Too much financial help?



Published On

June 9, 2014

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FRIDAY, SEPTEMBER 20, 2013 © 2013 Dow Jones & Company. All Rights ReservedToo much financial help?Count ‘em: Some families of investors bring in as many as nine financial advisorsBy JASON ZWEIGYOU KNOW WHAT THEY say about too manycooks. Is your financial kitchen getting overcrowdedwith advice?

A recent academic study of families with an averagenet worth of $90 million, based on data from 2000through 2009, found they relied on an average of ninefinancial advisers apiece by the end of that period-up from eight before the financial crisis. That includeswealth managers from banks, registered investmentadvisers or a “family office” that manages a wide arrayof financial matters. With no shortage of investmentscandals in recent years, many of the wealthy havesought comfort through an additional layer of advice.

“After Madoff, I believe everybody has an obligationto have somebody review their accounts,” says GreggLorberbaum, founder of Centric Real Estate Advisors,a commercial brokerage firm in New York.

Tiger 21, an educational network of more than 200wealthy members who collectively control $19 billion in assets, found in a 2012 survey that 29 percentof them count on an adviser to make most of theirinvesting decisions, up from 20 percent in 2011. “Theexpansion of advisers isn’t simply about seeking moreadvice from a greater number of people,” says MichaelSonnenfeldt, founder of Tiger 21. “It’s more about allocating portions of capital to individual managers withspecific expertise.” That means more investors arereplacing generalists with specialists-a bond manager, for example, or a firm that builds portfolios ofdividend-paying energy companies known as masterlimited partnerships.

Affluent investors also are leveraging their wealth toget second opinions-free. Once a year, a financialadviser who lives in Lorberbaum’s neighborhood-but who doesn’t yet manage any of his assets-goesthrough his portfolio, spot-checking it for any potential risks or flawed strategies. The adviser does sowithout charge, says Lorberbaum, in the hope of landing a piece of the account someday.

“We have no problem with that,” says Gregg S. Fisher,chief investment officer of Gerstein Fisher, the financial adviser who runs Lorberbaum’s portfolio. So far,say both Fisher and Lorberbaum, the adviser givingthe second opinion hasn’t recommended any significant changes.

But being wealthy doesn’t mean you should takeanything for granted. Alan Mantell, a former investment banker who now runs Mantell Advisory, afinancial-consulting firm in New York, says assessing an adviser’s “intellectual capability is a judgmentyou’re required to make.” That’s not easy, of course,but experts say reading the adviser’s complete FormADV, a disclosure required by the Securities and Exchange Commission, helps, as does getting referralsfrom current-and former-clients. Also, it makessense to disclose that you’re getting a second opinion,as well as to ask your own questions: What investingapproach is most successful? What evidence is therethat it has helped your clients reach their goals? Andwho will take over if anything happens to you?While the rich have been adding new advisers, theyrarely dump any of the old ones, says Enrichetta Ravina, an economist at Columbia Business School whohelped conduct the study that looked at how ultra-wealthy investors behaved between 2000 and 2009.

“There’s a lot of inertia,” she says-perhaps the biggest reason why the rich end up with more advisersstuck to them like barnacles with each passing year.

It’s best, say wealthy investors, to name one adviseras what Lorberbaum calls the “quarterback”-theperson who makes the strategic decisions that yourother managers need to follow. Otherwise, each willcompete against all the others to be top dog, increasing the odds of more investment risks.

The most draconian step is, of course, firing an adviser. If fees take a sudden jump, an adviser deviates froman agreed upon strategy or performance tumbles, it’stime for a change. That will be easier, says Tiger 21‚Ä≤sSonnenfeldt, if you have kept the relationship professional, not personal. He suggests telling any newadviser at the outset, “I’m only going to give you themoney if you understand that there may come a timewhen I’ll have to take it away.” If you choose wiselyin the first place, that day might never come. But if itdoes, you’ll be glad you planned for it.