What is Wealth Management?
Wealth management (WM) or wealth management advisory (WMA) provides solutions to a wide array of clients ranging from affluent to high-net-worth (HNW) and ultra-high-net-worth (UHNW) individuals and families. It is a discipline that incorporates structuring and planning wealth to assist in growing, preserving, and protecting wealth, whilst passing it onto the family in a tax-efficient manner and in accordance with their wishes. Wealth management brings together tax planning, wealth protection, estate planning, succession planning, and family governance. [1]
Strategies of a Wealth Manager
The wealth manager starts by developing a plan that will maintain and increase a client’s wealth based on their financial situation, goals, and risk tolerance. Importantly, each part of a client’s financial picture, whether it is tax planning or wills and estates, is coordinated together to protect the wealth of the client. This may coincide with financial projections and retirement planning. After the original plan is developed, the manager meets regularly with clients to update goals, review, and rebalance the financial portfolio. At the same time, they may investigate whether additional services are needed, with the ultimate goal being to remain in the client’s service throughout their lifetime. [2]
Wealth Management vs. Portfolio Management
Wealth management offers more complete financial planning than portfolio management. It includes comprehensive guidance on a client’s financial situation, including investment management, estate and tax planning, accounting, retirement planning and even legal guidance in some cases. Portfolio management refers to a service or person who crafts an investing strategy on behalf of a client. Portfolio management involves picking investment that minimizes risk and maximizes returns, but typically does not include other financial planning services. [3]
Wealth Management vs. Financial Advisor
“Financial advisor” is a general term for various financial professionals and has no regulation or certification requirement. A wealth manager typically refers to a specific kind of financial advisor whose work focuses on topics that concern very wealthy individuals. A wealth manager usually has a significantly higher investment minimum than a regular financial advisor. Wealth managers also tend to offer more services than financial advisors. These services can include estate planning, trust services, family legacy planning, charitable giving planning and legal planning. Some wealth managers have even incorporated concierge health care into their services. Always be sure to vet whatever types of financial advisors you use. [3]
Wealth Management – Key Terms
Diversification
Diversification is spreading risk and reward within an asset class. Because it is difficult to know which subset of an asset class or sector is likely to outperform another diversification seeks to capture the returns of all of the sectors over time while reducing volatility at any given time. Real diversification is made across various classes of securities, sectors of the economy, and geographical regions. [4]
Rebalancing
Rebalancing is used to return a portfolio to its original target allocation at regular intervals, usually annually. This is done to reinstate the original asset mix when the movements of the markets force it out of kilter. For example, a portfolio that starts out with a 70% equity and 30% fixed-income allocation could, after an extended market rally, shift to an 80/20 allocation. The investor has made a good profit, but the portfolio now has more risk than the investor can tolerate.
Rebalancing generally involves selling high-priced securities and putting that money to work in lower-priced and out-of-favor securities the annual exercise of rebalancing allows the investor to capture gains and expand the opportunity for growth in high potential sectors while keeping the portfolio aligned with the original risk/return profile. [4]
Asset Allocation
Asset allocation means that you spread your money among different assets, such as equities, fixed-income, and cash equivalents. Each of these responds differently to different trends in the market, so having a blend of them in your portfolio will help you minimize losses in a market downturn. [5]
Hedge Strategies
An investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts. [6]
Fixed Income
Any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. For example, the borrower may have to pay interest at a fixed rate once a year and repay the principal amount on maturity. Fixed-income securities can be contrasted with equity securities – often referred to as stocks and shares – that create no obligation to pay dividends or any other form of income. [7]
Active Portfolio Management
Investors who implement an active management approach use fund managers or brokers to buy and sell stocks in an attempt to outperform a specific index, such as the Standard & Poor’s 500 Index or the Russell 1000 Index.
An actively managed investment fund has an individual portfolio manager, co-managers, or a team of managers actively making investment decisions for the fund. The success of an actively managed fund depends on a combination of in-depth research, market forecasting, and the expertise of the portfolio manager or management team.
Portfolio managers engaged in active investing pay close attention to market trends, shifts in the economy, changes to the political landscape, and news that affects companies. This data is used to time the purchase or sale of investments in an effort to take advantage of irregularities. Active managers claim that these processes will boost the potential for returns higher than those achieved by simply mimicking the holdings on a particular index.
Trying to beat the market inevitably involves additional market risk. Indexing eliminates this particular risk, as there is no possibility of human error in terms of stock selection. Index funds are also traded less frequently, which means that they incur lower expense ratios and are more tax-efficient than actively managed funds. [4]
Passive Portfolio Management
Passive portfolio management also referred to as index fund management aims to duplicate the return of a particular market index or benchmark. Managers buy the same stocks that are listed on the index, using the same weighting that they represent in the index.
A passive strategy portfolio can be structured as an exchange-traded fund (ETF), a mutual fund, or a unit investment trust. Index funds are branded as passively managed because each has a portfolio manager whose job is to replicate the index rather than select the assets purchased or sold.
The management fees assessed on passive portfolios or funds are typically far lower than active management strategies. [4]