Hi All,
My parents are of retirement age and fairly well off. (although my dad will probably work until he dies bc it makes him happy). They are hard-working and smart people who both have masters degrees in their fields yet, they are completely financially illiterate.
They currently have a PWM advisor from a Raymond James in a deep south state managing their retirement portfolio. While I am not a portfolio analyst (I merely work in IB), I noticed these advisors have my parents in many high-expense ratio and entry fee investments that yield underwhelming returns, which made me angry. I feel as though they are being scammed a little bit because I feel as though these advisors are preying on their lack of financial literacy to yield high fees.
I feel as though if it were my money (and I were in my 60s) I wouldn't opt to have an advisor at all, rather I'd likely manage it myself by creating a portfolio of government/municipal securities, diversified ETFs, blue-chip dividends and possibly corporate bonds of the highest quality, none of which require much with regards to fees.
-So monkeys, what are some red flags to look for in a PWM advisor for retired folks with no financial literacy?
-What green flags should my parents look out for as they look for a new one?
-Is my strategy flawed, or is the portfolio I proposed safe and realistic enough for me to teach my mother how to manage on her own? How should this be tweaked? (she is of sound mind and has the ability and desire to learn)
-Are there courses out there that aren't complete salesy/scammy bullshit that can actually teach them about constructing and maintaining a conservative portfolio?
It is worth noting that they have diversified away from the markets via property and land holdings, and other small things so I am only asking for advice relating to their securities portfolio.
I am so glad that my parents are talking to a PWM. They ask me things from time to time, but generally, I think it is good that they have someone who is a third party that can help them with not only risk management, but also tax management, and estate planning. Do I think my dad is smart enough to manage his own portfolio. Absolutely, would I want him to, NO. We we think of aging parents, I am hoping that they stay smart enough to not fall for scams, think logically about the long term, oh and stay up to date on any news around estate planning. But, I know that at some point they are going to start to go and I would really like someone else to be there to help them through that process.
They already have a tax guy and estate planner who help with those things and they are fantastic. Our issue is the portfolio managers who have overlapping portfolios, high fees, and poor performance.
Maybe ask if the tax guys or estate guys have a good PWM. I would definitely get them out of high fee portfolios.
My recommendation is to start with your other advisors - tax and estate planners - and get recommendations of PWM's you can talk to. That would at least provide a few other views on how and what you should be doing with your investments. Talking with your existing advisor about your concerns/issues is the other thing you should do if you haven't, especially if they are very blatant things - i.e. a higher fee index fund vs. a vanguard or something.
On teaching them to manage it - I don't think that's the best option if they have enough assets to have a PWM, estate, and tax planner. Good on you for taking an interest but family + money has a tendency to go south very quickly if you are not careful. I would assist them, guide them, offer advice in selecting an advisor you all are comfortable with - but would probably stop short of managing it for them. The risks to them mismanaging themselves are so costly now - one or two wrong moves at their age is a big problem - I think it's worth finding the right PWM to help them. Obviously, this is entirely up to you and your family - I can only speak to how I look at it.
Good on you for taking an interest and of course for looking out for your parents. One thing to keep in mind is that most wealth managers worth their salt will do a full portfolio diagnostic as part of their initial courtship/pitch. Hidden Levers is the tool I'm familiar with and there are many more now, but they'll essentially take your last statement and do a full run through of expense ratios/returns mapped against the new proposal. It can be quit illuminating, particularly if you find your advisor is heavily favoring products from their own firm.
Maybe this is personal bias from experience, but I'd be weary of any advisors that are purely leading with investment performance. Particularly in the case of your parents, it's not about wealth creation at this point rather wealth preservation. You should be hearing about things like asset allocation and even more nuanced is asset location (e.g. leveraging tax-deferred accounts for certain investments). They should be well versed in estate and tax matters, regardless of whether or not you have outside advisors doing that work. I've seen plenty of instances where wealth managers have reviewed work done by outside advisors and found costly mistakes. That is also something that you can usually have done before ever signing up as a client. These things are not differentiators, but table stakes for good wealth managers and many firms will just give away these services if the portfolio size makes sense.
The differentiators on the investment side, which may or may not be applicable, would be things like access to alternative managers for UHNW investors. You might need $20mm to get a whiff of Warburg Pincus, but does the firm have commingled vehicles in place to get client's access in $250k or $500k increments? Taking it further, you might want a diversified alternative strategy, but will you have to fill out 6 subscription docs? or have they solved for that.
Additionally, as a next-gen, you can certainly be engaged in process and many wealth managers will make a point to do so. They want recurring relationships and long term clients, they want the money to stay with their firm. The wealth transfer statistics are pretty unbelievable and you better believe that the good ones are aware of it.
