By Jason Zweig
Sept. 20, 2013 10:58 a.m. ET
Image credit: Jan Brueghel the Elder, “Visit to the Farmstead,” ca. 1597, Wikipedia Creative Commons
You know what they say about too many cooks. Is your financial kitchen getting overcrowded with advice?
A recent academic study of families with an average net worth of $90 million, based on data from 2000 through 2009, found they relied on an average of nine financial advisers apiece by the end of that period—up from eight before the financial crisis. That includes wealth managers from banks, registered investment advisers or a “family office” that manages a wide array of financial matters. With no shortage of investment scandals in recent years, many of the wealthy have sought comfort through an additional layer of advice. “After Madoff, I believe everybody has an obligation to have somebody review their accounts,” says Gregg Lorberbaum, founder of Centric Real Estate Advisors, a commercial brokerage firm in New York.
Tiger 21, an educational network of more than 200 wealthy members who collectively control $19 billion in assets, found in a 2012 survey that 29 percent of them count on an adviser to make most of their investing decisions, up from 20 percent in 2011. “The expansion of advisers isn’t simply about seeking more advice from a greater number of people,” says Michael Sonnenfeldt, founder of Tiger 21. “It’s more about allocating portions of capital to individual managers with specific expertise.” That means more investors are replacing generalists with specialists — a bond manager, for example, or a firm that builds portfolios of dividend-paying energy companies known as master limited partnerships.
Affluent investors also are leveraging their wealth to get second opinions — free. Once a year, a financial adviser who lives in Lorberbaum’s neighborhood — but who doesn’t yet manage any of his assets — goes through his portfolio, spot-checking it for any potential risks or flawed strategies. The adviser does so without 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 giving the second opinion hasn’t recommended any significant changes.
But being wealthy doesn’t mean you should take anything for granted. Alan Mantell, a former investment banker who now runs Mantell Advisory, a financial-consulting firm in New York, says assessing an adviser’s “intellectual capability is a judgment you’re required to make.” That’s not easy, of course, but experts say reading the adviser’s complete Form ADV, a disclosure required by the Securities and Exchange Commission, helps, as does getting referrals from current — and former — clients. Also, it makes sense to disclose that you’re getting a second opinion, as well as to ask your own questions: What investing approach is most successful? What evidence is there that it has helped your clients reach their goals? And who will take over if anything happens to you?
While the rich have been adding new advisers, they rarely dump any of the old ones, says Enrichetta Ravina, an economist at Columbia Business School who helped 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 advisers stuck to them like barnacles with each passing year. It’s best, say wealthy investors, to name one adviser as what Lorberbaum calls the “quarterback” — the person who makes the strategic decisions that your other managers need to follow. Otherwise, each will compete 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 from an agreed upon strategy or performance tumbles, it’s time for a change. That will be easier, says Tiger 21’s Sonnenfeldt, if you have kept the relationship professional, not personal. He suggests telling any new adviser at the outset, “I’m only going to give you the money if you understand that there may come a time when I’ll have to take it away.” If you choose wisely in the first place, that day might never come. But if it does, you’ll be glad you planned for it.