What is that Advisor Really Worth?

by Tim Chase

So here's the dilemma:  You have spent the last 20 years scratching and clawing your way building your business into a phenomenal success. It wasn't easy and no one knows the ins and outs of the business like you do. By far your biggest asset is the business and you instinctively know how to grow and protect that asset. Suddenly an opportunity emerges to monetize all of that hard work and you find yourself in unfamiliar territory. The territory of a pre-transaction business owner headed towards a liquidity event.

Once your deal is closed, your new world is one with lots of cash. You have new best friends that have popped out of the woodwork from all sorts of financial shops ... Banks, Brokers, Money Managers, Insurance salesman, Financial Planners. All of them call themselves "Advisors" or some variation of that.  You also have your accountant, multiple lawyers and virtually everyone else from your business world telling you what to do with your money.

You start having conversations with these people and it all sounds the same.  There are some very slick people delivering those messages. It's hard to figure out where these people are really coming from and how they are getting paid so you drill down and do your homework. It's shocking when you look at the amount of fees these people expect to earn!

Here's the question:  Just what do these people do? How are they getting paid? Can they possibly be worth all of those fees?  How do you know who to trust?

Most of the people you will encounter in these conversations will fall into one of three categories:  A salesperson, a money manager, or a financial advisor.

Let's start with the simple one first. Avoid the salesman, period.  I don't care how compelling their presentation, you can be assured that they are only telling half the story. In the financial world, commissions are a major conflict of interest, they are exorbitant, and they are almost always hidden. There is no such thing as transparency and that salesperson only makes money by selling you stuff. You do not have the ability to see through their game.  Don't try because you will lose -- their entire business is based on their ability to win at this game. Simply stay away as they are dangerous to your financial health. You see these salespeople in banks and brokerage firms, but also many accounting firms and financial advisors fall into the same bucket. The best way to ferret them out (it's not easy) is to ask them directly: will you personally, your company, or any of your affiliates ever earn a commission on anything I do by following your advice?  It's important to ask about the affiliates because the slick ones are very good at playing hide the bean. If the answer is anything but no, don't wait for the explanation.  Just run.

Money managers are a definite step up and there are great money managers out there. These people are paid a fee (typically a % of assets managed) to select the stocks or funds for your portfolio.

This may come as a shocker from someone in the financial advisory business:  most money managers are not worth anywhere close to what they charge.

Pop quiz: Over the last ten years, what percentage of active money managers beat their passive index?  You would think, based on the fees they charge, that nearly all of them would beat their index. You probably guessed where I am going with this. Over the last ten years, only about 20% of managers actually performed better than their index. Some of the craftier managers have gotten wise to this game so they carefully select an obscure index that is the "perfect match" for their strategy that they just happen to beat pretty regularly.   Caveat emptor as they say (buyer beware).

Many money managers and advisors position themselves as your advocate in selecting managers. They often charge a percentage of your assets and allocate the assets to a variety of "Best of Breed" managers. Twenty years ago this was a true value added service, but with the advent today of low cost index funds and ETFs paired with hyper efficient financial markets, there is simply not much value add here any longer.

The best money managers offer something that you can't replicate through a simple index or ETF. Today, public markets are hyper volatile, but often the best opportunities are available through the private markets. If you examine how the top performing endowments invest, you will find that they invest significantly in private investments such as Real Estate, Private Equity, Venture Capital, Distressed Debt, Direct Lending, etc.

As an individual investor, this area can be especially dangerous as there are plenty of salesmen swimming in these waters. A good money manager can sift through the many to find the few. The top managers here earn their fees many times over.  The reality is that solid investments like income producing real estate have been a fundamental core of wealth building for generations and can take a portion of your money out of the craziness of the public markets.

Here's some questions to ask your money manager to see if you are getting a good deal:

1. What are the total fees on my investments, including fees on underlying funds?

2. What index are you bench marking and does that make sense?

3. Are they bringing investment opportunities to the table that I would not otherwise see?

4. Am I seeing institutional quality private investments?

The last group are the Financial Advisors. Many manage money, but they also provide overall advice in many other areas of your financial life such as tax planning, estate planning, generational planning, risk management, cash flow modeling, charitable planning and more. In reality, managing your financial affairs comes down to much more than picking investments as a well-coordinated financial effort is required to meet your families overall financial goals.  A financial advisor in his fiduciary capacity must always have your interest first.

For most financial advisors, the fees they charge often look very similar to that of a money manager, so it can be very confusing to tell the difference. Let's be real here, we all sound the same and everyone seems like they are the right solution.  One of the most significant areas of dysfunction in managing finances is the lack of coordination between advisors. Just like in the old childhood song, the hip bone's connected to the leg bone, etc...  In the financial world, the investment strategy is connected to the tax strategy which is connected to the risk management/asset protection strategy which is connected to the estate/gifting strategy which is connected to the charitable strategy and on and on. You get the picture.

Here's a question to ask:  Do you have a money manager that provides some financial advice? Or do you have a financial advisor that provides some money management?  Or just maybe, do you have someone with a balance between the two worlds?

So back to the solution for your dilemma:

Make sure you have a coordinated strategy with an advisor that sees the big picture, avoids conflicts of interest, and looks outside of the box for planning and investing ideas. If you can find this, you will earn those fees back many times over all the while having the peace of mind that your affairs are well managed.

IMPORTANT DISCLOSURES