The previous blog introduced the concept that you are the CEO of your personal financial and wealth management and security. Carrying that concept forward, here is what a CEO would do about human resource (HR) management, that you should also consider.
HR includes building a team of advisors and compensating them. Since you are not actually presiding over a business with employees, you will need to outsource the services you need. This includes some of the following:
- Brokers
- Bankers
- Financial planners
- Investment managers
- CPAs
- Attorneys
- Insurance agents
The brokers are the custodian of your funds and these should be separate from the asset managers who might order the trades and transactions. Brokers can also make recommendations, execute the trades and manage your portfolio. Most of these professionals can serve in multiple functions so it is careful to understand their role in each area and the compensation they earn. The bankers are the holders of your cash and cash equivalent funds and make loans and receive the payments. Many now have affiliated brokerage and wealth management organizations. Financial planners will assist in developing and possibly directing the overall investing plan, strategy, asset allocation and rebalancing as will investment managers. Investment managers, as well as some financial planners, may also sell you the products they feel you need along with their other functions. CPAs will be your tax advisors and can also review your asset allocation to help determine if it meets your stated goals and also assist in formulating your goals. Some CPAs also are financial planners and some also sell products or manage portfolios. For those, their roles are bifurcated and so will their compensation. Attorneys usually are involved with the review and preparation of legal documents and agreements; and some can be involved as business or transaction advisors. Insurance agents and brokers could assist in your risk management and make sure you have adequate coverage. Life insurance agents will advise on estate liquidity and cash flow for heirs.
CPAs that do not sell products or manage portfolios can be used a sounding board and as someone to run a transaction by if you do not fully understand it or if you are not quite sure it is something you should do. I find that a “time out” to say you want to check out the tax aspects with your accountant provides a “cooling off” period that many need; so use it to call your accountant. Also, it doesn’t hurt to get his or her quick opinion. My rule for investing is that if you do not understand what you are asked to do – don’t do it!
Finding these people is not as easy as listing who you need. It will require you to get recommendations; checking references and credentials, reviewing SEC and regulatory agency files for unresolved complaints, and interviewing them to obtain a comfort level that they understand your goals, risk tolerances and have the right level of knowledge and experience to help you.
We all know that no one works for nothing – when they do, it is called a hobby. This is not a hobby for you and should not be for your advisors. It is incumbent upon you to clearly be told how your advisors will be compensated, the basis for it, and the payment terms.
Some advisors get paid an hourly rate, while some charge a fixed fee for the project or per year and there might be minimum yearly fees to handle a client. It is typical for portfolio managers to receive a percentage of the assets they manage; and some get this fee plus a planning fee and/or a “performance” amount if they exceed certain benchmarks. Other advisors get commissions and fees from the places they direct your funds to. Whatever the arrangement, it needs to be thoroughly explained to you and what extras, bonuses or contingencies are built into the structure. Where product commissions or fees are paid to the advisor you should be clear under what circumstances this will happen. If it will never transpire, then you should be told how the advisor will deal with commissions and fees that will be paid to them, or their companies, directly or indirectly when they are paid even though they are unsolicited by them. And get it spelled out in writing so that there are no misunderstandings. Also, find out how you will be billed for expenses they incur.
Despite the time and involvement in finding the right people, engaging people is a lot easier than discharging them. Very few discharge or fire people as soon as they should. There is usually a “second chance” period once it becomes evident that someone needs to be let go. There is also the discomfort of telling them you no longer want them on your team. So do the right vetting beforehand.
Another facet of HR management is to have your advisors function as a team. At appropriate times they need to communicate with each other, need to keep each other in the loop, and possibly should attend an annual meeting, which can be costly to you, but can provide great benefits if the right planning can be developed and implemented. It also provides you with oversight by professionals and gives you an opportunity to see them interacting on your behalf.
If you were a CEO and were hiring a top echelon person, you would have a contract spelling out their duties and responsibilities. In managing your individual financial affairs, an investment policy statement (“IPS”) serves this purpose, even though it is not a binding contract.
The IPS is written between you and your advisor or portfolio manager and put in writing your goals, approach to investing and the amount of risk you feel comfortable with. The purpose of the IPS is to get all your advisors and participants in your financial security to agree on a methodology to lead you toward and close to your goals. An IPS identifies your specific goals; states the appropriate amount of risk needed to accomplish your goals; suggests the type of investments needed to attain your goals; the expected returns from each investment category; lays out the asset allocation strategy so that your goals will be achieved based on your current investment return assumptions; the role taxes will play in the execution of the plan; sets forth monitoring, reporting and meeting intervals; rebalancing periods so that your allocation will continue to be what was originally agreed upon; and circumstances when your strategy and goals will or might have to change. Also included will be the basis for your advisors’ compensation.
Engaging professionals is daunting, but essential and is very important to assure that your long term plans and goals for your financial security have a reasonable probability of being attained.
If you have any business or financial issues you want to discuss please do not hesitate to contact me at [email protected] or fill out the form below.
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