Geddes said investors, by the way they panic and call their advisors, provide evidence that they often do need soothing and handholding. That, he said, is not a bad thing because it’s like they are buying discipline, which leads to better performance. “When people start tweaking, they get in trouble,” he said. “There are lots of valuable services advisors can provide, but I think investors are too often unclear about all the different services available and that’s the part that can be daunting and a little overwhelming.”
Geddes said equally as daunting is the process of assessing a prospective advisor to provide wealth management, and in his book, he has carved out a section on interviewing an advisor once you have decided that you need financial planning help. The following is a list of five areas Geddes said investors should focus on:
• Fees: What are the total fees I will be paying? How is it broken down in terms of what I pay to you, to the asset managers you select? And how much are the other implicit costs like transactions?
• Services: From the available services, which ones do you claim to provide, and at which do you claim to excel?
• Active Management: What is your philosophy on active management? If you do focus on active, why do you believe your predictions of the future are better than the documented research of the failure to beat the market? Do you measure the performance of your investment recommendations after you have made the recommendation, or only the performance before you make the recommendation? Geddes cautioned that if they won’t give you an answer on their track record after recommendation, then that is a bad sign. That is something that they should brag about.
• Credentials: What are your credentials and areas of specialization? Do you offer all the services I need? Do you offer more services than I need? Can I get services separately, or do you offer only one packaged version?
• Non-Investment Needs: Do you address my non-investment needs like insurance and trust services? If not, how do you interact with the other experts in my financial life, like insurance, tax, legal, estate planning? What is your philosophy on bundling together those services versus combining separate providers? Geddes suggested unbundling combined services because only then can you accurately assess the cost of each service you are buying.
One of the terms Geddes uses in his book is “trust but verify,” a line used by former president Ronald Reagan in nuclear talks with former Russian leader Mikhail Gorbachev. Geddes said he uses the term to explain that consumers should find the middle ground when it comes to asset managers and wealth management advisors. “We have all heard the extremes on both sides, one that says, ‘they are all snake oil people and you can’t trust them.’ And there is reason why that cynicism is out there,” Geddes said, noting that the investment industry tends to rank fairly low among other industries for consumers’ trust.
“But the other extreme of, ‘well they are the experts and I like them, and I have a great relationship with my manager, so I am all set’ is a little naïve,” he said. Geddes explained that too often people judge the success of their interaction with their advisor based on how much they like them or how well they get along. “That can add a lot of value, but by itself, you could just be paying for a golfing buddy, basically.”
“The trust but verify is don’t be such a cynic that you think the whole world is going to rip you off. ... But it’s not an industry that’s always honest about where it adds value,” he said.