Most advisors exercise discretion over their clients’ accounts. But some high-profile wealth managers are refusing to take control of trading their clients’ registered securities – on the premise that the money lasts longer that way.
Maria Elena Lagomasino — CEO of JPMorgan Private Bank in the early 2000s and head of GenSpring Family Office, a firm with around $13 billion under management, from late 2005 through October 2012 — is in the vanguard of this movement. Her current firm, WE Family Offices, has a strict policy of not taking discretion (trading authority) over client accounts. In her view, this stance keeps her customers — some of them families with hundreds of millions of dollars — more attuned to their money. And that’s a point she and her colleagues drive home when dealing with prospects.
“Three decades of experience in wealth management have taught me that the most successful families manage their wealth with the same rigor they apply to the businesses” that made them rich in the first place, says Lagomasino. Business-founding families that don’t exercise investment discretion aren’t teaching the next generation to be responsible stewards of their wealth, she adds.
Discretion works especially well for families that still run their businesses, Lagomasino says. And it may appeal more to non-U.S. families. Miami-based WE Family Offices, a business with over $1.6 billion under management that Lagomasino and two partners bought from GenSpring in January, now caters mostly to families based in Latin America and southern Europe, although it plans to start targeting U.S. clients.
The firm screens potential investment vehicles by investigating price-to-performance characteristics and weighing how each fits with the family’s overall strategy. The result is a short list of managers for clients to choose from.
A New Normal
For advisors, taking discretion is actually a fairly new normal, says industry veteran Jamie McLaughlin, now a family-office consultant. “When I started with [Sanford C.] Bernstein 22 years ago, it wasn’t widespread at all,” he recalls. “Some elite firms took discretion, but the brokerages didn’t.” McLaughlin adds that leaving discretion to clients may help keep even the appearance of conflict at bay.
And in some practices, discretion is a case-by-case decision. Frederick Keator, for example, is managing partner of Keator Group, an independent affiliate of Wells Fargo Advisors’ Financial Network in Lenox, Mass. His firm, which manages around $500 million for customers that include millionaire-next-door types and ultra-high-net-worth families, has discretion over most client accounts – a state of affairs that saves him and his clients a lot of bother. “If I had to have a conversation — the same conversation — with even my top 20 clients every time I wanted to make a change, I wouldn’t get much done around here,” he says.
But some longtime clients prefer to keep control of every trade — just as they did when the firm got its start more than 30 years ago. “We call them legacy clients,” he says.
With legacies and new clients alike, Keator signs investment-policy agreements that define asset-allocation parameters. These documents serve as protection when it comes to liability for errors and omissions. “There’s a paper trail,” he says.
McLaughlin predicts that advisors will move to the middle ground on discretion. “The ideal would be a firm that has discretion for when it’s needed but acts like it doesn’t have discretion and consults with clients on that basis,” he says.