How a Wealth Manager Does (Other People’s) Money

The more I read, write and talk to people about money, the more I’m convinced that we’re living in between two worlds when it comes to our money. Thirty years ago, almost half of the country participated in defined-benefit pensions that nearly guaranteed a stable income until death. And call me optimistic, but in 30 years I’m hopeful that, either through education or legislation, a majority of workers will have a 401(k) that operates much more like a pension than today’s sadly underfunded species. We’re currently living with all of the responsibility and none of the knowledge to secure our own financial futures; many of our parents who may have been otherwise great with money passed down no knowledge about retirement investing because they themselves never had to think about it. We’ve been given the keys to the car, but the car has a standard transmission.

As part of my journey to understand this situation better, I’ve been talking to people at all levels of wealth. One major goal is to find out how professional, active money management differs from the administration of the average middle class nest egg. To that end, I recently talked with a wealth manager for a large bank. Let’s call him Tom.

Thanks for talking to me Tom. What’s your actual job title?

Wealth Manager, AVP (Assistant Vice President).

 

And what kind of services do you provide for clients?

I provide management of investments and assistance with lending needs. At our bank, we also provide banking products with increased rates and access to institutional investments, which are investments normally only available to pension funds, 401(k)s or investors with one million or more to invest. We can get clients into these because we pool funds.

 

It sounds like getting access to a buying club. How much money does a person need to have to work with you?

In order to hire me, a prospective client would need $200,000 of combined bank and investment assets. My average client has one million dollars liquid net worth, liquid meaning all investments not tied up in real estate.

 

Give me a description of a typical client: their job, how they got their wealth, etc.

There are basically two types of clients I deal with. One is in retirement and has saved their entire life: a lot of retired educators, doctors, lawyers, and executives. These clients are very conservative and typically invest in fixed-income or structured investments (this is an investment with low guaranteed returns but no worry of losing the farm). The other client is in their late-40s to mid-50 in their peak earning years. These clients are executives, doctors, and lawyers who make $300,000 to $5 million per year. These clients tend to be more moderate in their risk investing and are saving for retirement. They tend to invest in managed portfolios, municipal securities and variable annuities.

 

What percentage of your pay is flat and how much is commission?

My pay is roughly 60/40 salary vs. commissions.

 

So it sounds like commissions could make or break your year! Are you paid based on the amount of money someone has, or are you paid to sell specific products? If so, what are those products?

My commissions are based on how much new revenue I create. I do this by increasing assets under management, issuing new loans where the bank gets some fees, and by selling investment products.

 

You work for a large company. What level of investment are you involved in? Do you pick stocks for people, or Exchange Traded Funds (ETFs), or are you more involved in higher-level strategy for a client? I guess, more to the point, what do you actually do?

We do not pick individual stocks or ETFs for clients. We do not employ researchers, so for investments I would refer someone to a wire house like Merrill Lynch or a cheaper online alternative for the individual stock/ETF portion of their portfolio. We specialize more in building comprehensive portfolios of diverse asset classes including mutual funds, managed portfolios which are funds of mutual funds which are actively managed, and structured investments. We seek out the best portfolio managers and use them. We also will build and manage portfolios for specific clients. As an example I have a client who works for a technology company and he owns millions of tech stock. We built a tailored portfolio with no technology companies since he didn’t need any more.

 

Ok—I understand better now. This image I have of you yelling “buy!” and “sell!” into a phone all day is not accurate, sadly. So is it safe to say one of the benefits of hiring you is that you’re a single point of contact? You make a strategy with your client, the money may be invested all over the place, but you’re the one they check in with for progress. Sound right?

That’s exactly right.

 

What do you your higher net worth clients get from you that that the average middle-income client does not?

High net worth clients do not want to have their time wasted and they want to feel appreciated. They expect that you will do your homework to research them before an initial meeting so you have an idea of who they are and what they do. They also have different needs that a middle-income person doesn’t. They may need a $10,000/day limit on their ATM card or a $1 million unsecured credit line or $5 million of FDIC protection all of which we can arrange.

