How some firms take on lead advisor role - and charge $100,000 a year for it

For years, advisors have heard the unwelcome news that a surprisingly large number of high-net-worth clients hire more than one advisor. After the financial crisis, even more clients started playing the field.

Now, a new study has come out with some real advice about what to do about the decayed trust: Instead of convincing clients to dump their other advisors, advisors should spend their time becoming the client’s lead advisor or primary advisor, says research out Tuesday from State Street Global Advisors and Knowledge@Wharton.

“It’s OK if your client has other advisors, but you want to be the quarterback,” says Tony Rochte, senior managing director at State Street Global Advisors. “You want to position yourself as the primary advisor by partnering with other investment advisors and other asset managers. You want to be an important part of your client’s solution.”

The report’s findings are based on surveys completed by 2,196 financial advisors and 776 investors combined with insights from Wharton faculty, State Street Global Advisors and top wealth managers to investors. The study of investors was wide-ranging from those with fewer than $100,000 in assets to those with more than $10 million. The majority of investors – 85% had less than $2 million in assets.

Forty-nine percent of investors manage their own investment portfolios, 34 percent work with one advisor and 17 percent work with two or more advisors.

See: Tiger 21 members have shifted priorities in choosing who manages their investments.

At the end of March, Boston-based Cerulli Associates Inc. issued a study looking just at investors with $10 million in assets or more. Of that group, 63% were working with five or more advisors. That compares to nearly 16% who had four or more advisors in 2008.

Diversification a bad thing?

Of those investors who use multiple advisors, 55% said their primary advisors were unaware of the decisions and performance of the other advisors. Some reported that their primary advisors weren’t even aware that other advisors were managing some of their assets.

Advisors can make a clear case to clients that in their attempts to diversity risk with several advisors, investors may be putting their portfolios at greater risk, says Eric T. Bradlow, a Wharton marketing professor.

One advisor’s recommendation could inadvertently be hedged by another advisor’s investment choices, causing the risk profile of the client’s overall portfolio to be more conservative than the investor would want. Likewise, overlapping exposures can lead to higher risk in a single stock or asset class.

Becoming the lead advisor

Patricia Williams, a Wharton marketing professor, encourages advisors to position themselves as the one advisor with eyes on the big picture. The report shows that advisors can charge a flat fee for their services or a retainer that can be paid annually by clients. These fees can range dramatically.

See: Nearly half of advisors now charge clients to manage held-away assets.

Advisors who are able to carve a niche as a lead advisor often use many of the same best practices, the report shows. Those include transparency in fees, open architecture and have solid data to back up all recommendations.

“In order to build trust, you have to eliminate as many conflicts as possible,” says Greg Van Slyke founder, co-owner and manager of Lake Street Advisors LLC in Portsmouth, N.H., who has carved out such a niche.

Van Slyke works with about 50 families who on average have about $60 million. He says fees vary, but it’s common to charge about $100,000 annually to clients as the lead advisor.

“Our firm is set up to be the central advisor. It’s the only thing that makes sense the way our business model is set up. Many folks are sellers of products or a management method. We want to help our clients pick out the best managers. We’re helping the families in an objective third-party way.”

Ask the question

The most important thing is that advisors must be aware if their client has more than one advisor, says Bing Waldert, a consultant with Cerulli Associates. Admittedly, it can be an awkward conversation, but it’s important for advisors to ask clients whether they’re working with another advisor.

Ask that question when an advisor is meeting with a client annually for a review.

“You don’t want to accept the answer at face value. You need to keep asking the question and you may get different answers. Suddenly, a client who told you no, might say that they do have other advisors.”