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What is Wealth Management and Why Do I Need It?

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As many people with significant assets near retirement, they often want to know what is wealth management and what it can offer.

Wealth management entails all management functions of a person’s wealth and assets. This includes both financial planning and investment management services. In contrast to other financial professionals, wealth managers are concerned with delivering a full spectrum of financial services that meet whatever needs their clients may have.

In Canada, the highest-level wealth managers are often referred to as portfolio managers. These financial professionals have an actual fiduciary duty, in law, to their clients. This means that these wealth managers must always act first with the best interest of their clients in mind. In the United States, high-level wealth managers are often referred to as investment advisors, also having a legally binding fiduciary duty towards their clients.

Wealth management is, therefore, a financial service that seeks, first and foremost, to help clients devise long-term financial goals that are tailored to their individual needs and then to meet those goals through the design and implementation of broad investment strategies that are most likely to succeed.

In North America, the term wealth management usually implies that the client has a liquid net worth, usually excluding residential real estate, of at least $250,000. Some major wealth management companies in Canada and the United States have limited financial advisory programs that become available to clients with as little as $100,000. On the other hand, many other wealth management companies will not be interested in clients with less than $500,000 of investable capital.

The bottom line is that wealth management is exactly what the name implies: high-level strategic investment services for those with sufficient wealth to merit a sophisticated investment approach. Wealth managers will typically be full-time finance professionals who provide the client with highly personalized and attentive service.

Why is wealth management important?

Everyone has experienced buyer’s remorse at some point in their lives. We’ve all had that voice in our heads asking if we really needed to buy that $1,000 stereo or if we could have held on to our old car for another year rather than splurging on a new one. This is a perfectly natural response. It’s our minds, which evolved in an environment where big mistakes were often fatal, telling us to very carefully consider large outlays of resources so that we don’t experience opportunity costs that could imperil our very survival.

Luckily, this response is mostly atavistic, largely irrelevant in our modern world of plentiful resources where many people can easily make $1,000 in a single week. However, when it comes to capital outlays that represent life-changing sums that a person is unlikely to be able to replace, those mental alarm bells that lead to indecision and buyer’s remorse are well worth listening to.

It is when we start talking about life-changing money, sums that individuals really can’t afford to lose without dramatically affecting their lifestyle and their future, where the indispensability of wealth management comes into focus. While there are some people with the disposition, natural talent and time to become their own wealth managers, the simple fact is that 99 percent of affluent people simply lack both the time and the inclination to become full-time financial managers for their own accounts. And for those who don’t have 40 hours per week to put in, attempting to follow a set-it-and-forget-it passive investing strategy will frequently prove to be a mistake.

Even above earning outsized returns, a wealth manager’s primary duty is to prevent their clients from experiencing loss of capital. This is realized through the creation of a robust and diversified portfolio.

Wealth management versus asset management

Wealth managers differ from asset managers in the scope and purpose of their services. Wealth managers tend, in theory at least, to be independent of and disinterested in any particular investment or financial product. The job of the wealth manager is always to help his client articulate long-term financial goals that make sense in the context of that client’s life. The wealth manager will then design strategies to achieve those goals while making the day-to-day investing decisions that will be most likely to achieve them.

This means that a wealth manager may be carrying out tasks that range from establishing retirement accounts to writing options to acquiring individual stocks and bonds for their clients’ portfolios. Wealth managers may even use advanced trading techniques, such as evidence-based technical analysis, in order to maximize their client’s return. A wealth manager will usually have strong working knowledge across virtually the entire spectrum of modern finance, from banking to fundamental stock analysis to real estate to portfolio theory. And a good wealth manager will have a deep enough understanding of all asset classes to make the right decisions on their client’s behalf, no matter what type of investments are called for in reaching that client’s specific goals.

On the other hand, asset management often does not involve a fiduciary duty to any one client or group of clients. Asset management usually refers to the full-time management of a particular asset or class of assets. In practice, this means that an asset manager can be anyone from the manager of a local apartment complex all the way up to the head of a hundred-billion-dollar hedge fund.

The important distinction is that an asset manager is primarily concerned with maximizing the value of the assets under their management. Asset managers working in the financial world typically receive fees that are based on the value of the assets under management. And such payment structures can easily lead to perverse incentives, causing the asset manager’s best interests to drift away from those of their investors.

While making investments with asset managers can sometimes be a good move, caution is always warranted and due diligence in the investment should always be carefully conducted. For those who are not professional investors, going with a financial advisor or wealth manager who has a legally defined fiduciary duty towards the client will almost always be the best choice.

Asset managers will often have a vested interest in either selling a particular investment product or generating market demand for the assets under their management. More often than not, these situations turn out far better for the asset manager than for their clients.

What kinds of services do wealth managers provide?

Earlier, we touched on some of the services that wealth managers offer. A wealth manager is truly a generalist, a consummate finance professional who has deep expertise across a wide breadth of products, services and techniques that can be translated into meeting client needs. Some things at which a wealth manager will be adept include:

  • Setting up and managing retirement accounts. This can include everything from simply setting up TFSA accounts all the way to sophisticated strategies that use tax deferral and sheltering as a means to generate outsized compound returns.
  • Analyzing and choosing individual stocks. Wealth managers will often be adept at the fundamental analysis of individual securities, including assessing industry-wide factors, analyzing balance sheets and income statements and making independent valuations of publicly traded firms.
  • Dealing with fixed-income securities. Wealth managers understand the ins and outs of bonds, annuities and life insurance, helping clients design and implement long-term strategies that hedge against risk while providing lifestyle continuity into retirement.

Choosing a good wealth manager is the smart play

Most affluent individuals have achieved success through hard work and hard-won abilities in their chosen fields. Few who have no mechanical expertise would try to fix their own transmission when it breaks. It makes even less sense to attempt to master the theory and skills of professional investing on the fly, especially when millions are potentially at stake.

The right wealth manager can help affluent clients achieve their goals through the same kinds of sophisticated investing strategies that are used by hedge funds, major corporations and the world’s most successful investors. For the vast majority of those with significant assets, choosing a solid wealth manager is the smartest play they can make.

Exponent Investment Management