How to Determine if You Need a Wealth Manager

A wealth manager is a financial professional who provides investment and financial planning advice to individuals and sponsors of retirement plans.

"Wealth manager" can apply to different types of financial advisors, including robo-advisors, personal advisors you interact with online, and financial advisors you meet in person.

What is a wealth manager? 

Wealth managers provide a wide array of services much broader than managing investment portfolios.  These offerings may include strategic tax planning, retirement planning, estate planning, and more.  A wealth manager often works with other experts like accountants and attorneys to coordinate a comprehensive financial strategy.

Do you need one?

If you're clear about your financial goals and confident in your ability to grow and protect your wealth, then you may not need a wealth manager.  However, if you have complex questions that you can't find the answers to on your own or feel you may benefit from a specialist's input, then you might need a wealth manager. 

The search for a wealth manager is often triggered by major life events, like the birth of a child, divorce, inheritance, or a health event. 

Wealth managers can also help if you are past the accumulation stage of your financial life and are concerned about having enough money to retire.  For many, longer life expectancies, rising medical expenses, and concerns about the solvency of Social Security have spurred them to seek assistance from a financial advisor. 

As your financial needs evolve, you may need wealth managers' specialized knowledge to structure your portfolio so that you are not taking too much or too little risk.  Or, you may turn to wealth managers for guidance on issues like legacy planning and charitable giving

Wealth managers are especially useful to help you determine a suitable asset allocation (the division of your portfolio between stocks, bonds, and cash) and make sure your portfolio is properly diversified. 

A wealth manager will periodically rebalance your portfolio to keep it aligned with your agreed-upon risk profile. 

If you decide you need to retain a wealth advisor, here are some factors you should consider.

Fees matter

Wealth advisors have different fee structures.

A robo-advisor that charges based on assets under management typically charges 0.25%-0.50% of the assets managed. 

A traditional advisor you can meet in person may use a declining fee schedule starting at 1% for the first $1 million, although this varies greatly. 

Other financial advisors charge flat annual fees or retainers, typically ranging from $2,000 to $7,500.  Still, others charge hourly fees, usually $200 to $400 an hour, or a flat fee for creating a financial plan.

Even a small difference in fees can significantly impact returns over time.  Here's one example: $100,000 invested over 20 years with a 4% annual return and a 1% ongoing fee will be worth $180,000 after 20 years.  The same portfolio, with a 0.25% ongoing fee, will be worth $210,000—a difference of $30,000. 

There are a small number of traditional financial advisors who are highly qualified and provide high-touch services but charge sharply discounted fees.  If one of these advisors is suitable for you, you can save hundreds of thousands of dollars in fees and loss of earnings over the long term.

Beware of additional fees you may incur.  The SEC has published a helpful guide describing these fees.

Credentials matter

Check the financial advisors' credentials to identify those best qualified to assist you.  

These credentials are generally considered to be the top three: Certified Financial Planner (CFP®), Chartered Financial Analysts (CFA®), and Personal Financial Specialists (PFS®).

What these credentials have in common is that the candidates must adhere to rigorous standards set by boards and institutes.  They must pass comprehensive examinations, have experience providing finance and investment advice, take continuing professional education courses, and adhere to high ethical standards.

A less common but meaningful credential is Certified Public Accountant (CPA).  CPAs are highly qualified professionals who must have an undergraduate degree, pass a challenging four-part exam, maintain a state license, complete 120 hours of training every three years, and commit to a code of conduct. 

Some wealth management firms have both CFPs and CPAs on their staff who work together to meet your needs.

CPAs enjoy a well-deserved reputation as being among the most trusted professionals. 

Check investment philosophies

Wealth managers have different strategies for managing your wealth.  A primary difference is between advisors who recommend active or passive strategies.  

"Active" investing means the portfolio manager attempts to beat a benchmark index, often by stock picking or market timing.

"Passive" investing means the fund manager simply seeks to replicate the returns of a benchmark index, often by purchasing index funds, exchange-traded funds, or passively managed funds that track a particular index. 

There's compelling evidence that over time, especially after fees and taxes, most actively managed funds underperform comparable index funds.  

Disciplinary history

As part of your due diligence, consider a financial advisor's reputation and disciplinary history.  You can find extensive disclosures through the SEC's Investment Advisor Public Disclosure database.

Why your wealth manager should be an RIA

There are good reasons why you should insist that your financial advisor is a Registered Investment Advisor (RIA).

An RIA has a fiduciary duty to always act in your best interest.  Being a fiduciary means that RIAs must always place your interest above their own.  RIAs are required to minimize conflicts of interest and disclose any that exist. 

RIAs must also register with either the SEC or state securities regulators and make extensive disclosures about their advisory practices.

Whether or not to retain a wealth manager is among the most important financial decisions you will make in your lifetime.  Hopefully, you now have enough information to do so in a prudent and responsible manner.

Darrell Armuth founded Sensible in 1994. Since then, he has served hundreds of clients. Darrell is a Certified Public Accountant certified by the state of Nevada.