3 Wealth Management Assumptions That Might Hurt Your Wallet

NEW YORK (TheStreet) -- The wealth management advice population is vast and varied but not all wealth managers are the same. In fact, what you think you know about your wealth manager might not be true.

I'm in the business and in my opinion there are a lot of things that clients assume are true across the board no matter who they speak to about managing their money but simply aren't. Those assumptions, if false, can cost an investor both money and peace of mind.

Assumption One: Wealth Managers Are Investment Experts

In reality, most wealth managers are first and foremost relationship experts. What this means is that their job is to liaise with the investor and manage that relationship by responding to client requests and to recommend and sell products.

Their primary responsibility is to bring in new assets by building up a book of clients.

Yet, when many investors turn to a wealth manager to get help building an investment portfolio, they assume they are speaking to an investment expert. It may, or may not, be the case.

Brokers, for instance, are under no obligation to recommend investment vehicles that are in a client's best interest -- called the fiduciary standard. Indeed, by regulation they only have to suggest "suitable" products based on factors consistent with age and risk tolerance. They are not required to compare the cost of their recommendations with alternatives.

By comparison, a registered investment adviser (RIA) is legally required to act in a fiduciary capacity and to put a client's interests first. Certified Financial Planner practitioners, while not bound by law, often adhere to similar professional standards.

Assumption Two: Your Wealth Manager's Pay Is Tied to How Well Your Investments Perform

Since most investors pay a fee tied to the amount of assets they have with a wealth managers, many assume that payment alone is how their adviser earns his or her income. The following assumption is that if those investments do well the adviser makes more money and therefore that is what the adviser is focused on.

In reality, the fee tied to assets under management is often just a part of how advisers can be remunerated.

There are many third-party payments that in effect, "hide in plain sight." By that I mean they are spelled out in lengthy disclosure documents. What this means is that an adviser could be earning money from recommending certain products, money that is "costing" you in addition to the fees paid which are tied to total assets.

It's common, for example, for insurance companies to pay advisers commission based on the first year's insurance premium for selling equity-linked insurance policies. Then there are proprietary investments: some companies pay managers bonuses for moving certain products.

Furthermore, some wealth managers sell "controlled" or "discretionary" accounts which are professionally managed by someone else or an institution which is also paid a fee. In such cases, these third-party managers could take 1% or more of the amount of that investment (or even more when it comes to alternative investments).

Of course, some advisors are upfront about detailing precisely how they are paid. In other cases, they might simply present clients with lengthy disclosure documents. Fortunately, the SEC requires firms to publish a "Form ADV Part II" which explains adviser compensation in plain language. It will explain if an adviser is paid a commission from the investments he or she sells, charges a flat fee or a percentage, or is paid in other ways. Clients can find this on the SEC website or request the document from their adviser. Nevertheless, this form doesn't always tell the whole story.

Assumption Three: Portfolio Composition Is the Most Important Financial Planning Tool

Those colorful pie charts that many advisers produce provide comfort to many investors, but there is really so much more that goes into creating a stable financial life.

In reality, there are many variables that simply cannot be captured or addressed when planning a portfolio. These include taxes, insurance, retirement income planning, estate planning, and more. These all need to be tied to a client's goals, core values, objectives and risk tolerance. In short, the best wealth management is about how wealth is defined at each stage of a client's life and beyond.

In estate planning, for instance, are assets structured in such a way that they are securely passed down to beneficiaries? Estate taxes must be paid in cash within nine months of death and before the distribution occurs and many families don't have that kind of cash on hand, which forces them to sell assets at less than market value. However, life insurance can help offset some of these costs. None of this can be captured in a colored pie chart illustrating a "diverse" portfolio.

While this is a highly regulated industry with several agencies watching over it, investors can help themselves by checking their assumptions and making sure that their adviser is working in their best interests.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

This content is for general information only and is not intended to provide specific advice or recommendations for any individual.

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