Financial Advisors for the 99%
KEY POINTS
Advisory Boards and their financial advisors are not just for the world’s wealthiest families
Learn the value of a Family Advisory Board
Fiduciary advisory relationships are critical to growing and protecting your financial legacy
Many families experience difficulty when trying to select financial advisors for their legacy plan. We developed a definitive guide to ensure you choose the best advisors to achieve your legacy goals.
It can be a challenge to simply understand what advisory services are available and how to differentiate one advisor from another.
At a high level, selecting a financial advisor is a three-stage process: identify which advisory services you require, select the advisor(s) you wish to work with, then engage each advisor.
We developed an estate planning checklist the incorporates the selection of professional advisors.
Today we will focus on a sub-section of stage one:
Identify Types of Financial Advisors Available
This is a rudimentary step in the process of forming a trusted and talented Advisory Board. The wealthiest family offices likely have multiple advisors for a given area (e.g., investment specialists for real estate, fixed income, domestic equity, emerging markets equity, etc.). Very few families have a net worth requiring a professional family office. Be rest assured though,
The 99% need an Advisory Board
What is an Advisory Board?
It is an informal group of trusted advisors that provide non-binding strategic advice to you, your family, corporation, organization, and foundation. The Advisory Board is not formally appointed in the same manner as a corporation’s board of directors. Each family’s Advisory Board is unique and may include any combination of the advisors described below, and many more not listed.
The development of an Advisory Board will differentiate your legacy plan from other families that simply hire ad-hoc advisors that provide their services in a silo format.
A key attribute of the Advisory Board is that the members must be relational and interdependent with other members of the board. Such should include regularly scheduled board meetings (quarterly, semi-annually, or annual) and ad-hoc meetings when contemplating significant financial decisions. Minutes should be kept of such meetings for future reference and accountability.
For example, you may benefit from an integrated advisory board approach when deciding whether to pay a management bonus or dividend from your corporation and then invest it in either a tax deferred savings account, fully taxable account, or place it in an insurance contract as a form of asset protection and generational wealth transfer with potential tax benefits.
You will also need to consider the advisor’s credentials and compensation model.
We recommend, whenever possible, you choose financial advisors that have a fiduciary duty to their clients. Such requires they always put your interests ahead of their own. In other words, they must offer the best products and services for your specific needs as opposed to the products that pay them the highest fees or commissions. The advisor should be licensed and in good standing, if applicable.
The advisor’s compensation model must be well understood at the onset of the relationship as such can lead to potential conflicts of interest. There are three primary compensation models: commissions, fee based, and fee only. Commissions can be generated from the sale of a financial product (insurance policy, mutual funds, equity trade, etc.). Fee based accounts have a set fee schedule, but also allow commissions and referral fees. Fee only accounts are based on a percentage of assets under management or a fixed dollar retainer fee. Fee only accounts are best aligned with the client’s interests, and they are often the least expensive and most transparent.
Transparency is a core tenet of your Advisory Board’s foundation. Never sacrifice transparency due to complacency. Do your homework and ensure a crystal clear understanding of what services are being provided, the cost of such services, and how every single advisor is being compensated. Some fees like hourly fee billings are explicit. Other fees like referral fees may not be fully disclosed. For example, your accountant recommends you to a lawyer, then the lawyer pays your accountant a referral fee for such introduction.
Our blog will delve deeper into all the above concepts in future posts.
For now, let’s review the primary types of financial advisors you should consider when developing your Advisory Board. You will notice that some advisors provide overlapping services. At your discretion, you will need to decide if an advisor offering multiple services will fulfill your family’s goals and objectives.
We elected to reference credentials common to the United States in the following overview. Such credentials may vary based on your geographic perspective.
Personal Banker
Provide banking, credit, foreign exchange, and sell investments (e.g., mutual funds, bonds). They are typically compensated directly by their financial institution. Therefore, the cost of such services is built into your account service fees or the cost of your investments. Although individuals possessing a bachelor’s degree often provide such services, those possessing the Certified Personal Banker designation would be better qualified.
Accountant / Tax Advisor
Provides bookkeeping, accounting, tax planning and preparation, consulting, auditing, and financial statement analysis. Accountants are not typically well suited to provide investment advice from both a training and licensing perspective. However, they can be invaluable when analyzing the financial implications of a proposed investment (e.g., cash flow, taxation). Advisory fees are often fee only based on a flat rate or hourly rate. Individuals possessing the Certified Public Accountant designation are well suited for this role.
