Financial Advisors vs. Wealth Managers
A big change in the financial industry took place with the advent of discount brokers. There were really two main methods to make money with other people’s money in the stock market. You could recommend stocks and bonds to wealthy investors and collect a fee every time your client bought and sold stocks. The fee ranged from 1% to 8%, and when a client purchased anywhere from 1,000 to 1,000,000 shares, the fee gradually reduced. The other way to make money was to run a hedge fund. The fund took more risk and could be short and long in the market. The fee charged by the manager of the pool was 1% to 2% of the assets under management, and then 20% of the increase in capital each year.
Discount brokers changed the way of doing business. No longer could you charge thousands of dollars in commissions per trade, because discount brokers charged a small flat fee. Today, Schwab and Fidelity charge $4.95 per trade, and no limit to the number of shares. Stockbrokers used to charge fees of $.50 to $1.00 per share per trade or more. Stockbrokers had to find a new way to earn a living.
They acted as financial advisors. They collected assets under management (AUM) and made their money on the fees charged up front. They would advise their clients on the best way to diversify the client’s money, e.g., small cap vs. large cap; growth vs. value; fixed income vs., stocks, etc. These financial advisers had no licensing requirements.
Some brokers became financial planners. Financial planners charged a fee to do a financial plan and then sold products that fit the plan. Often the products they sold had large front-end fees, but no exit fees.
Forbes describes a wealth manager, as one who has an informed view of the client’s total financial picture, as well as a better understanding of his or her goals and limitations, and that understanding will dictate which products come into play. As such, a product will be positioned, not promoted, as the next logical step in an ongoing plan to meet the client’s long-term agenda. Along the way, the wealth manager engenders trust by putting their client’s needs and wants over a given product. The financial adviser had a conflict of interest built. He was paid large commissions to promote certain products.
Because the products that an investment advisor promotes have a somewhat limited scope, there are a finite number of options from which to choose. Wealth managers can offer their clients the same investment choices (though positioned differently) and can also offer products and services that are not necessarily investment oriented, notably advanced planning options.
It is not enough, however, to simply be able to offer a longer menu of products and services. Wealth managers position each product and service in the context of the client’s overall financial plan. The prime focus is the interplay of products and services and the way they can be integrated to address a client’s complete financial equation over the course of a long and mutually beneficial relationship.
The future may bring Artificial Intelligence to the fore that will manage your money for you via an App you download. There will be no need for stock analysis. Just plug in your investment parameters, and your portfolio will fill with stocks. Or maybe, the returns will be so generic that someone will break from the pack and offer to generate outsized returns like the stockbrokers of old and get paid commissions that reflect the gains.