Money Management Decisions for High Net-Worth Individuals

When I have new potential clients in my office, I’m always interested to see what their current financial advisor is doing for them. Needless to say, I’m frequently disappointed with the level of service standards (many differing markedly from my own) which some advisors display with multi-million dollar accounts. For example, mutual fund ‘wrap’ programs are very popular with the big brokerage firms. These are basically portfolios of mutual funds wrapped up in advisory platforms with annual fees. As popular as this platform is, I’ve shown clients how to reproduce a similar portfolio which strips out many of the fees and the actively-managed mutual funds. In my opinion, these wrap account platforms are often convenient and provide adequate diversification for many clients, but may not be the most cost effective way to invest. Obviously the money management business is competitive and for me, showing clients a potential method for reducing their costs and creating more efficient portfolios has generated considerable interest.

The first thing I do for my clients is focus on how I can help them achieve their financial objectives. Sounds obvious, right? Believe it or not, many advisors, even if they do so subconsciously, focus too much on the money management and not enough of the planning aspect. And while it would be nice to think that most advisors don’t think of their own bottom line when giving advice, we’ve all got families to feed and reality is reality. A good piece of advice for clients is to inquire heavily into how your advisor get paid, whether it be through hourly fees, asset-based fees, commissions from mutual funds, commissions from insurance products, etc. Understanding an advisor’s compensation structure can be an eye-opening experience. My personal belief is that using a fee-based advisor (hourly and asset-based fees) will often eliminate several important conflicts of interest.

Next, I show clients how to use individual stocks, bonds and exchange-traded funds instead of actively-managed mutual funds.* As I’ve written about in the past, I think mutual funds have their place in the investment world, namely in 401k plans and for small account balances looking for diversification, but I don’t believe they are always right for large brokerage accounts unless the client is buying the funds at net asset value (without paying a front-end or back-end commission) and is buying funds with reasonable expenses (under 1% or 1-1.5% for an international fund).

My clients also receive comprehensive financial planning. Some advisors who I’ve spoken with assume that higher net-worth individuals need less financial planning because they already have sufficient assets to meet their long-term needs. I’ve found this isn’t entirely the case. Plugging all of a client’s assets, liabilities, and annual expenses into software can produce interesting analysis of spending ratios, asset allocation errors and estate planning blips. I’ve also noticed that clients with 2-3M in assets are often concerned about running out of money in their later year and/or not having enough to adequately help their children and grandchildren pay for tuition and other expenses while maintaining their pre-retirement lifestyles. In this case, providing financial planning services can be positive and if the client only wants to focus on money management they will usually say so.

Another planning error which some advisors make with higher net-worth individuals is plugging up too much money in insurance products because they ‘do the work’ for advisors. I tend to keep fixed and variable annuity allocations to around 20% or less of a client’s total investable assets. Annuity products are always good talking points and often an ‘easy sell’ because they provide guarantees during turbulent and volatile environments such as the one we’re currently in. That being said, each client has different needs and figuring them out should always be a priority over product recommendations. Obviously investors and their advisors should have a detailed dialogue about the individual risks, fees, expenses, etc. inherent in each investment product and strategy before deciding on a strategy.

Question or comments? Please e-mail me for further honest discussion.

Russell Bailyn

Wealth Management
Premier Financial Advisors, Inc
14 E 60th St. #402
New York, NY 10022
P: 212-752-4343 *231
F: 212-752-7673

Financial planning fees are disclosed via the Form ADV, which you will receive upon engaging in a fee-based management relationship.
Investing in mutual funds involves risk, including possible loss of principal.
Variable annuities are long-term investments designed for retirement. The value of the variable investment options will fluctuate and when redeemed, may be worth more or less than the original cost. Variable annuities are sold by prospectus. For more complete information about underlying fund investment objectives, risk, charges, limitations and expenses, please read the prospectus carefully before investing or sending in money.
Guarantees are subject to the claims-paying ability of the issuing insurance company. CD’s are FDIC insured and offer a fixed rate of return if held to maturity. Annuities are not FDIC insured.

The enhanced income benefit is based upon the claims paying ability of the issuing insurance company and does not apply to the contract value which fluctuates daily. There may be an additional cost for income benefit features of some variable annuities, and depending on the performance of the investment option(s) selected, the contract value at the time of annuitization could be such that the investor would incur a higher expense with the income benefit feature without receiving any explicit benefit.
*Equity-based ETFs are subject to risks similar to those of stocks; fixed income ETFs are subject to risks similar to those of bonds. Investment returns will fluctuate and are subject to market volatility. Shares may be worth more or less than their original cost when sold. Foreign investments have unique and greater risks than domestic investments. Past performance is no guarantee of future results.

Although exchange-traded funds are designed to provide investment results that generally correspond to the price and yield performance of their respective underlying indexes, the trusts may not be able to exactly replicate the performance of the indexes because of trust expenses and other factors.

Keep in mind that there are many distinctions between mutual funds and variable annuities. For instance, mutual funds serve various short and long-term financial needs, while variable annuities are designed specifically for long-term retirement savings. Unlike mutual funds, variable annuities include insurance features for which you pay certain fees and charges, including mortality and expense charges and a contract administration fee. Mutual funds and variable annuities are taxed in different ways. Mutual funds and variable annuities each have unique features, benefits and charges, and you should discuss the appropriateness of any investment for your particular situation with a qualified investment representative.
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

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