Fiduciary Standards

The Rewards of Fiduciary-Base Financial Planning

The film “The Big Short” might be a somewhat-sensational, fictionalized retelling of the 2007 financial crisis, but it got one thing right: nobody appears to read prospectuses.

“There are very few people, even in the industry, who read their prospectuses, and this is something that needs to be changed, in my opinion,” said Alex Sugar CFP®, managing director and financial advisor within the Institutional Consulting Group at The Core Group, part of RBC Private Wealth Management. Sugar added that marketing materials often provide prospective investors with a more concise overview of how a product works.

“When you actually read the mutual fund prospectus you will learn about the fee-structure; what you can expect for returns, the risk that is associated with it, and the strategy that is going to follow,” Sugar told “Advisors Magazine” during a recent interview. “The problem is that most mutual funds don’t make this information available in marketing materials and most clients don’t read mutual fund prospectuses.”

The Core Group at RBC Wealth Management provides comprehensive financial planning, investment advising, and estate planning services to high net worth clients, typically those who hold more than $5 million in investable assets. The group plans to become more selective as the business grows, and most new clients now are worth in excess of $10 million, Sugar said. The Core Group primarily serves entrepreneurs who have had a recent “liquidity event” or divorcees who no longer wish to work with their former spouse’s financial advisor.

Sugar founded The Core Group with his partner, Senior Vice President Grant DeVaul AIF®, a financial advisor and senior portfolio manager. A third partner, First Vice President Alex Davis, joined the team in 2001, and is also a senior portfolio manager.

“I witnessed many rookies learning the hard way through trial and error with clients’ hard-earned capital,” DeVaul said about partnering with Sugar in the 1990s. “Alex was able to coach me away from some typical rookie mistakes and help me take a deep dive into the whole client picture. Today we are a team of eight people managing close to a billion dollars for high net worth families. We collaborate as partners both in developing a big picture strategy and in developing individual portfolios. The families that we serve benefit from the diversification of ideas, collaborative construction of portfolios, and the ever present service of our team.”

Investors often misunderstand how their investments work. A 2018 study by Personal Capital found that 20 percent of investors could not correctly say how much they pay in fees and a further 10 percent did not know if they paid any at all. Sugar’s experience bears that out.

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The Core Group fee structure is “incredibly transparent,” Sugar said. The group uses a one-page weighted fee sheet that shows all advisory fees as well as expense ratios which are embedded in every fund. The bottom right of the page features the amount a client can expect to pay prominently displayed. The Core Group works to keep investors on the same page, and ensures that clients know exactly what they are paying – without readings a dense, legalese-laden prospectus.

“A clear statement of fees and fee structure should be much more prevalent in our business. No business segment is guiltier of obscuring fees than insurance.” Sugar said. “Unless somebody really looks at the fine print or looks at the prospectus they won’t really know what fees are on an annuity or Universal Life Policy, and trust me, they are there and they are substantial”. ”
Transparency builds trust with clients, but it also gives advisors peace of mind. Davis, Sugar’s partner, was working for Paine Webber in 1999 when he learned first-hand that “stocks do not always go up.” In midst of a downturn and with his then clients losing money, Davis found the resources at hand lacking when it came to serving investors well.

“I would sleep very little as the people who entrusted me to provide investment advice lost money,” Davis said. “The lesson I learned quickly is that the people I was entrusting at my firm were not always right. The dotcom bubble was bursting and this is perhaps the best thing that could have happened.”

The dotcom bubble popped in 2000, resulting in trillions of investment capital evaporating. As the market plummeted, Davis began looking for a more forthright and personally rewarding niche to fill in the industry. He contacted Sugar, who he had known since 1990.

complaince400“I was aware that Alex and Grant ran their business differently. They were managing client assets looking at the rest of their lives, and not on how much return they could provide in a year. They were managing client’s wealth and helping them prepare for the future for a fee,” Davis said. “It made perfect sense to me then, as it does today. Since joining forces with Alex and Grant I haven’t lost a night’s sleep.”

Sugar had similar experiences with the financial services industry’s less transparent side. Sugar began his career selling stocks and bonds, making money from markups and commissions. Brokers, at least back then, rarely took a fiduciary stance toward clients and Sugar sought a better, more open path.

“We have since migrated and are currently about 95 percent fee-based business and just about every one of the clients we have a fiduciary relationship with,” he said.

The Core Group acts as a fiduciary to clients who use its investment management and financial planning services, meaning that investors’ best interests come before firm commissions or bottom-line concerns. Fiduciary financial advisors must put clients’ best interests first, unlike broker-dealers who must meet the less stringent “suitability” standard.

The client-advisor relationship is built on trust. To put clients first, an advisor needs to understand their motivations, fears, and hopes for the future. Financial advice often becomes an exercise in tempering client emotions and fears, and making sure investors stay aligned with their goals. The old axiom still remains true that markets reach glory at the top and fear at the bottom, but insulating clients from those chaotic ups and downs is a large portion of an advisor’s job.

“I’ve yet to meet an unemotional client and it’s our job to keep their emotions in check,” Sugar said, adding that the 20 percent decline that roiled markets last December reminded him how important reaching clients on an emotional level can be. “It’s remarkable how, when the market does that, few clients actually want to invest.”

Keeping clients’ emotions in check requires a strong investor-advisor relationship. Sugar spends a “tremendous amount of time” getting to know his clients and their views towards money, prosperity, and the future. The Core Group holds quarterly meetings with clients and ensures that their accounts are tested against serious setbacks.

“On my quarterly reviews with clients I pull up their allocations and discuss what would happen in a bear market – especially like in 2008 or even something worse than that – and what would happen at that point to make sure they are comfortable with the overall risk that we’ve set for their portfolios, and if they’re not than we can make adjustments,” Sugar said. “We produce a cash-flow financial plan as well as a wealth plan and that is the blueprint for how we will work together in the future. This is where our work begins.”

The Core Group’s focus on high net worth individuals and business owners allows the group to maintain a small number of clients. That means clients get the personalized attention they need and the methodical, deliberate financial planning it takes to shepherd hard-earned money through difficult markets. The firm keeps the clientele limited in order to provide a level of service that larger, more cookie-cutter establishments simply cannot.

“It enabled us to step away from the daily moves of the markets and plan much more for the long-term,” Sugar said. “It’s our belief that clients are looking for advisors who are stewards of their wealth and want professionals who are motivated to protect their wealth as well as grow it efficiently.”

For more information, visit: The Core Group

 

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