Before Entering Into A Serious Money Relationship, Self-Assessment Is In Order

By Megan Gorman

Long before social media overtook the media business, back when many investors had to check the morning newspaper for stock prices, the choices for wealth management were limited. A typical affluent investor might have a stockbroker who telephoned weekly with stock ideas and a CPA they visited at tax time. Holistic financial plans were a rarity. Today, by contrast, you have a multitude of options for managing your money and planning your financial future, ranging from using a fin-tech app to determine proper allocations on your own, to hiring a wealth manager who provides a team of professionals at your beck and call.

How to narrow your choices? Start by picking the role you want to play in managing your money—or at least the one that suits you at the stage of life you’re at. As Shakespeare wrote in As You Like It, “All the world’s a stage, and all the men and women are merely players… And one man in his time plays many parts.”

Which one fits you depends on how much time you’ll be willing to devote to your money; the confidence you have in your financial abilities; the sort of advice experience you want; and the amount of assets you have.

Before the Internet, it was easy to stereotype do-it-yourselfers. The engineer who built her own spreadsheets to track her finances. The doctor who believed he was smarter at picking investments than the pros.

Today, with the resources available on the Internet, anyone can be a DIYer and most young investors start out that way. You can be a Striver whatever the level of your assets, provided you’re ready to spend the time and are comfortable relying on computer programs and apps to design and stress test your asset allocation and financial plan. Some of the most committed DIYers are motivated by a goal—as demonstrated by the burgeoning online FIRE (financial independence, retire early) movement.

Strivers can easily educate themselves and do basic research on ETFs, mutual funds and individual stocks and review their asset allocation using free tools at Morningstar and Yahoo Finance, as well as those provided by their own online brokers. You can put your portfolio through hypothetical stress tests by using free Monte Carlo simulators at Portfolio Visualizer. Plus, most online financial services firms also provide clients tools to help determine the risk level in their portfolios and whether they’re on track for retirement. 

There are two big risks for Strivers. Many investors overreact to market moves and news; studies have shown that mutual fund investors, for example, tend to underperform indexes,  buying at tops and selling near bottoms. There is also the risk of building a financial or retirement plan using faulty assumptions. As Strivers age and their assets grow, they many find themselves graduating to become Jugglers or Delegators.

This growing group of affluent investors prefer to combine DIY financial management with professional advice—and have the time, skill and patience to manage it all.  That can mean doing retirement and budget planning themselves with online programs while turning investment management over to the pros—or vice versa. Fortunately, these days you don’t need to be wealthy to get portfolio management; a growing list of fintech startups and established financial companies now offer preconstructed investment portfolios matched (via an online questionnaire) to your timing, goals and risk tolerance. (Some of these same providers also offer financial planning, including phone or web consultations with a human being, for an additional percentage of assets fee—an arrangement typically known as a “hybrid” service.)

Another Juggler technique is to pick your own allocations and investments and then hire a financial planner for specific assignments at key points in your financial life-cycle. For example, a 50-something DIYer who has mostly allocated his investments to index funds and has run his own financial plan showing he’s on track for retirement, might decide to engage a financial planner to check his assumptions and make suggestions about changes to the plan—before it’s too late to course correct if needed. New parents might consult a planner about life insurance needs and whether to use a 529 college savings plan, but then compare insurance policies online and invest in a 529 directly online.

Finally, some Strivers who still enjoy the thrill of picking their own investments may decide, as their assets grow, to split responsibility for their money—say, turning management of their core investments over to a pro who will keep them well diversified, while running a small share themselves as they prospect for the next hot stock or alternative investment.

Those who fully embrace the wealth manager model should expect not only results, but service—in other words, to be treated as though they are the sovereigns of their financial domain. Just as for the Strivers, time is a key consideration—except here, not wasting an investor’s time is of paramount importance. Instead of taking the investor into the minutiae of the markets, a good wealth manager will use meetings to focus on macro trends and individual goals; provide both easy to read and in-depth reports on a regular basis; and be available when markets turn volatile to discuss what actions, if any, should be taken. 

Investors pay a premium for this level of engagement, usually calculated as a percentage of assets under management, known as an AUM fee. Firms’ charges typically start at 1% to 2% of assets a year, but drop from there as assets managed increase. (Note that the AUM fee is a management fee, in addition to any fees associated with the underlying investments.)

The greater an investor’s assets, the more opportunities she’s likely to be offered to engage—everything from lunch with the firm’s economist to events at a golf course or museum may be part of the wealth management experience. While some of this might sound excessive, such personal contacts are part of building a successful relationship with an advisor, who in many ways takes on the role of personal consigliere. As a trusted bond develops and goals are clearly understood, the full service financial advisor will often bring specialized ideas and strategies to the client, including alternative assets like private equity or low volatility hedge funds. These types of investments may not be available to the Strivers or Jugglers.