How to Protect Your Money With Investment Consultants
Not completely favorably, they are known as the gatekeepers of the financial world: the all-too-powerful investment consultants who tell the world’s most influential investors where to invest their money. And, if a search is in progress, you may receive three separate calls from three separate individuals in the same organization, each offering vastly differing opinions on how best to proceed…all with a vested interest in turning over the next slice of the investment world. The result is that there are big, fat relationships formed between the planners and their corresponding clients. This is the “bagman relationship.” And, if you are a client under such a arrangement, you are likely never to be completely happy with the decisions made by your investment adviser.
But what is the alternative? While there are no formal policies to protect investment advisers against conflicts of interest, the best ones have strict guidelines for determining whether an adviser is working in the best interests of his or her clients. They use metrics like asset protection, income generation, and return on equity to determine which investment managers are the best for their purposes. Then they ensure that their advisers provide the proper fiduciary advice. This means that the investment consultants are held to a standard of conduct so that the decisions they make are informed and safe, even if they run the risk of putting their clients’ capital at unnecessary risk.
But the most important thing an adviser does is make investment consultants their clients. After all, an investment consultant’s job is to help those investors make good choices, and a good consultant is worth his or her weight in gold if that decision involves helping a client choose an asset management firm. It is impossible to say that an asset management firm itself is a conflict-free entity, given that it makes investments and considers them when making investment recommendations. However, the likelihood of conflict-free entities resulting from an investment consultant’s work is small, as most firms will not hire someone who does not sign a non-disclosure agreement.
Moreover, investment consultants are only paid for those projects where their advice produces an actual financial benefit to the firm. This means that if an advisor consistently recommends that thebuy list company buy stock instead of another firm with comparable products, then the advisor’s advice may actually be money lost rather than earning the buy list company any tangible financial benefit. Since buy lists are a haphazardly selected piece of paper, companies will typically base their final decision on the amount of “earnestness” an advisor can show – which may not necessarily be in their best interest. As a result, investment consultants are not actually compensated when their advice causes a company to lose money rather than earn a profit.
Finally, and perhaps most importantly, investment consultants cannot protect their clients from themselves. There are many scenarios in which an advisor might not be able to adequately fulfill his or her duties. In addition, some investment consultants have family members who are willing to act in an advisor’s stead. For these reasons, it is absolutely crucial that clients ensure that the adviser fully discloses any family relationship with a given client. If the investment adviser does not disclose that an investment advisor has a family stake in a given transaction, the client should not allow the advisor to proceed unless the transaction is fully disclosed and controlled by his or her family.
Investment consultants may very well be valuable additions to the investment team of a firm, but they cannot be the final arbiters of what should not be done. Clients need to ensure that the investment consultants they hire are capable of taking the ownership of their decision making process and protecting their clients against self-interest. When the goal of an advisory relationship is to create a profitable investment for the client, then the best investment consultants may be the ones who do the most effective job of providing that profitable outcome. Otherwise, the client might be wasting time or money on ineffective consultants.