What Exactly Is Wealth Management?

What exactly is wealth management? Many people are impressed by the term “wealth management.” It sounds important, official, and impressive. You might choose to work with someone whose business card reads “wealth manager” over someone who bills themselves as an “insurance salesperson.” After all, it seems like someone who manages wealth for a living must be trustworthy and dependable, right? 

Maybe…but maybe not. 

People who claim to be wealth managers might be honest and capable. On the other hand, they could be more concerned with making a profit than emphasizing dedicated client care. A person or company could provide various financial services—from estate planning to life insurance sales—and claim to be practicing wealth management. Why is that?

The term “wealth management services” can include many disparate services because it doesn’t have teeth. No one is regulating its usage or stipulating the requirements to become a wealth manager. There are no exams to pass, no oath to take, and no unifying guidelines. This lack of accountability can cause trouble for people seeking legitimate financial planning assistance.

Before we dive into the pitfalls of overusing the title “wealth manager,” let’s backtrack and discuss some basics, starting with defining this ubiquitous term.

Five Qualities of an Effective Financial Advisor

What if Warren Buffett called you today and offered to be your personal financial advisor? I bet very few people would turn him down. Buffett is the sweetheart of the financial world—someone who embodies a rare blend of intelligence and success mixed with humility and personability.

He’s a grandfather, a Midwesterner, and has owned the same modest family home for six decades…but he’s also worth over $100 billion, making him the sixth richest person in the world.

If Warren Buffett offers you advice, you might be inclined to take it. He has a proven track record and is not known for underhanded ploys or wild risk-taking. Some may consider him a little “old school,” but his methods have worked, and he wouldn’t intentionally lead another investor astray.

Many of Buffett’s qualities would make him a competent, trustworthy financial advisor—if he were to choose this profession. If we examine Buffet’s attributes, we find that they’re not terribly groundbreaking or unusual. Many financial advisors also embody these qualities, and it’s possible for consumers to recognize them. For this blog post, I’d like to discuss five important qualities to seek in a financial advisor and how to identify them.

First, however, let’s establish a few baseline characteristics.

The Essentials

My goal is to steer investors toward honest, disciplined, and fair financial advisors. With that in mind, I suggest consumers

• Seek fee-only financial advisors
• Avoid investment securities brokers, bankers, and insurance agents for financial planning
• Pay attention to professional designations/qualifications
• Do your research (using sites such as FINRA’s BrokerCheck, NAPFA’s Find An Advisor tool, and other resources I’ve listed in past blog posts) 
• Look for financial advisors who are committed to a fiduciary standard of care.

Three Steps to Avoid Media Bias

If you are looking for a financial advisor, where would you go? You may search the internet for the “top financial advisors near me” or “best financial planners in 2024.” When the search results pop up, you might breeze past specific firms in favor of a more “neutral” source—an article from a major news outlet, a column by a financial writer, a database of financial planners or a report from a financial publication. As you scroll through these articles, the same names or, at least, the same companies might keep popping up. You may think, “That’s a good sign; clearly, these are the top performers in the industry.” But are they the top performers or merely the top spenders? Are these the most competent and trustworthy financial advisory firms and advisors or simply the ones with the largest marketing budgets?

The Media Can Be Bought

At this point, few people will probably be surprised to learn that much of the news media—including financial media outlets—can be bought. Though the average consumer might, in theory, be aware of this, they may not realize the extent of the deception or know who to trust. It can be challenging to discern between factual articles and sponsored content. And it can be hard to see how a media company compiled lists of “top financial planners” or “best investment companies.”

In Barrons’ recent “Top 100 Financial Advisors,”[1] most advisors hailed from wirehouse brokerage firms. “Wirehouse brokerage” — a term coined before the advent of wireless communication — refers to large-scale, full-service brokerages employed by one of the big players (i.e. Morgan Stanley, Wells Fargo, Bank of America’s Merril Lynch, and UBS).[2]

Decoding Financial Advisor Compensation Models

Many people ask us the difference between fee-only and fee-based compensation models for financial advisors. They also want to know how project fees, asset-based fees, and hourly fees work. For the average investor, the compensation models of financial advisors can feel downright confusing.

Few other industries have so much variation when it comes to paying a professional. When you hire an auto mechanic, you pay for parts and hours of labor. When you hire a piano teacher, you pay per lesson or for a set amount of time. All these methods are straightforward and easy to understand.

Unfortunately, the financial advisory world is a different ballgame. Payment models vary from firm to firm and, sometimes, from client to client (depending on client needs, services rendered, net worth, etc.).

Since payment models for financial advisors are sometimes complicated, misinformation abounds. Consumers might fall for “special offers” or “guaranteed returns.” Or they might believe they are entitled to free financial planning because large brokerage terms do this for “free.” However, there’s no such thing as a free lunch—those big firms are making their dollars somehow. Many of these large brokerage firms use 10-20 questions to be analyzed by a robo-advisor, which is NOT financial planning. Genuine financial planning is comprehensive, multi-layered, and involved. For most people, quality financial planning is worth the price tag.

But how can clients determine if a pricing model is fair? And how will they know if a particular pricing model is right for them? To clarify the confusion, let’s talk about different ways a financial advisor could be compensated AND which methods make sense for certain types of investors.

Two Compensation Models to Avoid

There are several legitimate, ethical compensation models for financial advisors. However, before discussing those, I want to touch briefly upon two models to avoid: commission-based and fee-based.