 

As a follow up question: What do your clients, all of them, get that someone without the money to hire you cannot get?

All of my clients get better rates on bank deposits. They all have access to our trust department, our portfolio managers, and our highly skilled financial consultants. Not all of them use these services. I position my role as a team of all these individuals with me being the quarterback of the relationship.

 

No matter what your role, you should always explain it with a sports metaphor. The reason I asked the above is that I’m interested in the idea that there is a tier of wealth where, after you reach it, it is magically easier to make money investing. Do you find this to be the case with your clients, that it’s easier for them to make money than someone with modest assets? Or do you think this is untrue?

I don’t think there is a tier where you can magically make more money. An investor can make or lose more with a million dollar investment because of the size of the investment, but a 10 percent gain is 10 percent no matter if you’re investing $10 or $10K. The difference in the size of the portfolio is that you will pay less in fees and you have more options available to you. Both of these can have a significant impact on your bottom line, so that is a benefit. But where it really makes a difference is income. Eventually you could reach the point that you amass enough money that you can simply live off the interest and that’s where our clients use us most. You get to the point of having a large nest egg and then you want to keep the principal intact and create a legacy by passing it to your heirs while living off the income and limiting their tax liability. This is where we utilize our Wealth Management team to come in and make Trust arrangements, develop portfolios, use insurance, etc to accomplish the client’s goals.

 

I was hoping to hear about this magical world of investing that opened up once you amassed a good nest egg, but it sounds like in truth the benefits are real, but much more mundane. Just like at Costco, you get a better deal when you buy in bulk.

True, the same way 401(k)s have cheaper fees at big companies with bargaining power.

 

Through you, are your clients able to invest in IPOs, short stocks, etc.? Do they ever?

Our clients could do this but we do not make IPO recommendations and our platform is quite expensive for short sales. I don’t discourage people from IPO or short selling. I think this has a fit in most portfolios but each company has things it does well and this is not a strength of ours. We just don’t have the resources. But if a client came to me and said, “I just have to invest in IPO XYZ,” for example, we could do that.

 

That’s another benefit then. I once tried as an experiment to invest in an IPO and found it almost impossible to do as a regular person. But I digress. Do you have a wealth manager, or do you manage your own investments?

I work with a wealth manager at my firm but tend to manage my own investments.

 

Would you consider your own investments complex, or do you follow the same advice given to most people to set their 401(k) and rebalance, but otherwise forget it?

I consider my own investing fairly complex. I have three separate buckets. I have some stocks that I own as short term investments that I monitor daily. Once they reach a price I’m happy with I’ll sell and buy something else.  I have some mutual funds that I monitor at least quarterly; these are more mid-term investments. And then my retirement which I check performance quarterly but don’t usually change. Two months ago was the first time I changed anything and I pulled my bond holdings back from 12% to 2% expecting a drop in the bond market.

 

Do you think that everyone with the means to hire a wealth manager should? Or just those who are not financially savvy?

I think everyone who can, should have a wealth manager. When you qualify there is usually no fee, it’s a free service. We bring things to your attention that you never would have thought of. I have a countless number of clients who say “I have that covered” or “I’m all set with investing” and when we sit down I usually uncover a shortcoming in their plan or bring to light a product that fits their needs that they don’t have and didn’t know about. Don’t get me wrong, our job is to produce revenue for our company, but a happy client with the right products produces much more revenue than an unhappy client who takes his relationship elsewhere.

 

What money advice would you give the someone with a livable income, a 401(k), and some small investments, but not enough money to hire a wealth manager (the average Billfold reader does not have a wealth manager)?

Make sure to auto balance your 401(k) at least annually. The market has been zooming so it’s important to keep your portfolio balanced. You should have multiple elements in your 401(k) and you did that for diversification so you need to make sure it stays balanced. Do not try to predict what will happen in the market. Stay well diversified so you can weather the ups and down of the market. If you want to speculate then do so with a small amount—whatever you’d be willing to lose. [Note: automatic rebalancing is a standard option in many, but not all, 401(k) plans, so if you have one, check that it does.]

