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Three Types of Wealth Management Firms

Wealth management firms differ in their core value proposition. This is an updated version of a post originally published on 10/12/2017



From the outside, different wealth management firms may seem similar — they are all fiduciaries who wish to do well by their clients. But if you look under the hood, they’re actually very different. There are basically three kinds of wealth management firms: Product Vendors, Customized Traders and Planner/Coaches. Some firms are hybrids of one sort or another, but in our experience, this taxonomy goes a long way in explaining how firms are organized, how they compete, how they present themselves to clients and the true nature of the business. Here’s a short description of each:

  1. Product Vendors. These firms pride themselves on access to great product. They promote this access and strive to provide their clients with market-beating performance. Client meetings center on portfolio performance and product selection; underperformance of any given product results in the selection of an alternative. Because it interferes with clean performance numbers, Product Vendors do not put great stress on tax management and customization (other than product selection). The advisor’s core message to investors is that the advisor is a guide to selecting the best performing investments. Product vendors have a simple message that is easy to market.

  2. Customized Traders. These firms approach portfolio management one trade at a time. They take pride in being able to explain each individual trade. Even in discretionary accounts, clients may be consulted on key portfolio trading decisions. Every portfolio is different because it has its own unique history. The advisors are not focused on products, per se, but they believe that their security-level decisions will improve performance. The advisor’s core message is that they are there to help clients make better trading decisions.

    Customized Traders develop close relationships with their clients, but marketing can be a challenge because it’s hard for Customized Traders to define and deliver a consistent service. And this account-by-account, trade-by-trade approach doesn’t scale, which means it needs more people and higher costs to service the clients.

  3. Planner/Coaches. These firms view their primary role as guiding clients to make better financial decisions and maximizing their chances of meeting their goals. They’re happy to delegate stock selection, active asset allocation and rebalancing to specialists because it’s not their core strength. Planner/Coaches lean towards investments that are low-cost and tax efficient because they’re less persuaded of the value of active management, and it’s more important not to underperform benchmarks than it is to outperform them. Performance is still important, but mainly in the context of whether the client is meeting their goals. Planner/Coaches differ from Customized Traders in how they approach customization and tax management. With Customized Traders, customization and tax management is incorporated “on the fly” into trading decisions. Planner/Coaches are more comfortable delegating these tasks to specialists based on high-level instructions (e.g. “implement a Catholic SRI Screen,” “Actively tax loss harvest,” “Apply a Tax Budget of $10,000”).

    Because of the intrinsically personalized nature of their practice, Planners/Coaches face challenges with scale, but they have the potential to develop the deepest client relationships of the three advisory types.


How can you tell from the outside what any given firm “really” is? Ignore what they say. There’s a lot of noise and generalities that will obscure what’s going on. But in the special case where the firm’s portfolios include individual equities (with all-mutual fund or all-ETF portfolios, it’s a bit harder), there’s a simple way to tell the different types of firms apart: look at how they trade the equities. Here’s the key:

  • Product Vendors. If they follow equity models, and they implement trading and management with a sleeve-based accounting system, they’re Product Vendors.
    Sleeve-based systems are expensive to operate and offer only limited support for customization and portfolio-level tax optimization. Their main purpose is to support sleeve-level performance reporting. This is vital to Product Vendors, not to others.

  • Customized Traders. If the firm buys individual equities but they don’t use equity models, they’re Customized Traders.

    Models are ill suited to the world of Customized Traders. The whole point of the Customized Trader approach is that every portfolio is a unique series of trades. Customized Traders may have buy lists, concentration guidelines and the like, but not models.

  • Planner/Coaches. If they follow equity models, and they implement holistically (without sleeves), they’re Planner/Coaches.

    Implementing models holistically is, relative to a sleeve-based approach, lower cost, more tax efficient, more customizable and results in lower overall return dispersion. But it doesn’t lend itself to sleeve-level performance reports. That’s OK for Planner/Coaches. They want to maximize tax efficiency, minimize costs and keep tight control of the portfolio’s overall risk characteristics. The performance of the portfolio as a whole is important. The performance of the individual components, less so. 

There isn’t a single best type of firm to be, but it is important that each firm recognizes who they are so they can focus on their competitive advantages and develop sales and marketing efforts consistent with the type of service they provide.

And firms can change. We see a trend across the board of Product Vendors and Customized Traders moving in the direction of becoming Planner/Coaches. However, it’s not an easy transition. It usually requires new systems, but that’s only the beginning. It requires reinventing the client experience — everything from client reports to client meetings to marketing and sales. This has been a challenge for many firms. The first step? Identifying who you are today, so you can understand what you will need to change.

President, Co-Founder