Wealth Management: What it is and How it works

What is Wealth Management? 

Wealth management is a niche professional advisory service that devises personalised strategy for a client using various financial products and services. In some cases, depending on the client’s complex needs, use of all specialized financial services like taxation, estate planning, accounting, philanthropy management, risk management, retirement planning, will and trust services, etc, may be done. A good wealth management company acts as a one-stop-shop for all the needs of busy, affluent individuals or families. The aim is to increase returns from the investment portfolio and maximize the family’s overall financial well-being.

Explore: Difference Between Financial Planning and Wealth Management

Standard Features of a Wealth Management Company

Some of the standard features that can be seen across wealth management firms are as follows: 

SEBI & other Regulations

These firms are governed by various regulations depending on the nature of the service rendered. It is common to find these firms getting licensed with SEBI as Registered Investment Advisor, Portfolio Management Service (PMS), Alternative Investment Fund (AIF), etc. These licenses help generate confidence in investors that the firm complies with the applicable legal and ethical requirements. 

Client First

These firms act as a “fiduciary” to you. This means a relationship of trust whereby the firm keeps your interests first. The firm can only recommend investment products after a detailed analysis of your risk profile and financial goals. This is in welcome contrast to the general trend of financial companies pushing only those products that generate the maximum commission. 

Compensation Model

These firms generally charge a fee for their efforts and given the fiduciary nature of the work involved. The fee is generally linked as a nominal percentage of the volume of investment assets you assign to manage on your behalf. 

Process Driven Teamwork

Instead of a one-man army, wealth managers are generally organized as a separate division in a bank or small independent boutique firms. These firms consist of skilled professionals who are subject matter experts in multiple areas. These firms have well-defined internal processes for on boarding and service delivery of clients. 

How Wealth Management Works? 

An overall good wealth management process generally consists of the following step-wise sub-processes: 

Client Onboarding:  You have to first sign a legal agreement with the firm. Then, the firm creates your login credentials to their client portal, collects your family’s income and financial investment details, and fixes up an appointment for a kick-off meeting. 

Initial Meeting to understand goal/need: The wealth managers conduct an initial meeting with you and your family to understand the overall financial situation, needs, aspirations and goals, and any financial worries and pain points. The meeting also focusses on the more nuanced discussion about the existing financial situation and investments.

Risk Profiling and Asset Allocation: The wealth managers or advisors creates your risk profile. He/she can do this via a simple questionnaire or a complex Artificial Intelligence-based tool. Basis the risk profile, the wealth manager, arrives at the ideal asset allocation. 

Plan Preparation & asset allocation: The wealth advisor prepares a financial plan. A plan consists of insurance needs analysis and goal-wise investment plans. It also contains additional solutions to re-align the existing investment portfolio to align with ideal asset allocation. The plan also has recommendations on reducing the tax liability, succession aspects, etc. Once the plan is ready, the wealth manager sets up a meeting with you to explain the plan and get a sign-off on plan implementation. 

Plan Implementation: Once you provide your signoff, the wealth manager coordinates with his/her back-office team. This is done to initiate the purchase of investments on behalf of the client. 

Plan Progress Tracking – Portfolio Audit: They actively manage your portfolio at all times. He/she does this by setting up periodic meetings to track the plan progress and assess the need for any course correction. 

What should you Consider While Hiring a Wealth Manager? 

