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The number of affluent individuals in the United States and worldwide continues to expand, bringing a host of new clients seeking professional guidance from an investment advisor. As I have argued before in these pages, notably in “Great Expectations” (December 2003), an advisor ready to capture that segment of the market must prepare himself to face the changing needs and wants of the wealthy. The universe of investment options is changing–and growing–at a rapid pace, surrounded by an increasing web of rules and regulations that must be untangled. Moreover, the scope of the typical investor’s assets and management needs is changing as well. Clients are as interested in saving for future college tuition bills and adventure vacations as they are concerned about retirement. They are likely to ask for your help in fitting toys like yachts, personal jets, or second homes into their greater financial plan.

Resolving the resulting patchwork of issues presented to an investment advisor requires a well-researched decision-making process. Finding the methods and products and vehicles that allow the advisor to provide this high level of service is anything but easy or straightforward; even a dedicated, experienced advisor’s standard practices can fall short of the mark.

I like to think of this as a “Twinkie” issue. If you give a Twinkie a whirl in a blender and compare its pre-blend volume with its post-blend’s, you’ll find that the little cake is almost 70% air–pure dead space. Similarly, conventional investment advisor wisdom, while offering clients a host of wonderfully structured resources and intelligent-sounding advice, often falls short when it comes to the substance and details of portfolio design and implementation.

It’s easy to get stuck in a rut, applying standard, easy solutions to each client. However, sticking with a static list of mutual funds or a fixed view of asset allocation is unlikely to suit the needs and tolerances of every investor. Although a cloned investment plan might feel “close enough” to fit the bill, both a client’s portfolio and the client-advisor relationship can reap immeasurable benefits from a plan that takes personal nuances into consideration.

A classic cookie cutter example is the standard 60-40 stock-bond portfolio allocation. Although the model has its merits, it is not the perfect solution for all investors. Consider the client who is severely risk-averse, or the client whose assets under management represent only a fraction of his net invested dollars, some or most of which are already allocated to stocks and bonds via other platforms. Even a cursory consideration of these cases shows that they don’t fit the mold and require personalized advisor attention.

Are you proud of your financial plan prowess? If you think you can relax once you’ve formulated a great plan for a client, in the real world of constantly evolving financial markets and products you’d better think again. Not only should an excellent investment plan adjust from one investor to another, it must evolve over time. An advisor with allocation techniques based on research of several years ago or market conditions of similar vintage risks advocating client portfolios with marginal risk and return profiles.

Financial developments in recent months provide obvious examples of how up-to-date research will affect choices in both allocation structure and exposure. A force that could change the mechanical side of portfolio construction is the emergence of hedge fund index products and the new perspective they provide on alternative investment exposure. Whether the advertised performance of these hot new instruments conforms to a client’s financial goals is a question that requires research on the part of each advisor. Similarly, the rapidly changing interest rate environment should prompt a review of the asset class allocation of a portfolio. New research may reveal techniques for effective rising-rate protection unique to the current total economic landscape, such as incorporating or increasing allocations to adjustable rate mortgage or bank loan funds.

Here are two common mistakes that can occur if an advisor takes a static approach to solving client problems:

Neglected Implementation. Simple adjustments like periodic rebalancing and tax harvesting can be excellent ways to enhance a portfolio’s total performance. The existing research on the subject makes it tough to deny that a regular application of these techniques can boost portfolio returns and, more important, reduce both portfolio volatility and tax liability. These and other investment management “chores” are easily neglected, and often are. With a large book of clients, all with varying market exposures of varying durations, putting these practices to work can become a time and resource hog. Postponing the process, or applying it willy nilly, can dramatically reduce or negate the possible benefits. For example, rebalancing and tax harvesting should not be performed independently. A blind rebalancing might impose taxation that far outweighs the excess returns anticipated, and vice versa. Thus a case-by-case analysis is often necessary.

Avoiding Communication. Just as the markets evolve, so do a client’s needs, desires, and resources. If an investment advisor does not make regular client contact, it is likely that changes in income, assets, or other issues of importance will go overlooked. In addition, fostering a strong client relationship must include keeping investors abreast of market conditions, offering explanations when performance is poorer than anticipated, and reaffirming the stated goals of the portfolio. Sidestepping the sometimes traumatic interfaces with clients may save some time and energy in the short run, but can ultimately lead to a great divide between investor and advisor.

The Model Advisor

Avoiding the pitfalls that lead to vacuous investment advice begins by rethinking the fundamental role an investment advisor can play for his clients. In addition to addressing the points above, an advisor that aims to expand the traditional view of service from just “advice for a fee” to something greater, can find a truly effective path to excellent wealth management. Incorporating a little scientist, a little psychologist, or even a little motorcycle cop into an advisor’s repertoire of financial skills yields an advisor as diverse and talented as the portfolio he aims to create. Here are four job descriptions that the custom advisor can fill:

1. Pie Slicer. Investors and advisors alike recognize the importance of keeping their eggs in more than one basket. The real dilemma, of course, is which baskets to use. Top-notch advisors have investment methodologies available to their clients to dynamically diversify their investment exposure over many markets and asset classes to achieve target returns with reduced risk. In addition, a well-educated advisor can add a level of sophistication to the portfolio, enhancing elements like mutual fund selection and the application of advanced theories of portfolio design. These practices will vary both between investors and as market conditions evolve. Regular client communication and technical research are necessary to gauge the appropriate distribution of dollars.

