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The Joys and Pitfalls of Advising Finance Professionals

By Chris Latham August 6, 2013

Financial professionals naturally pride themselves on being good with money, but the smartest ones recognize that even they can benefit from outside counsel. Which raises the question: Do they make good clients?

According to advisors who serve this niche, there are two major upsides to working with finance pros. First, they often make at least six figures. Even better, perhaps, they refrain from second-guessing their advisors. The downside is that their egos often affect their ability to budget prudently. That means advisors sweat bullets to draft an expert plan, then pray the client doesn’t veer too far off course.

“I’ve heard that our bankers make the worst clients for our advisors,” says one member of the wealth management team at a large private banking and trust company. “They spend like crazy.” This market strategist, who requested anonymity, said a pervasive culture of large homes and lavish trips was a constant drain on those clients’ resources.

That description resonates somewhat with Larry Luxenberg, who runs Lexington Avenue Capital Management in New City, N.Y., in affiliation with Partnervest Advisory Services. During a previous career in institutional money management, he observed that his peers were often house-poor. “These guys would get a second home in the Hamptons and be in debt,” he recalls.

Now, though, about a dozen of Luxenberg’s 45 clients work in finance — from banks to hedge funds to insurance companies — and he says they do a fairly good job of controlling their spending.

Word of Mouth

Advisors who develop this niche often do so without necessarily meaning to. Luxenberg, for example, says his institutional background and CFA win the respect of industry peers, as does his membership in the local chamber of commerce. His cadre of finance pro clients has grown steadily over five years, largely by word of mouth.

Similarly, Pam Dumonceau has gradually added about 20 CFPs and CPAs to her practice, Consistent Values in Greenwood Village, Colo., an affiliate of Asset One that manages about $100 million for 100 families. She grows her business by referral only; when new clients come on board, she connects with their accountants, who sometimes become clients themselves in addition to recommending others. (Greenwood Village is something of a hotbed for advisors, as it’s home to the College for Financial Planning.)

Pam Dumonceau
Dumonceau says she has to remind herself that her finance pro clients, despite their training, may not be up on the latest news about Medicare or retirement. At the same time, she’s always mindful of their professional pride.

“They have blind spots and irrational behavior, like everyone else, and like everyone else, they’re best served by addressing that,” Dumonceau says. “But we have to be very careful to let them save face when they don’t know something. I always start by giving them credit for their expertise in their area of specialty.”

Another challenge in working with financial professionals is their often complex and highly erratic compensation. The words “planning” and “bonus,” for instance, are hard to use together in a sentence. Yet more than half of a finance pro’s income may come in the form of an annual lump-sum bonus, says Andrew Karelis, a partner with KSP Financial Consultants in Waltham, Mass., which manages about $390 million for 550 families.

Andrew Karelis
Karelis says at least 15 of his 100 clients are financial professionals, like hedge fund analysts and investment bankers. The actual value of their bonuses, which typically combine cash and equity — both dependent on the performance of the client and of the client’s firm — can fluctuate wildly from one period to the next. If the equity portion comes in the form of restricted stock or stock options, things get even more complicated and unpredictable.

“It can be a great surprise or not so great,” Karelis says. “You have to plan for not so great.”