“Whoo! I just bagged the elephant!” Like many others over the past 12 months, I’ve done my share of re-watching old films, and this line from Oliver Stone’s “Wall Street” always makes me chuckle.
Charlie Sheen’s portrayal of stockbroker Bud Fox, ever on the make, lands Michael Douglas’ Gordon Gekko – loaded with ego and money – as a client. Conspiracies and flashy consumption ensue.
Ah, the 1980s. These were simpler times, especially with films containing improbable plotlines involving wealth management professionals. But there is one valid industry challenge this scene speaks to: Many RIA firms fail to thrive at serving ultra-high-net-worth (UHNW) individuals and families — those with a minimum of $25 million in net investible assets.
These RIA firms often capture one or two relationships at most, before losing momentum.
Why? Because they embrace unnecessary complexities that drive conflicts without adding real value for the client.
More Capabilities Drive More Conflicts
How many times have you heard about RIAs making their first foray into the UHNW space by building out multiple capabilities beyond investment management and planning?
They set up trust companies, create sub-custodian relationships and offer tax preparation and bill pay services. Extras like these add expenses, time, audits and regulatory filings for the RIA, while escalating the potential for conflicts of interest.
Indeed, there’s an argument to be made that the combination RIA, trust company and CPA model – where the firm serves as corporate trustee, investment manager and tax advisor – is antiquated and fails to create great outcomes for clients.
Instead, firms would be better off doing the following to grow their UHNW business:
- Don’t own an investment advisory and a captive trust company under the same roof.This means partnering with a directed or administrative trustee (in whichever jurisdiction makes the most sense) with an independent investment advisor. When these two roles are under one roof, the firm’s decision-making process potentially becomes clouded when it comes to decisions that benefit the client, as opposed to decisions that drive collective revenue and other financial goals of the business.
Not so fast… Here’s a real-life example: Last year, we brough aboard a UHNW client who came to us in part due to concerns about being consistently denied distributions from her trust by her prior firm, a combination RIA and captive trust company. After much review by our team as well as other external advisors, we confirmed that the client had, in fact, been entitled to distributions from the trust.
Why didn’t that happen? We can’t say for certain, but the client’s former trustee wore multiple hats across the trust company and RIA, which raises the risk of details like these falling between the cracks.
- Work in strategic concert with tax advisors but think twice before bringing them in-house. Tax advisory solutions for established RIAs are a great way to add revenue streams and insulate the client relationship, right? Well, not always. Let’s start with the fact that there’s tax advice, and then there’s tax advice for the top echelons of wealthy clients, who must deal with issues of incredible complexity
And when in-house tax advisors commit errors, the firm risks losing both the wealth advisory and tax advisory business. Not to mention the regulatory and legal risks of providing deficient tax advice.
- Focus more than ever on alignment of fees. There’s a mistaken notion among some newbies to theUHNW space that clients in this tier will be less attentive to hidden fees and added commissions, so long as they are pleased with overall portfolio performance, intergenerational wealth preservation efforts, and effectiveness in aligning business planning, personal planning and tax efficiency.
This is a gross simplification that can generate serious blowback. Many UHNW clients are very financially sophisticated. And they generally have at least one or two external advisors who are very experienced and know what questions to ask. Any hidden fees and extra charges will eventually be unearthed, and the rich dislike being charged unnecessary or opaque fees as much as anybody.
- Charge one overall advisory fee and disclose clearly and proactively. New entrants to the UHNW space will frequently charge significantly higher fees for certain asset classes that might require more active oversight, like equities, while charging lower fees for assets such as long-term fixed income. While this makes good business sense, it doesn’t always seem that way to a disgruntled client.
Indeed, if a portfolio seems skewed towards specific asset classes that could be argued are more revenue generative for the RIA than the client, just remember: UHNW clients can afford the best auditors and attorneys, and decisions like these can haunt wealth managers far more than similar issues with clients further down the wealth spectrum.
RIAs should charge one overall advisory fee that places the wealth manager on the same side of the table as the client, allowing the RIA to be truly asset class agnostic. In the spirit of full transparency, advisory fees should be listed on monthly or quarterly client statements.
Keep It Simple and Focused
The best approach for an RIA seeking UHNW client growth is to be an investment advisor and planning partner, while keeping a carefully curated network of pre-vetted experts for adjacent professional areas where clients need support. This means establishing solid checks and balances while communicating each step of the way accordingly.
Put another way, “Field of Dreams” is another classic 1980s film that I’ve recently re-watched, but with a note of caution about embracing the “if you build it, they will come” idea too far. This might work for stadiums (I wouldn’t know), but not for firms seeking UHNW success by building unnecessary extra services, businesses and hidden fees. Keep it simple and focused.