investments
• Coordinating and integrating all family, financial and legal matters
• Ensuring that all appropriate regulatory filings are made on a timely basis and recorded
• Communicating with and educating all stakeholders
• Making sure all activities support individual and family objectives and are sustainable²

An Altered Landscape

Traditionally, the wealthiest of families established family offices to advise them and work on their behalf to buy and integrate the myriad of different products and services they required. Doing so ensured that all activities would be aligned with their families' interests. However, family offices were a luxury the expense of which few families could afford. Even for some that could afford one, the challenges of hiring, managing, and retaining talented staff made having a family office unappealing. Most families chose to work directly with providers for all of the products and services they and their families required, which were relatively few: a banker, a stock broker, an insurance salesman, an accountant and attorney, and maybe a trust company—each with a straight-forward and relatively transparent array of products and services they manufactured.

But over the years families began to see a substantial increase in the amount and complexity of investment options. Regulatory changes led to a complex wave of mergers and acquisitions that dramatically altered the wealth management landscape: banks bought stock brokers, stock brokers bought insurance companies, and insurance companies bought banks. "The wealth management landscape has come to be characterized by complexity and conflicts of interest, and presents significant challenges for wealthy families." Many providers became financial supermarkets or "one-stop shops" for the sale and distribution of a wide variety of financial products and services to individuals and, increasingly, businesses. The transparency that wealthy families once enjoyed was lost in the process of bundling a wide array of products and services under the guise of advice. The inherent conflicts of interest soon became apparent, most notably the incentive to advise clients toward products and services that yielded the providers more and higher fees. From tainted research to marked-up pricing on securities and from accounting scandals to churning, examples of conflict and fraud are pervasive.

The wealth management landscape has come to be characterized by complexity and conflicts of interest, and presents significant challenges for wealthy families. Families are being forced to play an increasingly active role in the oversight and management of their wealth, a role in which they are at a substantial disadvantage. They are being told that they are getting "holistic" advice though only receiving advice that leads to the purchase of products and services their providers have assembled for sale or distribution. It is impossible for a family to know if they are getting more or less than what they need, or receiving the best ideas and solutions available. And because of the lack of transparency, they will never know how much they are actually paying in fees. Though there are many well-intentioned advisors at these firms who suggest that they "protect" their clients from these inherent conflicts, principles can easily get compromised when doing right by the client does not maximize their own compensation or their employer's profits. At times, even these advisors do not realize the conflicts embedded within the products their employers are encouraging them to recommend. For example, these providers sell "structured products", like principal protected notes, which have multiple embedded fees within them that make it difficult to evaluate the merits of the solution or understand whether the same result could have been achieved in a more cost effective way. Sadly, even within so called "open architecture" providers, the sales and distribution culture is invariably biased toward selling investment managers that are willing to trade through their own platform or pay them fees or commissions for the distribution of their products. It is unfortunate, but this is the financial services business model.