• Qualifications, expertise, and licenses: This is the most important. Check whether the wealth manager is sufficiently licensed for the activities that it performs. The licenses should be active and not expired. Check the profile of the team members of the firm for their qualifications and experience. 
• Transparency: A good wealth management firm’s website must clearly state matters like investment philosophy, fee model, past performance, licenses, Code of Ethics, and other regulatory disclosures. Checking this will give you a fair idea of the level of transparency maintained by the firm. 
• Investment philosophy: A clear-cut and objective investment philosophy forms the bedrock of any good wealth management process. It shows that the firm follows a process-driven approach to investing. Review the investment philosophy to see how much it aligns with your preferences. Don’t hesitate to ask questions if anything is not clear. 
• Investment performance: While past performance is not a guide to future performance, it still acts as a valuable benchmark for selecting. While checking the performance, pay special attention to the down phases of the markets to see if the fund could hold its performance in those times. 
• Range of services: A good wealth advisor must provide a range of comprehensive services across financial services like accounting, tax, estate planning, etc. Ask whether these services are available in-house or provided externally. Prefer the former option to prevent dilution in service quality and the possibility of delay. In the case of external providers, check for their credentials and capability in their respective fields.  
• Quality of service: Service excellence acts as a significant differentiator in this industry. The best way you can check on the service levels is to speak to the past and present clients of the firm. 

What are the Roles and Responsibilities of a Wealth Manager?

The wealth managers need to play many hats depending on client requirements and requires both hard and soft skills. The hard skills represent knowledge of various investment products, taxation, and regulations. The soft skills represent the wealth manager’s overall EQ (emotional quotient) like communication, presentation, and counseling skills. A mix of skills is necessary to understand your needs, dreams, and anxieties related to money and prepare objective and precise plans for meeting those goals. 

Some of the prominent roles and responsibilities of a wealth manager include the following:

• Devise solutions and provide support on various investment, tax, and estate planning matters
• Provide a quick solution to your concerns and manage the overall relationship with you 
• Keep you updated on the new and upcoming financial changes and government regulations (for, e.g., Union Budget) and its impact on your investment portfolio
• Provide counseling support in challenging market situations so that you don’t panic but rather stick to your investment plan
• Use various financial tools and software to prepare a customized financial plan. Explain the plan calculations to you in a simple way and get your implementation signoff 
• Coordinate with the back office and other experts in the team regarding the implementation of plan recommendations.
• Regularly track the performance of your financial plan and hold periodic meetings with you to check if any changes need to be made
• Update you of new investment opportunities along with a suitability and risk analysis 
• Develop and share presentations and other educational materials with you to build your financial knowledge 

What is Asset Management? 

Imagine that you have just won a lottery of say INR 5 MN and don’t know where to invest this money. You hire an asset manager who invests your money in the right avenues as per your risk profile. This is asset management for you, plain and simple. The aim is to maximize return while keeping the risk to an acceptable level. The asset manager can generally be a bank or even a small investment advisory firm. 

A good asset management firm needs to register itself with SEBI as an “Investment Advisor”. It generally maintains a clear investment philosophy and a well-researched list of investment products. The asset manager finalizes the risk profile and asset allocation. Then he/she chooses the right investment products and invests your money in those products as per the pre-decided asset allocation. 

After the investment is made, the asset manager actively tracks the performance of the investment. He/she then makes appropriate changes in the investment portfolio as per the market movements. 

What is the difference between Wealth Management and Asset Management? 

Wealth management is a comprehensive and holistic activity. A wealth manager evaluates a family’s overall financial situation and goals and devises appropriate solutions for those goals. It considers things like risk profiling, investment suitability analysis, insurance, cash management, asset allocation, tax planning, estate planning, charitable giving etc. 

In contrast, asset management is limited and narrow in its approach. The aim is only to generate decent returns while keeping the risks to a manageable level.  It does not concern itself with broader aspects like financial goals, succession plan, etc. In a way, asset management is a subset of wealth management. The only downside is that the investment portfolio may not be fully aligned to the family’s financial needs. In the long run, this can even impact the achievability of the goals. 

Conclusion

Wealth management is an industry whose time has come. Increasingly, young and affluent investors are warming up to the idea of seeking professional and holistic advice to sort out the many pieces of their financial puzzle. Your focus as an investor should be finding a trusted wealth manager who understands your unique needs and puts your interests first. A good wealth manager by your side not only helps you make your money work harder but also reduces your money worries and helps you get a peaceful night’s sleep.

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