Charles Schwab ova here
I work in the private wealth industry. Raymond James is a good shop. It is not a wirehouse wealth firm tied to a bank like ML, UBS, MS, etc. If I were looking to build a wealth management practice or lead my parents towards an advisor at a specific broker dealer, Raymond James would be among the select few I point them to. Raymond James advisors have two types of businesses and practices: RJA which is Raymond James Advisors. These guys are employees of Raymond James and have much of the compliance and business costs paid for by the firm, and as a result make a lot less of their total revenue, somewhere in the range of 50-60%. Then there is RJFS or Raymond James Financial Services and these guys are independent contractors of Raymond James and have to front the costs of most of their business such as salaries for support staff, rent for their offices, running compliance etc. Their payouts since they receive less support can be in the 80-90% of revenue that they generate. Neither of the two are better advisors per se, however the brighter businessmen and big rain makers trust their business abilities and will thus go to RJFS. Many RJA advisors who get the lesser payout truuly love being financial advisors and dont want to be running a business and just want to focus on supporting their clients, and so they are fine with receiving a smaller payout. I would ask the advisor if they are RJA or RJFS and just keep that in the back of your head.
Raymond James recruits heavily from the wirehouses and have been successful at this. They give 7 figure checks to advisors in the form of a forgivable loan where if they agree to stay for at least 5 years, they don't have to pay back the check. How long has the advisor been with Raymond James? It's not a bad thing if they joined the firm recently and were recruited from a UBS, Wells Fargo, etc. type of firm, but if they were just know they did it for a paycheck so don't buy into the "I could serve my clients better here" b.s. that they give you.
Within their wealth management practice, there are two types of styles: brokerage business where the advisor receives a commission from the funds that your parents invests in (this isn't necessarily a scammy thing or bad thing and it sounds like this is what your parents are in) or advisory business where the advisor charges your parents a flat fee (usually 0.9-1.0% of assets) plus an additional fee from the asset manager for investing the funds (usually around 0.5% for fixed income funds and 0.8% for equity funds). The best and most successful advisors run an advisory business, and they are truly worth their costs, however it doesn't sound like your parents may need this type of service. The cost of receiving advice is an expensive services. Thus, this is why I would prefer advisors that had a brokerage business who were serving my parents. They would provide investment recommendations and give market updates to your parents, and if your parents agreed, then they would invest in the funds and pay a sales charge/commission for the trade. Your parents could check with you to see if this recommendation makes sense. The problem in this business model though is when advisors begin "churning" accounts, or every couple years providing biased recommendations so that your parents sell out of a fund that they previously paid a commission on in order to buy another one that comes with another commission. This isn't always a bad thing, but certainly something to keep an eye for. Last year, it would have been good service for an advisor to receive commission by recommending your parents sell out of growth stocks and invest in value stocks. These brokerage model funds will come in the form or A-shares or more expensive C-shares. I would make sure that your parents are buying A-share funds and not C-share funds. There really isn't a reason to be buying C-share funds, and I would question the advisor that is selling C share funds over A share funds. For the advisory business, the client would be put into lesser expensive "Institutional" or I-share funds. For a US equity fund, an I-share would cost around 0.8%, an A-share would cost around 1.2% and a C-share would cost around 1.8%. Keep in mind that the less expensive I-shares would also have to come with the advisory fee that the advisor charges for.
Raymond James corporate also puts heavy research into pre screening funds, and they publish to their advisors a "recommended" list, which comes with deep level due diligence into the funds. These are good funds to invest in, but many times the advisors are just lazily selecting these funds and then lie to their clients and say that they are the ones that picked these funds.
All in all, I would encourage your parents to be in a brokerage business, be weary of expensive funds, and ask your advisor what type of business they are running.
Okay so you work at RJ.
I do not. I work in asset management in sales and raised assets for our strategies from wealth management firms such as Raymond James, Morgan Stanley, UBS, Merrill, etc.
Also in the PWM business (30 yrs) and view RJ as a fine shop. The reality is, like any other business, there are good FAs and bad FAs. Regardless of model (brokerage vs RIA), there are client centric and practice centric. Being a fiduciary (which I am, sounds nice, but it doesn't mean the FA really cares and being a commission / brokerage based RR doesn't mean they don't. It's all about finding solid solutions (best doesn't exist as it's fluid based on markets, goals, etc.) and aligning them with client goals / concerns. I assume the FA provides more than just investment advice (regardless of what other planners your parents use) because investment advice in a vacuum is pretty useless. It needs to correlate with taxes, estates, income planning, wealth preservation, etc. You can't look at things simply based on returns and fees. Maybe they spend time with your parents explaining how this all works, discussing options, educating, etc. However, if all they do is execute trades (and you'll have no idea of what they really do as you're no the client), they bring little value to the table. That's typically not the case with RJ (I'm with a competing independent firm so not an RJ commercial).
