7 Questions to Ask Wealth Managers: Choosing a Wealth Management Firm
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Are you writing down a list of questions to ask wealth managers?
Looking to find a wealth manager who has the expertise to protect and grow your assets?
A wealth manager can help position you for long-term financial success with wealth-building strategies, but you have to work with the right wealth manager for that to happen.
As we know, when it comes to something as precious as your money, you want to exercise due diligence when selecting your manager.
In this article, we discuss seven piercing questions you can ask wealth managers to separate the qualified from the unqualified.
7 Questions to Ask A Wealth Manager
Anyone can say they’re an expert. Not everyone can prove they’re an expert.
Our first question is an important one you may want to ask your wealth manager immediately to protect yourself and your finances.
1. Are you a fiduciary?
If the answer is “no,” politely end the conversation. It’s not worth your time to ask more questions.
Sounds harsh?
Well, let me explain ...
A fiduciary is someone who acts in the best interest of another person. Their behavior must serve their client, not themselves — even at the risk of making less money.
If your wealth manager is a fiduciary, they’re legally and ethically obligated to have your best interests in mind.
According to the U.S. Securities and Exchange Commission, fiduciaries must inform their clients of ALL conflicts of interest.
For example, suppose a fiduciary receives money on the back end when recommending certain investments to their clients. In that case, that can be considered a conflict of interest.
Furthermore, there’s a legal principle that fiduciaries must follow called the Prudent Person Rule. This rule forces the fiduciary handling your finances to treat your portfolio as they would their own.
Your wealth manager must try to operate in the capacity of someone trying to make money for you, while doing their best to protect your capital.
A fiduciary has to be upfront about their fees and all fees associated with transactions on your behalf. No hidden fees.
By contrast, a non-fiduciary wealth manager can recommend investments that bring them high commissions, while neglecting your needs and best interests. That is not to say all non-fiduciary wealth managers are conniving. It’s just that a non-fiduciary wealth manager follows “suitability standard,” which doesn’t protect you as well as when a wealth manager follows fiduciary rules.
Also, make sure your wealth manager is a fiduciary 100% of the time. Just because someone says they’re fiduciary doesn’t guarantee they always operate in that capacity. In some cases, they may advise you as a fiduciary. In other cases, they may act as a non-fiduciary when it suits their hidden financial interests.
Let’s continue with more questions to ask wealth managers.
2. Which investment licenses and certifications do you hold?
According to U.S. News & World Report, almost anyone can claim they’re a financial planner or advisor.
So, don’t automatically assume a wealth manager knows how to manage wealth. Your safest bet? Check their credentials rather than waiting for them to volunteer this information. Ask them directly so you can get some answers.
But don’t just trust their answers; verify that they’re correct. Because if someone would lie about their credentials, who’s to say they wouldn’t lie about your money?
Here’s what you do ...
Confirm they hold these licenses by searching on the SEC & FINRA Websites:
These are the basic licenses that someone should hold to call themselves a wealth manager.
There are over 300,000 licensed financial advisors in the United States. How do you separate the Major League Players from the Minor League Players? The superstars from the scrubs?
Advanced designations!
In our professional opinion, the wealth manager you interview should personally hold at least one of the following designations:
Certified Public Accountant (CPA®)
Certified Financial Planner professional (CFP®)
Chartered Financial Analyst (CFA®)
Certified Private Wealth Advisor (CPWA®)
As with the licensing, confirm that they hold these designations by checking their respective regulatory boards.
Often, to obtain these designations, the professional has to agree to a background check.
If they do not hold any designations, in addition to investment licenses, understand they have not demonstrated completion of any advanced education. That means if you work with them, you could receive faulty advice.
Don’t place yourself in that position!
If you would like to see a comprehensive list of professional designations, FINRA (Financial Industry Regulatory Authority) provides that.
Now, let’s tackle some more questions to ask wealth managers.
3. What asset allocation will you use?
Asset allocation is an investment strategy that focuses on balancing risk and reward by categorizing assets within a portfolio.
A great wealth manager would need to speak to you and study your finances before letting you know the asset allocation they’ll use.
Before coming to any conclusions about your assets, the wealth manager must know your long-term goals and risk tolerance.
Suppose you ask a wealth manager what asset allocation they’ll use, and they give you an answer without examining your finances? Likely they’re not your best option.
4. What is your investment philosophy?
A wealth manager’s investment philosophy influences their recommendations. That’s why before hiring one, make sure their investment philosophy matches yours.
Ask prying questions.
But listen to this ...
A skilled, qualified wealth manager should also want to make sure they’re on the same page as you. That way, they can customize their recommendations.
Here are some questions to ask wealth managers to discover their investment philosophy:
Do you believe in diversification? Some managers may want to invest in multiple types of assets, like stocks and bonds, to minimize risk. Other managers may focus on one type of asset—for example, stocks in major US companies.
Do you favor growth stocks or value stocks? If they favor growth stocks, that may be a sign that they have a short-term approach. If they favor value stocks, that may be a sign they have a long-term approach.
What type of investments do you prefer? Some managers may prefer mutual funds or individual stocks, or index funds. Either way, you want to determine if they’re investing in assets you’re comfortable with.
