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The Evolution to a Wealth Adviser

The role of advisers has evolved considerably over the past several decades, from stockbroker to financial advisor to investment consultant to wealth adviser, according to Tony Davidow, CIMA, author of "Goals-Based Investing."

by Tony Davidow, CIMA

The role of advisors has evolved considerably over the past several decades, from stockbroker to financial advisor to investment consultant to wealth advisor. This natural evolution has changed the way advisors engage clients and the services provided. The interplay with clients has transformed from transactional to relationship-based, and from pitching a product to solving client needs. 

The Evolution to a Wealth Advisor

The Evolution to a Wealth Advisor

Wealth advisors have needed to invest in themselves and expand the types of services provided to clients. Many built teams to better serve their client’s needs. 

With the introductory of more robo-advice, advisors needed to pivot, focusing on capabilities that are difficult to commoditize. Wealth advisors have needed to recast their value-propositions – but have their clients changed their perception?

Do clients still perceive their advisors as transactional? Is their perceived value-proposition outperforming the market? Do clients view them as a ‘trusted advisor’?

How have wealth management firms responded?

Beginning in the late 1990s, wealth management firms evolved their business models. They wanted their advisors to move their practices upstream, to serve larger families with more complex needs. They recognized that the competition for smaller accounts was growing, and that smaller accounts offered fewer opportunities to add significant value. The HNW market represented a target-rich opportunity, with significant wealth being created and transferred from one generation to the next.

According to the Capgemini 2020 World Wealth Report, there are approximately 5.9 million HNW investors in America: investors with $1 million or more in investable assets. There are 120,000 UHNW investors: investors with $30 million or more in investable assets. (Capgemini uses $30 million as a minimum for this group, however, many wealth management firms use $20 million as the entry point.)

As more firms target larger clients, some have segmented their businesses and invested in training their advisors to effectively handle the complexities of wealth. The training and tiering have been geared towards educating advisors about the unique challenges and issues wealthy families face. Advisors learned advanced wealth management techniques and often were able to leverage firm resources for wealthy families.

As an industry, we have seen a big shift to team-based models. Team members often have a diverse set of skills. Teaming gives advisor practices scale, efficiency, and expertise. A team structure also reassures clients that there is bench strength, diverse skill sets, and back-up coverage. While the industry has become segmented, and there are significant differences between the coverage model and experience, these differences are not always clear to investors. Below I highlight the different coverage models.

Coverage Models

Coverage Models

Private Wealth  - Morgan Stanley, Goldman Sachs, UBS, Merrill Lynch, and JP Morgan have dedicated teams focused on serving the needs of UHNW families. These businesses are often called “Private Wealth Management” or “Private Client Groups.” They are typically structured in teams and usually handle 30 to 50 families. Private Wealth Teams often work with founders and senior executives of public and private companies. These teams often have expertise in dealing with concentrated positions, trust & estate issues, executive compensation, charitable giving, tax management, and alternative investments, among others.

Global Wealth Management - global wealth management firms (also known as wirehouses)— Morgan Stanley, Merrill Lynch, UBS, and Wells Fargo—have teams focused on HNW and mass-affluent investors, as well as institutions, retirees, business owners, and other client segments. They typically leverage firm resources to handle challenging issues. The teams focused on HNW investors are often required to complete internal training and sometimes advanced industry training. These teams typically handle several hundred clients, some of whom receive preferential treatment.

Retail/Digital - Charles Schwab, Fidelity, and Vanguard have been aggressive in launching robo-asset allocation and robo-financial planning tools to their retail clients. The robo-offerings provide scale and efficiency. Without human intervention, however, it is not clear that investors will remain disciplined through challenging periods. After all, we are only human, and we are tempted to let fear and euphoria take the reins in extreme situations. Robinhood offers a trading platform for millennials, but little advice in valuing securities, understanding financial markets, or building portfolios.

Investment Advisors - Schwab, Fidelity, and Pershing provide custodial services to Registered Investment Advisors (RIAs) who serve clients across the wealth spectrum (Retail, HNW, and UNHW). The RIA segment has grown dramatically over the last several years, fueled by large advisory teams leaving the wirehouses. The growth of the RIA model has been fueled by the advisor’s desire for independence and the public’s perception of Wall Street conflicts of interest.

Putting Theory into Practice

HNW and UHNW families have multiple issues to contend with. Wealth advisors should consider cash-flow needs and estate planning issues before developing an asset allocation strategy. They may need to develop hedging and monetization strategies for a concentrated position; and need to evaluate the tax consequences and gifting strategies before allocating capital. These issues are often interrelated and should be considered comprehensively.

Wealth Management Issues of High-Net-Worth and Ultra-High-Net-Worth Families

Wealth Management Issues of High-Net-Worth and Ultra-High-Net-Worth Families

In the late 1990s to mid-2000s, I worked in Morgan Stanley’s Private Wealth Management division. In addition to being responsible for Graystone Wealth Management, I served as a member of the firm’s Client Strategy Group, a group of dedicated specialists deployed to work with the firm’s largest prospects and clients, many of whom were investment banking clients (pre & post-IPO).

The Client Strategy Group had experts on trust & estate issues, hedging & monetization techniques, tax management and I was the designated expert on asset allocation & alternative investments. We used a SWAT team approach working with these large families, coordinating these capabilities, and helping these families through the complexities. We could not develop an appropriate asset allocation strategy, or allocate to alternative investments, without considering these interrelated issues.

The point of this blog is experience and expertise really do matter. HNW and UHNW want and expect dedicated coverage from teams that understand, and have experience dealing with, similar families and the related complex issues. These families require customized solutions that go well beyond their portfolio needs and these capabilities cannot be replaced by a robot.

About the author: Tony Davidow, CIMA®

Tony Davidow, CIMA®, is president of T. Davidow Consulting, an independent advisory firm focused on the needs and challenges facing the financial services industry. Davidow leverages his diverse experiences to deliver research and analysis to sophisticated advisors, asset managers, and wealthy families. He has held senior leadership roles at Morgan Stanley, Charles Schwab, Guggenheim Investments, and Kidder Peabody among others. He is focused on developing and delivering content relating to advanced asset allocation strategies, alternative investments, factor investing, sustainable investing, and other topics. In 2020, Davidow was recognized by the Investments and Wealth Institute, with the Wealth Management Impact Award, which honors individuals who have contributed exceptional advancements in the field of private wealth management.