Why Your Clients Need A Board

Why Your Clients Need A Board

Advisors and their clients need to establish their own boards that have the ability to make binding wealth management recommendations.

High-Net-Worth (HNW) investors and their advisors have adopted many investment management strategies pioneered by institutional investors and academia.

The good news is that everyone is better off for it.

Strategic asset allocation, for example, was a concept born in academia and quickly embraced by institutional investors. It wasn’t long before it became part of the bedrock upon which financial advisors manage money for HNW clients.

That innovation is one of the best things that ever happened to HNW investors. Although a diversified portfolio has under-performed the market over the past four or five years, it has protected clients well over the past 20 years.

Money manager due diligence and performance benchmarking also started out in the institutional market and have become standard operating procedure for HNW advisors and investors.

Before this discipline was a regular fixture in the HNW market, there was no systematic way to evaluate money managers. Advisors and investors too often relied on tips from friends or unquestionably used their parents’ trust department.


Greed Is Good

That’s when greed took over.

Wall Street put its own spin on manager due diligence and turned it into a pay-to-play circus.  Run-of-the-mill managers were included in programs that supposedly vetted managers. Or those programs were populated with proprietary money managers. They were hardly ever the A-team.

Even due diligence firms like Cambridge and Callan got into the act. They started charging money managers a fee to present at their manager due diligence conferences. 

The backlash to all of this was relatively swift and resulted in a positive outcome: the creation of ETFs.

Since then, investors have flocked to ETFs.  Asset flows to ETFs have far exceeded other investment vehicles because they significantly reduced active money manager fees. Why invest with an active manager when more than 80% of them don’t outperform their benchmark?

Unfortunately, even in the ETF space, we’re starting to see ETFs that are fee-laden.


Dealing With The New Normal

In my view, the HNW market needs to follow the lead of the institutional market on another important item: Being forthright about return expectations going forward.

In fact, many pension funds, corporations, state and local governments have been told by their boards to reduce their return expectations.

For public sector entities, that’s particularly important because many pension fund obligations are already underfunded. They will face even more challenges when returns are lower than they have been over the past few years.

The Toughest Sell

Breaking that kind of bad news is always painful on two levels. To meet your goals with lower return expectations, investors must contribute more to their investment program. And, they’re going have to accept smaller distributions. Double ouch.

Why haven’t HNW advisors followed the lead of their institutional counterparts and informed their clients about what’s coming?

There are a myriad of reasons.

First, investors want to believe that trees grow to the sky. They want to hear that the great returns over the past 20 years will continue. Second, lower returns don’t sell.  “You mean I’m going to make less? What am I paying you for?” Third, and most importantly, unlike the institutional world, there is no board to warn about potentially lower returns.


The Solution

I think we can solve this problem.

Advisors and their clients need to establish their own boards that have the ability to make binding wealth management recommendations. The board should be a collaborative venture between advisor and investor, complete with its own guidelines akin to the investment guidelines used by institutional investors.

Whatever the board recommends, it must be binding. If that process is anything but automatic, the board will be a joke.

Who should be on that board? People who are already in the client’s circle of trust – the client’s attorney, CPA, insurance specialist and most importantly, the client’s spouse. Advisors already interact with these professionals, so it isn’t a new intrusion into your business. You’re just inviting them to be involved in a more positive way.

* * *

Change is difficult, but making the tough decisions will help save our local governments just like they can secure our client’s legacy. 


Jeff Spears is Founder and CEO of Sanctuary Wealth Services and author of the blog, Wealth Consigliere. Follow Jeff on Twitter and Facebook.

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