There is an old saying that the rich are different—which may or may not be true, but when it comes to investing, the truly wealthy are indeed different. Wealthy investors tend to be very discerning when it comes to the nature of their investments; this is especially true in regard to attendant fees, costs and expenses of investing, as well as the tax and estate planning implications of same.

Most importantly, the difference can be seen in their choice of investment advisers. In these essential aspects of investing, the wealthy have something that they can teach any investor, regardless of their current wealth and financial situation.

What the wealthy invest in (and what they often avoid)

Many wealthy investors invest institutionally. What is institutional investing? Well, let’s start with what it is not. It is not paying retail through a broker or bank. Although the wealthy often prefer institutional investing over most other forms of investing, they would rather invest in a simple, no-load index fund than pay retail commissions. Two popular examples of retail investment products to avoid are annuities (annuities are essentially a form of life insurance and are not a pure investment) and actively-managed mutual funds which are almost universally sold by brokers (A, B or C shares, and so on). These retail products are often very expensive, especially annuities.

Unlike retail products, institutional investments do not typically have any commissions or surrender charges associated with them and often have very low internal expense fees. Institutional investing is similar to buying at wholesale cost, instead of traditional retail brokerage prices.

A word of caution is in order regarding annuities because they are so often sold to investors as they usually pay very high commissions to the broker. The caution is two-fold. First, if your broker tells you that you do not pay a commission for annuities because the insurance company pays him then we recommend you secure a new advisory firm. Second, many brokers sell annuities that provide several thousands of dollars in signing bonuses to investors. Beware. Where do you suppose the commission and bonus money is coming from? You probably guessed it correctly—from your pocket. The insurance company charges you a fee and often several separate fees—each and every year. In addition to these fees, many annuities have hefty surrender charges lasting several years to in part cover the commissions that the insurance company advanced to the broker. You pay and pay and pay then you or your heirs suffer the adverse tax consequences of the supposedly tax-favored annuities. Following the lead of many wealthy investors, we recommend that you avoid annuities.

We are not alone in our warnings about annuities. Take notice that the State of Michigan has issued warnings to the public regarding certain annuities and certain broker sales tactics that are less than scrupulous. We strongly encourage you to thoroughly review these and other annuity warnings with an independent adviser (an adviser who does not sell annuities) before purchasing an annuity.

Wealthy investors are concerned with fully optimized risk-adjusted, after-tax returns 

It is not enough to earn a positive return. Wealthy investors know that returns are only good if they are comparatively better than any other return that they could earn taking on similar risks. The current year is especially illustrative. The market has gone up considerably but not equally across asset classes. Many investors have made significant returns this year but have unknowingly forgone the opportunity to possibly make substantially greater returns and at a lower overall risk. We call this form of risk-adjusted optimization strategy “The Science of Investing,” and we refer readers to our article of the same name in the September 2009 issue of The Greater Lansing Business Monthly. One note of caution: The science of investing is not a computer program designed to produce a report or financial plan. It is not a disguised product sales tool designed by the broker or their firm.(Remember that a sales tool is not independent and objective advice.)

Just as wealthy investors are concerned with risk-adjusted returns, they are also concerned with after-tax returns along with the estate tax consequences of any investment or investment strategy. It is, after all, the after-tax return that the investor has available to them. For more on after-tax returns please see our article entitled, “Ask an Expert: Tax Engineering Your Investments” in the November 2006 issue of The Greater Lansing Business Monthly. 

How the wealthy choose an investment adviser

It is not enough that an investment adviser offer institutional investments, or a specific mutual fund or ETF. While these products are important they are only one part of the financial, tax and estate plan. The product does not make the adviser and the wealthy know and understand this principle. Wealthy investors seek out investment advisers who have the highest level of education, training and experience. There is simply no substitute for rigorous academic training for such a complex field as investments and financial planning. The wealthy often look to advisers holding a master’s degree or doctoral level degrees in business or a related field, along with either a CPA or CFA. These advisers should also be fee-only (not merely fee-based) and serve as fiduciaries (truly independent and objective). 

The wealthy recognize that a broker is not a fiduciary and, as such, has no duty to his or her client other than suitability. Wealthy investors demand more than a suitable product. Note that many brokers prefer not to associate with the name “broker” and instead use terms such as financial planner, retirement planner, investment adviser, risk manager and so on.  

		Stephen L. Hicks, JD, MS, CPA and Roger L. Millbrook, JD, CPA/PFS, are fee-only fiduciary investment advisers and principals of Siena Capital Management, LLC, serving high net worth individuals, professional practices, businesses and nonprofits with institutional investment strategies. Both are accountants and hold doctoral degrees as well as other advanced degrees and designations in the area of financial services.