One reason so many people are confused and intimidated by personal finance issues — especially when trying to find a professional to help them — is the verbal fuzziness, jargon and lack of transparency that permeates so much of the messaging from financial providers.
“Wealth management” is a case in point.
What is wealth management?
What, precisely, does “wealth management” mean? How is it different from “investment management,” “money management,” “financial planning” and other terms that often are used to describe helping people with money-related issues?
Let’s start with some basics to cut through the fog. First, there is no legal or regulatory definition of “wealth management.” It’s an elastic term that can mean almost anything. In the financial services industry — which includes banks, brokerage firms, mutual fund companies, insurance companies and advisor-owned firms that provide advice, investments and related services — wealth management usually means a package of services intended to help wealthier individuals and families manage and grow their wealth. Those services typically include investment management, estate and legal planning, tax and accounting services, philanthropy management and sometimes certain administrative services, including bill-paying and property management.
How much money is required for wealth management?
How wealthy do you have to be to require wealth management services? That’s elastic too. Some advisors and firms will provide what they call wealth management services to pretty much anyone who walks through the door. For other firms, depending on whom they wish to serve, account minimums may be $100,000, $1 million or considerably more. The key point to remember is that as an individual or a family becomes wealthier, which usually means having a combination of very high income and considerable assets (real estate, businesses and financial assets, including stocks and bonds), it becomes more complicated to effectively manage the financial aspects of their life. “Wealth managers” are the people who claim to do that.
Who are wealth managers and what do they do?
Wealth managers perform a variety of services that depend on the type of firm they work for and the clients they serve.
Family offices
Individuals at the very upper end of the wealth spectrum — think multi-billionaire tech entrepreneurs — typically create family offices to manage their wealth. Family offices are essentially one-client private wealth management firms that employ investment experts, tax professionals, lawyers and specialists in areas such as philanthropy and art. In addition to handling those interrelated areas themselves, they often also identify and oversee outside experts. Multi-family offices perform the same function for small groups of extremely wealthy families.
Trust companies
Also serving the ultra-wealthy are the nation’s old-line trust companies, many of which were established in the 19th century by founders of America’s giant industrial and energy companies, essentially as family offices. At many trust companies, a $10 million minimum account size is common.
Private wealth management units
Serving those whose wealth is not in the stratosphere but merely at high altitudes are the wealth management units of giant banks, such as Merrill Lynch, Morgan Stanley, JPMorgan Chase and UBS, which employ financial advisors to seek out and serve wealthy clients. These firms and others like them have a variety of account-size minimums, from as little as $1,000 to $5 million or more, depending on the nature of the services provided.
Registered investment advisers
In competition with those firms are independently-owned wealth management firms technically known as registered investment advisors, or RIAs. These firms are required to act as fiduciaries, meaning that all decisions must be made with the client’s interest coming before the interests of the firm.
Robo-advisors
There also are several “robo-advisors” that provide a combination of self-directed and human-assisted wealth management services. These include standalone firms, units of large financial firms that also have advisors serving their own clients and mutual fund giants, such as Vanguard and Fidelity, who maintain teams of advisors at call centers.
Many firms and advisors whose clients consist largely of those with $5 million and less in total assets now also call themselves wealth managers, perhaps in part because the term may sound more upscale than “financial advisor,” “financial planner” or the old-fashioned “broker.” Some provide basic versions of the estate and tax planning services that managers serving wealthier clients provide, while others have relationships with non-affiliated attorneys, accountants and other experts who provide such services. Most of the work they do for their so-called “mass affluent” clients consists of financial planning and investment management. Many firms that focus on financial planning charge fees, which may be hourly, monthly or project-based, while others may charge asset-based fees or commissions, depending on their firm’s regulator.
How much do wealth managers get paid?
Most wealth managers charge a fee based on a percentage of the assets they manage, with many using a sliding fee scale and charging a lower percentage as a client’s assets under management (AUM) increase. Ken Robinson, a certified financial planner (CFP) and founder of Practical Financial Planning in Rocky River, Ohio, said that while a 1% AUM fee is typical, the variation around that level is great, as are the services delivered for what could be the same fee.
“It’s difficult to make apples-to-apples comparisons since some firms may focus mostly on investment management, for example, while others concentrate on financial planning; some may check in with clients once a year, while others meet with clients four or six times a year,” he said, noting that prospective clients should understand the services they will receive for the fees they pay.
Retirement and wealth management
The question of whether to use a wealth manager often arises as one approaches retirement. Many times, couples nearing retirement have paid off their mortgage, finished paying for their children’s education, are in their highest-earning years and have retirement accounts that have grown substantially. Whether they consider themselves wealthy or not, such couples may have a net worth of more than $1 million. As they transition to living in retirement, many seek guidance on how that nest egg will translate into income.
A professional most likely to be helpful in the transition to retirement — whatever term they use to describe themselves — will be one who can help not only with investing but also with financial planning (especially budgeting and spending issues), Social Security claiming strategies, tax planning and estate planning. Also important for retirees to consider is the income value of having an annuity, which many wealth managers and advisors may avoid discussing because buying an annuity could reduce the assets they manage, which lowers their own income.
Frequently asked questions (FAQs)
Unless you come into a sudden financial windfall, the realization that you need help managing increasingly complex financial affairs will come about gradually. One signal may be a need to shift from doing your tax return yourself to using an accountant because your income has grown and become more complex. Another sign may be having to make decisions about stock options and real estate investments. Such signals, or simply the realization that managing your finances has become too much to handle on your own, indicate it’s time to consider retaining a wealth manager.
Most wealth managers charge a fee based on a percentage of the assets they manage. Fees average about 1%. When shopping for a wealth manager, remember that everything, including fees, can be negotiated.
Value, like beauty, is in the eye of the beholder. If the peace of mind, investment returns, tax savings and time freed up by using a wealth manager outweigh the expense, then having a wealth manager is worth the cost.
Neither term is a legal or regulatory designation, and they are often used interchangeably. “Wealth manager,” however, connotes a financial advice professional who specializes in serving wealthier clients who need help with a broad range of complex wealth-related issues. “Financial advisor” tends to describe someone who can help a client located anywhere across the wealth spectrum.
