ALBERT HERTER

‘IN SEARCH OF COMPETENT (AND HONEST) ADVISERS,’ from today’s N.Y. Times.

In Uncategorized on August 3, 2009 at 17:21
AFTER all the turmoil in the markets, after Bernard L. Madoff and a bunch of other financial scandals, investors may well be questioning whether they’ve chosen the right financial adviser.
Most people are dissatisfied with their financial advisers, said Tom Collimore of the CFA Institute.
Related
About Financial Planners: What You Need to Know (December 23, 2008)
It may be someone you like and trust, but is it someone competent to manage your money?
A recent PricewaterhouseCoopers survey of 238 private banks and wealth management firms is not reassuring. “The economic crisis has presented client relationship managers with challenges that they have neither the experience nor the skills to deal with,” the study said. If quality of advice is the real differentiator, the study went on, then wealth managers need to make sure that their advisers have the relevant skills, tools and training.
What is disturbing in the study’s findings is that only now, after the crash, have wealth management firms realized they need to train advisers to do a better job.
“Does the person you’re talking to understand?” said C. Steven Crosby, head of PwC’s wealth management practice for the Americas. “It’s not going down a checklist and saying how many wives, how many kids, how many homes? It’s what wealth means to you.”
STATE OF PLAY The survey paints a picture of the wealth management industry that may be different from what investors expect, particularly investors with substantial wealth. Mr. Crosby said the survey questioned managers who advised clients with $500,000 to $20 million.
Of that sampling, only 7 percent said they felt strongly that they had received adequate training to complete their job to the highest standard. A little more than half said they felt they had received some training. What is shocking is the rest — some 36 percent of wealth managers surveyed — said they believed they were not fully qualified to do their job.
Why haven’t firms addressed this issue? The leading suspect is the industry’s focus on advisers who can bring in clients with lots of assets as opposed to advisers who can actually counsel clients.
The PricewaterhouseCoopers survey noted that this model was being replaced by one focused on fiduciary responsibility. What this means is that the adviser is essentially required to invest with your best interest at heart as well as to raise issues beyond your investment portfolio, like life insurance and estate planning. Given the data on training, though, this may be a tall order.
“Generally speaking, and this is true across all wealth levels, people are dissatisfied with their advisers, but they’re still incredibly loyal to them,” said Bruce Holley, managing director at Boston Consulting Group. “It’s been going on for years, but it’s been exacerbated recently.”
In the past, clients have not left advisers, preferring the devil they know. But that is beginning to change in the wake of huge financial losses, some of which clients were not even aware were possible.
“Historically, an adviser got fired not over a substantive issue,” said Tom Collimore, director of investor education at the CFA Institute, an association of investment professionals. “Now it’s, ‘Did you know what you were doing? When I said I wanted to be safe, you put me in auction-rate securities and said it was a seven-day instrument. A year later, I’m still waiting to get paid back.’ That adviser isn’t going to make it.”
YOUR RESPONSIBILITY But the burden of finding a competent adviser rests solidly on you. Even if you decide that the broker trying to sell you the latest offering does not have your best interests at heart, how do you pick someone better?
Mr. Holley said many people react by moving to a firm with a long-established brand. But that offers no guarantee of better results.
The more rational approach is to do serious due diligence on your adviser. This is not easy. It requires a lot of work, like checking an adviser’s regulatory record through the Financial Industry Regulatory Authority, the Securities and Exchange Commission and state regulators, and contacting many references.
And, as Mr. Collimore noted, “With Madoff you could have done that and you still wouldn’t have found anything.”
A more reasonable expectation is to make sure all the information adds up. Mr. Holley spoke about this process as a series of screens. “A reputable institution is a good screen,” he said. “Being presented with a financial plan is a good screen. If they’re good about understanding your risk profile, that’s another screen. What that starts doing is it puts discipline in the process and increases your chances of finding a good adviser.”
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