One of the most challenging diversification questions is to determine if alternative investments such as hedge funds have a place in client portfolios. If advisors see their role as matching a client’s budgetary needs with a targeted return, then steadily performing investments could provide some benefit. But there are added responsibilities and expenses associated with alternatives. In addition to added alpha come K-1s, performance reporting issues, and a plethora of additional operational challenges.

2. Mission Controller. Managing wealth effectively always requires a good plan. When it comes to both daily and long-term financial planning, an investment advisor can establish and maintain a good financial plan by prompting and then answering client questions such as, “How do I determine a budget for retirement?” “Should I pay off my mortgage?” or “What should I do with my IRA?” Even better are answers from an advisor well versed in tax laws, estate planning, insurance, and other layers of financial planning not always associated with the standard advisor’s toolbox. The reverse direction of inquiry will also benefit the portfolio’s design plan. An advisor should ask questions that carefully quantify an investor’s risk tolerance levels, establish a realistic income and spending outlook, and identify the level of attention and education the client requires in order to feel comfortable with the final plan. In addition to putting forth a solid final plan of action, an advisor should keep tabs on the progress of the portfolio in light of the original goals, and keep clients informed about the general success of recommended adjustments to their holdings.

One of the best ways to accomplish this task is through the use of a client questionnaire. In our experience, clients find the task an interesting one, mainly because it allows them to see where they stand on a risk-tolerance spectrum. And because most well-crafted questionnaires also help to uncover a potential client’s return expectations, the exercise is immensely valuable in matching an investor with the best possible portfolio.

3. Emotional Gatekeeper. As much as they’d like to deny it, inexperienced investors often make investment decisions based largely on wide-eyed greed or white-knuckled fear. An investment advisor can offer the more level-headed thinking that comes with greater knowledge of and experience with the markets, which in turn limits the hazardous impact of emotionally charged investing on client returns. This can be a delicate balancing act between the “customer is always right” approach and the straight and narrow path to portfolio success. An advisor who takes the other “model advisor” points to heart, however, may find that his client is already primed and prepared for an investment path that’s free of whimsy and sentiment. Moreover, in the same way that an advisor keeps client emotions at bay, she can work to instill confidence and calm when it comes to the client’s total financial well-being, especially in times of market turmoil. Communicating with investors on a personal level about the matters at hand, whether good or bad, yields a variety of additional rewards as well. Positive client relationships can lead to eventual increases in assets under management and ongoing referrals from friends and family.

Of course, personal communication does not preclude the use of an all-client missive. Advisor newsletters can foster a sense of community and help forge links between existing clients, which can often yield more referrals. Considering that high-net-worth investors are most comfortable with an advisor who communicates with them two to three times per month, in our experience, it becomes obvious there is plenty of room for advisors to creatively send to their clients the message that they care.

4. News Anchor and Teacher. An investor kept informed by her investment advisor is certainly more likely to view the advisor as well-informed, too. Even if you’re not delivering groundbreaking news, simply answering the question “How are the markets doing?” is always of interest to investors of all sizes and styles. Regularly assimilating and disseminating relevant financial developments to clients, even via a simple e-mail or Web posting, keeps both advisor and investor on their toes. Every client walks through the door with a different level of education and intuition about the world of financial markets and the role their investments play therein. An advisor who gains a sense of whether a client is interested in learning about the principles and even technical fundamentals of investing should capitalize on that opportunity to deepen the client relationship. Providing explanations and interpretations of styles of investing or market mechanics, and making available re-sources such as a Web site of links to recommended reading material, will not only further the client’s financial education, but will further strengthen the client’s trust and confidence in how the advisor manages the client’s wealth.

One way to deliver such broad-based explanations is through a Web site. Many will argue that in the present age, a Web site is all but required by an investment advisory firm that wants to be taken seriously. Allowing potential clients to sign up for a newsletter and communicating to potential clients those traits that differentiate the firm are two messages that a Web site can effectively and easily convey. However, it should be mentioned that finding a client in cyberspace is quite unusual–although it has happened to us a few times.

A New Resource

In essence, investors seeking an investment advisor are really looking for a talented problem solver. They want someone with the experience and intuition necessary to unravel their tangled financial skein into a sensible, well-ordered, and functional plan. An investment advisor who adopts this approach–viewing each client as presenting a unique set of challenges to be analyzed and solved–will naturally follow the tips and avoid the pitfalls outlined above.

As you are well aware, solving the problems presented by most clients is rarely straightforward or easy. In fact, providing a basic portfolio generating positive returns combined with the utmost in customer care and service is a difficult enough task. In particular, as an investment advisor delves deeper into the subtleties of making decisions that are right for his clients, the information required may be confusing or hard to find.

That’s where Investment Advisor’s new quarterly column–The Problem Solver–can help. Send in your questions to the address shown at left, and we’ll respond with the facts, figures, and expert opinions you need to make confident, informed–and customized–decisions on behalf of your clients.

Ben Warwick is CIO of Memphis-based Sovereign Wealth Management, and provides content for the monthly Searching for Alpha newsletter, available through He is also the author of several books, including Searching for Alpha: The Quest for Exceptional Investment Performance (Wiley, 2000). He can be reached at [email protected].

Bring It On!

Got a particularly nettlesome investing, estate, tax, retirement, or insurance problem? Send it to [email protected], and we’ll consider it for treatment in a future issue of Investment Advisor.


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