Do you believe in market timing? Market timing sounds great. Get out when you know the markets will go down and get back in when you know they will go up. The problem is, decades of academic research and evidence shows it's impossible. It's a great sales pitch, but would you want to test your money on a wealth manager's ability to predict the unknowable future?"
5. How will my investment performance be measured and evaluated?
A wealth manager should have benchmarks they follow. If they don’t, they should be able to explain why not.
A competent wealth manager should be able to track the status of your investments. All to make sure they help you reach your long-term goals.
Of course, they should also track market trends, but from the perspective of following your long-term goals.
If your investments aren’t performing well, your wealth manager should be able to rectify the situation. For that to be possible, your wealth manager would need to have a benchmark that acts as their guiding light for evaluating the health of your investments.
An example of a benchmark is the S&P 500 index. When used as a benchmark, the S&P 500 index allows you to measure your investment performance against the stocks for the largest 500 U.S. companies. But the S&P 500 index would only be an apt benchmark if you only plan on investing in large-cap stocks.
Another benchmark is inflation. Your wealth manager may want your investments to beat the rate of inflation and considers that a success.
In short, benchmarks allow wealth managers to track your assets’ health.
When you’re able to measure and evaluate, you’re able to adjust.
6. Are my funds being actively or passively managed?
First, let’s discuss the differences between active investing and passive investing.
Active investing involves a wealth manager or money manager attempting to outperform the stock market's average returns via stock picking or market timing. Usually, the money manager monitors a team of analysts who decide when to buy or sell a specific stock or bond.
But active investing has a downside. First, evidence shows active management is not persistent over the long-term. Second, the fees associated with it can be costly.
Typically, you would have to pay:
The transaction costs that active buying and selling triggers
The wealth manager
The money manager
The money manager’s team of analysts
All these expenses can eat into your returns. That’s IF you even have returns.
Passive investing is a less risky approach than active investing. Passive investing involves investing for the long term — a strategy that favors the buy-and-hold mentality. That means fewer transaction fees, fewer total expenses.But it doesn't mean you can't beat the market.
Passive investing is built on the belief that public markets are efficient. That means you can't beat the market via stock-picking or market timing.
Instead of trying to outguess the market, passive investing involves building portfolios that target higher expected returns in a cost-effective manner. Through a dynamic investment process that integrates research, portfolio design, portfolio management, and trading, an investor can manage the tradeoffs that matter for performance — balancing competing premiums, diversification, and costs.
Passive investing involves investing for the long term — a strategy that favors the buy-and-hold mentality. That means fewer transaction fees, fewer total expenses.
Also, that may include fewer taxes since you would likely hold your assets longer than a year. When you sell stocks after having them for less than a year, you pay more in capital gains tax than if you held them longer.
So, what’s the better approach?
As always, it depends on the individual.
That’s why asking your wealth manager if they prefer passive or active investing is so crucial.
7. What is the minimum asset requirement?
By asking this question, you'll determine if the wealth manager works with clients in your similar situation.
Suppose you discover their minimum asset requirement is too high. In that case, continue looking for a wealth manager who’s a better match.
Now, what if the wealth manager’s minimum requirement is lower than you’d expect? And you’re concerned about their experience managing your level of assets?
Well, you may want to continue looking.
So, we covered questions to ask wealth managers. But it’s also important to ask yourself this next question ...
Do I Need a Wealth Manager or a Financial Advisor?
It all boils down to your level of assets, overall net worth, and complexity.
Financial Advisors are a great fit if you are not in the highest tax bracket and you do not expect your Net Worth to exceed $5 million.
A Wealth Manager specializes in working with affluent clients. They usually require large account minimums and high net worth because of the level of service and expertise they provide.
Wealth managers handle the full scope of your finances. Read on to learn more.
What Do Wealth Management Firms Do?
A wealth management firm usually offers financial advice, investment management, estate planning, and tax guidance. Some even provide legal assistance. In a nutshell, they can provide comprehensive financial guidance.
If you’re wondering how to pick a wealth management firm, let’s talk about that now.
Before hiring a wealth management firm, investigate if they specialize in working with clients who have similar needs as you. If you have the complexity and net worth to require a wealth manager, you have unique needs. One way you can check if a firm supplies valuable advice is by speaking to their current clients.
But that’s just the start.
You also want to confirm that the wealth manager is a part of a comprehensive team.
No matter how intelligent a person is, they cannot be an expert in all of the areas required to provide the level of expertise you require.
Returning to the previous section above you will want to make sure there is a team of professionals with all the advanced designations.
And here’s another good tip for you.
Do you need more than a wealth management firm?
If your Net Worth is greater than $10 million you may benefit from a Family Office.
What is a family office? A Family Office is a wealth management company that specializes in working with the ultra-wealthy. A Family Office coordinates every aspect of a clients’ wealth with the purpose of maximizing multi-generational wealth.
In short, before you pick a wealth management firm, invest in deep research.
Find a Wealth Manager Today
If you still have questions, check out our in-depth wealth advisor questions.
And if you would like to talk to us about any aspect of selecting a wealth manager, we would love to hear from you.
