Yellow flag

Financial advisor yellow flags

The UHNW wealth management space is dominated by the large wealth managers and “private” banks (UBS, Credit Suisse, Morgan Stanley, Citi Private Bank, etc.). They offer white glove service and exclusive access for their “best” clients (read: most profitable for them). They’ll extract every dollar they can from you – you probably won’t notice, though, and you’ll work with someone you trust who is smart, articulate, and charismatic.

You think you’d have a better chance with large, independent RIAs. And that’s sometimes true. But, for many RIAs, in the conflict between business profits and the long-term interests of clients, the profits win. As a result, many large, independent RIAs also fall short. Don’t get me wrong, many offer great service and typically give clients what they WANT. But many (most really) follow an out-of-date investment approach, focus on accumulating clients and assets, and don’t spend enough time educating clients on what works.

While good advice may not be cheap, bad advice always costs you dearly, no matter how little you pay for it.
– Jack Bogle

I previously wrote about Advisor Red Flags. Here are a few yellow flags:

1) Offers “exclusive” access to PE/VC deals.

My favorite example is an RIA started by ex-PE partners. One partner’s PE firm had mixed results and the other’s had bad results. Yet a key part of their RIA’s pitch is “access” to private deals. You can find decent PE/VC programs but they are rarely part of advisory firms.

I know how hard is it to generate excess returns in PE/VC. I was employee #1 for a new $500 million PE fund and co-founded a family PE effort. Top tier PE/VC funds outperform but (1) they are hard to identify in advance and (2) they usually have more than enough money from the Yales of the world.

2) Promotes active management.

There is a mountain of evidence against active management. Everyone is trying to select “the best” or “superior” managers. So, the burden of proof – that they can beat the long odds – has to be on the advisory firm. What are they doing BETTER than their many competitors?

Depending on the study, 80-90% of active funds do not outperform over the long run. And those that do, do mostly by chance. In other words, they are unlikely to repeat the outperformance. But the fees and taxes of active management are real. If the advisory firm is picking stocks in-house, ask how their small investment team can outperform world-class, well-staffed hedge funds.

3) Predicts the future or offers insight into market fluctuations.

“It’s tough to make predictions, especially about the future” (attributed to Yogi Berra). No one knows what the next year or two will bring. Yet I see many firms tell you where you should invest in the coming year. Or why the market went up or down last month or last week. That might be reassuring but the truth is no one knows. One way to check is to write down what they say and check in a year or two to see how their “predictions” played out.

4) Conflicts of interest.

Regulators say it is okay to have conflicts as long as they are disclosed and “managed.” Offer proprietary (their own) products. No problem, as long as it is disclosed. Pay for referrals. No problem, as long as it is disclosed. These conflicts tend to be disclosed in the back of a long legal document. Even if you read it (which you should), it can be hard to understand what’s really going on. Yet these conflicts can and often do influence the advice you receive.

5) Constructs complex portfolios.

Complexity is more a client “retention” tool than a client value-add. A well-constructed investment portfolio doesn’t need dozens of funds. The hard part of investing isn’t building a portfolio; it is having the discipline to stick with a plan when everyone around you is “making easy money” or proclaiming the “death of equities.”


I wish I had an easy answer. But I don’t. So be careful. As I mentioned in Red Flags, your best bet is to try to educate yourself on investing and the financial services industry.

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