opposite of all of the red flags. in addition to that I'd say someone that actually takes time to answer questions is a good sign and someone that's not coasting
sometimes the benefits of an advisor are behavioral more than anything - in other words, preventing them from selling at the wrong time, and if you can prevent that, you can earn decades worth of fees just by helping a client sit on their hands. DIYers with no discipline don't have this luxury. it's very possible, but you specifically mention their lack of literacy so this is an immediate concern of mine. you may save them on fees, but if they cashed out in october when their FA told them not to, you would've just wasted all of those savings in foregone returns
a bit granular but I wouldn't touch individual bonds besides treasuries if I was a DIYer. with FI desks what they are now and online brokerages mostly catering to equities, options, and ETFs, the money you'll "save" in fees could easily be eaten up by a shitty spread/execution. plus the bond market is one of the few areas with demonstrable advantage to active management. pick a well known bond fund manager and stick with them
dave ramsey
intelligent investor by graham
bogleheads
permanent portfolio (I don't agree with it, but it's a sleep well at night strategy for people with low risk tolerance)
but beyond that, I'd simply have a conversation with them about why they have this FA versus shopping around. if they have at least $1mm investable, they should be able to get good help, and if they've got less, I'd personally go to vanguard PAS for 30bps and be done with it.
finally, see my 4 part series on PWM, I have a lot in there about shopping for an advisor. also happy to answer followups
Great post. I’m also interested in hearing more about this.
Someone close to me in retirement age has had their PWM pitch and sell them multiple annuities and at this point only ever pitches this person annuities.
Does anyone in the industry have thoughts on PWMs that mostly focus on selling annuities? Are they good or bad for folks in retirement?
the vast majority of them are sharks preying on retirees without financial acumen in order to enrich themselves, that is a HUGE red flag
there could be an incredibly small amount of people who are annuity heavy for good reasons, but as a heuristic if someone only offers complex, high fee products, it's not because they're mother teresa with a suit & tie
Not looking to start an argument re annuities , insurance, managed money, alts, etc. However, ALL of these are great or terrible totally depending on the client's situation. I have retirees "heavy" in annuities because their primary goals / concerns are a need for GUARANTEED income WITHOUT market risk. Hard to do that without using an annuity (yes you could do a bunch of hedging / structured products blah blah blah but that would cost as much as the annuity and wouldn't provide all the contractual income guarantees. I also have retirees who I would never put in an annuity and manage their money via SMAs, bond ladders, ETFs, individual stocks, etc.
A true FA (heavy on "adviser" should be product (including type of product!) agnostic. If life insurance is the most effective / efficient way for them to transfer wealth both tax free and on a guaranteed basis, you'd be doing them a disservice by not including it in their "portfolio".
What I've learned / seen as most insurance based FAs or poor at managing money and most RIAs are poor at financial planning (they simply manage money without considering asset protection, taxes, estate, etc.) It's like the leaders of each group forgot to get trained and understand the other side of the coin. Fortunately I've worked with both for many years and have learned the best of both.
Bottom line, if it's good for the client, it's good. Compensation is irrelevant.
I'm sure this will kick off a robust debate. Not interested in weighing in more than this post.
I can never understand why 99% of people don’t just invest in basic vanguard mutual funds. Like vanguard does a decent job advertising and it’s common knowledge you’ll never generate alpha if you’re not some hedge fund with insider knowledge. I’ll never get why people will use an advisor when the internet has such a plethora of basic investing knowledge.
True, but most people don't want to learn to things. I'm not saying knowledge is bad, but there's a line between knowledge and actually doing something; so would you want someone coaching a team who has coached teams for years or someone who has just read books on coaching for the same amount of time but never actuallly coached?
Think of the books on saving/investing and on losing/maintaining healhty weight;think of how many sources of information there are on those two topics alone.
I am by no means anywhere close to an expert in the industry, but my guess is most so-called financial advisors that work with <$100k net worth individuals are split into two categories.
1. Pay per hour for financial advice. These guys actually have to know what they're talking about and I'd suspect they actually give good advice. Just like seeing the doctor once a year, you see your financial advisor once a year for a financial wellness check up for those that need some help with personal finance.
2. Product salesmen mostly pushing sleazy financial products on poor people like whole life life insurance like northwestern mutual "financial advisors"
Note, neither of these advisors really focus on AUM fee % because they know to generate any reasonable income they'd literally need hundreds of clients. Assuming a 1% AUM fee, to generate $200k in fees that advisor would need 200 clients @ $100k net worth each. And there's no way 1 person can manage 200 clients' portfolios so they'd also have to divy up that $200k with a staff, office, software subscriptions, not to mention T&E for client events. The economies of scale are non-existent with low AUM clients hence FA's are either pay per hour FA's that actually give good advice or sleazy Northwestern mutual reps that sell dogshit products to unsuspecting customers.
With all that in mind above. At what net worth does it make sense to get a financial advisor? My wife and I have a decent net worth for our age but it doesn't make sense for us to hire a financial advisor just to tell us to put money into 401k and buy broad market index funds which we're already doing. I feel like $3 - 5 M is probably the sweet spot at which point you may want a financial advisor to help you with diversification because I feel like at that point you should be buying more than just broad market indices (should try to diversify assets) but curious on everyone's thoughts.
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