Lawyer
Your choice of lawyer will vary based on the nature and complexity of your situation. Estate planning lawyers are essential for administering wills and trusts. Tax lawyers can advise on matters involving domestic and international taxation. You may consider a corporate lawyer and employment lawyer if you own a company. A family lawyer becomes increasingly important and integrated throughout the legacy journey. Lawyers will often charge a flat fee or hourly fee for these types of services. Your lawyer will have passed the Bar Exam and you will want to ensure they are in good standing (usually registered with the state bar or state bar association).
Investment Advisor
Investment advisors, individual or a company, may also be referred to as: investment managers, asset managers, portfolio managers, and wealth managers. Investment advisors provide investment advice tailored to your specific goals, objectives, and risk tolerance. Such advice would entail selecting investments and rebalancing your portfolio. Some advisors will also provide portfolio management, brokerage services, and financial planning, depending on licensing. Advisory fees are often based on a percentage of assets under management; however, flat fee and hourly fee arrangements are common. Individuals possessing the Chartered Financial Analyst designation are well suited in this role.
Broker
Provides execution only services with respect to the purchase and sale of investments. Such may include stocks, bonds, mutual funds, futures contracts, etc. Brokers do not provide investment management advice or portfolio management services. Brokers are generally paid on a commission basis. Individuals are required to obtain certain minimum Series licenses to become a stockbroker. Additional Series licenses are required for certain other products (e.g., futures contracts, managed futures).
Insurance Agent
Provides insurance coverage to meet your goals, objectives, and risk tolerance. An insurance policy can support multiple objectives (e.g., protect against potential future losses, tax deferred investment growth, liquidity for shareholder buyout, estate transfer, etc.). Some agents will specialize in certain products (e.g., life insurance, property insurance) while others may sell multiple products. Agents are paid commissions from the insurance company based on the policy premiums you pay. All insurance agents must be licensed. Such licensing will vary by state and specialty.
Estate Planner
Provide services aimed at preserving and protecting your wealth and transferring it upon your death (e.g., will, trust, estate taxes). You may see overlapping services provided by estate planners and financial planners; we distinguished between the two as we view the latter as dedicated to wealth accumulation and growth. Estate planners may charge a flat fee, hourly fee, or continency fee. The breadth of services provided by an estate planner may be provided by various other advisors highlighted in this article. If you utilize a single estate planner, you should consider one with the Certified Estate Planner designation and ensure their credentials are in good standing. Regardless of the advisor utilized, you will need to ensure all legal documents are reviewed by a qualified lawyer.
Certified Financial Planner
Provides a comprehensive service offering that may include budgeting, investments, insurance, retirement planning, risk management, referral to other specialists, etc. Advisory fees are often fee based or fee only. Advisors from different backgrounds may offer multiple services under the title Financial Planner. Their qualifications may not necessarily support such a multi-disciplinary service offering. Individuals possessing the Certified Financial Planners designation are well suited in this role.
Trustee
A trustee is given control or powers (administration, investment, and distribution) over property within a trust with a legal obligation to administer the trust with appropriate care, caution, and attention solely for the purposes specified in the declaration of trust.
The nature of this advisory relationship is unique as the trustee has legal control over the assets. A trustee also has a legal fiduciary duty of care to act in the best interests of both current and future beneficiaries of the trust and can be held personally legally liable for any breach of such duty.
There are three types of trustees: professional (individual who manages trusts and conduct other fiduciary tasks as part of their profession), corporate (e.g., bank, trust company), and private trustee (e.g., family member, friend).
Trustees can be compensated based on a percentage of net assets of the trust, flat rate, or hourly rate. Family and friends may agree to provide such services at no cost. You may find added value in your advisor if they are a Certified Estate Trust Specialist. However, many families often appoint family, friends, or trusted professional advisors that do not hold such a designation.
The relationship between a trust, trustees, and beneficiaries is explained in our post Trusts - A Practical Guide.
Other
You may come across other types of advisors along your legacy journey (e.g., financial coaches, credit counsellors, mentors, consultants). Such advisors may have a place in your legacy plan. However, we recommend an initial focus on curating a carefully chosen combination of the advisors highlighted above as they will provide the foundation for a robust family Advisory Board capable of guiding your legacy across generations.
RELATED LINKS
U.S. Securities and Exchange Commission