 

Thanks for talking to me Tom.

No problem.

 

 

E.A. Mann is an engineer and freelance writer living in Warren, R.I. He has a twitter account, but feels like an old person when he tries to use it.

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10 Comments / Post A Comment

sea ermine (#122)

This was really fascinating! I wonder if it would be possible in the future to talk with someone like this, some sort of finance professional where readers can write in questions and they could be answered in the interview? I think there are a lot of billfolders who can’t afford this kind of assistance but might have a question about their 401k or about how much to invest in what (stocks, bonds, etc?) or whether they should keep all their emergency fund in a savings account or spread it around (because ‘high yield’ doesn’t really mean anything anymore).

I know a lot of these questions are really specific but I think there is a lot of stuff that isn’t super general but would also help a lot of readers if they saw an answer for it here.

EA_Mann (#5,000)

@sea ermine that’s a great idea. There are also some low cost financial planning websites online that I’ve wanted to check out

OhMarie (#299)

Wait, how is it free? I don’t understand that part.

EDaily (#4,396)

@OhMarie Some managers are fee-based, meaning you pay a fee to use them. Others are commission-based meaning you don’t need to pay a fee, but they make a commission off of the products they sell you. So he’s “free” as in “no fee” but not really free because he will end up costing you some kind of money. Personally, I’d rather use a fee-based advisor than someone who makes money by selling me things I may not necessarily need. SORRY TOM (not sorry).

sherlock (#3,599)

This was great! Such a good idea for an interview, and well executed.

jfruh (#161)

Out of curiosity, if your 401k is entirely in one of those date-targeted funds, like mine and my wife’s are, is that considered “diversified”? Since those funds are themselves composites of various different investments, with managers supposedly tweaking and balancing them with the aim of gradually reducing risk as you approach the target date.

rosaline (#4,266)

@jfruh I would like to know the answer to this as well! I always thought it was, but maybe I should be enrolled in this automatic rebalancing thing?

EA_Mann (#5,000)

@jfruh it is diversified at a risk level appropriate for your age. The rebalancing happens internally by the fund managers. If you’ve got all your eggs in that basket, no need for rebalancing

Beaks (#3,488)

@jfruh I suspect it depends on the target date fund, but I know that Vanguard’s at least are basically a mix of their total US stock market fund, their total US bond market fund, and some broad international stock and bond funds. Which is pretty darn diversified, if you ask me. You should be able to read the prospectus for the fund and figure out what it’s made up of/ how diversified it is.

I also like SigFig (like mint for investments) because it has cool charts and graphs that shows you what kinds of investments you have and where they’re located in the world.

Tuna Surprise (#118)

EA – just by way of a more fruitful explanation, it is nearly impossible for the ‘little guy’ to get an issuance of a hotly anticipated IPO.

For a company to go public, it uses an underwriter (Goldman, JPM, etc). The underwriter either promises to buy all the shares that are being offered (regardless of whether the public wants them) or to buy only the shares that are sold on to the public. In a case anticipated IPO, all of the underwriters are competing to get a piece of the deal so they will guarantee to the company that they will purchase all of the shares regardless of whether they’re all sold to the public. See link:

In an IPO like Twitter, there are 7 underwriters who have agreed to buy 70 million shares from Twitter and sell them to the public.

http://www.sec.gov/Archives/edgar/data/1418091/000119312513431301/d564001d424b4.htm

The split between those underwriters is usually unknown but it the lead left underwriter (Goldman) usually gets the biggest allocation and then it goes down from there.

So say Goldman gets 20 million shares. It buys those shares from Twitter and then immediately sells them to the ‘public’ in the offering. But Goldman gets to decide who it sells those shares to. FINRA has some rules (5130 and 5131) that have some limits on who Goldman can allocate the IPO to, but in general they are free to reward their good customers. If you think of it from the underwriters perspective, they want to give the IPO to the customer that does millions (if not hundreds of millions) of business with them each year, rather than a stranger who wants a few shares.

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