Wealth Management and Investment Management: All You Need to Know

Wealth Management and Investment Management All You Need to Know

Whether you keep yourself abreast with financial terminology or not, you are bound to have heard terms such as wealth management and investment management. Despite these terms being very prevalent, many people aren’t exactly familiar with what the terms wealth management and investment management mean. With this post we’ll help you understand what these terms mean and clear all your doubts. We will also familiarize you with the machinations of wealth and investment management and tell you how availing the services of wealth management firms will help you grow your wealth. Without further ado, let’s dive into the world of wealth management and investment management.

What Is Wealth Management?

Wealth management is a financial investment advisory service which utilizes a combination of various financial services to help serve the needs of affluent clients and enhance their wealth. Wealth management is a detailed consultative process which begins with a financial advisor gathering information about what the client wants. Once that information is obtained, the wealth management firm customizes a financial strategy tailor made for the client’s needs and desires. To execute this masterfully, a wealth management firm utilizes the appropriate financial tools and services.

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The spectrum of financial disciplines that wealth management firms like utilize include financial and investment advice, legal or estate planning, children’s education, accounting, tax services, and retirement planning. These are used to effectively manage the affluent client’s wealth. For this service, wealth management firms charge a nominal fees. Wealth management practices differ from country to country. If you are looking for some wealth management advice, you can get in touch with a prominent wealth management firm in the city.

Understanding Wealth Management

Wealth management isn’t merely an investment advice and it can cover all the financial aspects of a client’s life. The core concept behind the functioning of wealth management is providing a holistic approach towards managing the wealth of affluent clients. Instead of seeking and trying and work multiple ideas and financial products from a lot of different professionals, affluent clients can get all the services needed from a single source. In wealth management firms, a single manager usually coordinates all the services required to manage the affluent client’s money and plan for the current and future needs of the client and their family. 

Generally, a wealth management advisor’s role requires services in every aspect of the financial field, some wealth management advisors do specialize in certain areas. This usually depends on the expertise of the wealth manager involved or the primary focus of the business of the wealth management advisor’s operation. 

Wealth management advisors who are part of a firm famous for investments are likely going to be adept at market strategy. Those working with a large bank will be better suited in areas such as management of trusts, various other credit options and insurance options.

Certain specific cases will also require a wealth management advisor to curate and coordinate input from external financial experts and some of the client’s agents such as lawyers and accountants as well. Some wealth management advisors also help clients with general banking services and philanthropy.

While a wealth management advisor can not function without affluent clients, all affluent people don’t need wealth management advisors. If an affluent individual wants to focus his/her wealth on real estate alone (and doesn’t have many financial responsibilities), a realtor will serve his/her needs better than a wealth manager. However, financial wisdom always recommends diversifying one’s investments and in such cases, a wealth management advisor is really useful. A wealth management advisor can help affluent individuals who have a wide and diverse array of needs.

Wealth Management Business Structures

Wealth management advisors can work under different titles such as a wealth manager, financial consultant or financial advisor. Wealth managers can also work as part of a small-scale business or as part of a larger firm. Such firms are usually associated with the finance industry. Depending on the agreement with the wealth management firm, clients may avail the services of a single wealth managers or have a team of dedicated wealth managers working for them.

Wealth Management Strategies

Wealth managers start the wealth management process by creating and developing a plan that will help increase the client’s wealth over a targeted period of time. The plan is based on the client’s financial situation, goals and risk appetite. After developing the original plan, the wealth manager meets the client on a regular basis in order to review the current system, rebalance the financial portfolio and update the financial goals if required. In case any additional services are deemed necessary, they are also recommended to the client. Wealth management firms intend to be in a lifetime contract with the client and are focused on nurturing a long lasting, fruitful and rewarding relationship with the client. 

What Is Investment Management?

Investment management refers to the handling of financial assets and other investments—not only buying and selling them. Management includes devising a short- or long-term strategy for acquiring and disposing of portfolio holdings. It can also include banking, budgeting, and tax services and duties, as well.

The term most often refers to managing the holdings within an investment portfolio, and the trading of them to achieve a specific investment objective. Investment management is also known as money management, portfolio management, or wealth management.

Investment Management Basics

Professional investment management aims to meet particular investment goals for the benefit of clients whose money they have the responsibility of overseeing. These clients may be individual investors or institutional investors such as pension funds, retirement plans, governments, educational institutions, and insurance companies.

Financial statement analysis, stock selection, monitoring of existing investments, asset allocation, portfolio strategy and implementation are some of the services that are covered under investment management. Investment management may also include financial planning and advising services, not only overseeing a client’s portfolio but coordinating it with other assets and life goals. Real estate, commodities, bonds and equities are some of the financial assets and securities that professional investment managers deal with. The manager may also manage real assets such as precious metals, commodities, and artwork. Managers can help align investment to match retirement and estate planning as well as asset distribution.

In corporate finance, investment management includes ensuring a company’s tangible and intangible assets are maintained, accounted for, and well-utilized.

According to an annual study by research and advisory firm Willis Towers Watson and the financial newspaper Pensions & Investments, the investment management industry is growing. When based on the combined holdings of the 500 biggest investment managers, the global industry had approximately US$93.8 trillion assets under management (AUM) in 2018. This figure is up from an estimated $79 trillion in 2017.

Running an investment management business involves many responsibilities. The firm must hire professional managers to deal, market, settle, and prepare reports for clients. Other duties include conducting internal audits and researching individual assets—or asset classes and industrial sectors.

Aside from hiring marketers and training managers who direct the flow of investments, those who head investment management firms must ensure they move within legislative and regulatory constraints, examine internal systems and controls, account for cash flow and properly track record transactions and fund valuations.

In general, if an investment manager has assets of more than $25 million under management (AUM) or works as an advisor to investment companies that offer mutual funds, he/she needs to be a registered investment advisor (RIA). As a registered advisor, they must register with the Securities and Exchange Commission (SEC) and state securities administrators. It also means they accept the fiduciary duty to their clients. As a fiduciary, these advisors promise to act in their client’s best interests or face criminal liability. Firms or advisors managing less than $25 million in assets typically register only in their states of operation.

Investment managers are usually compensated via a management fee, usually a percentage of the value of the portfolio held for a client. Management fees range from 0.35% to 2% annually. Also, fees are typically on a sliding scale—the more assets a client has, the lower the fee they can negotiate. The average management fee is around 1%.

Investment Management: Pros and Cons

The field of investment management is really lucrative when it comes to returns, but there are a lot of problems that are associated with investment management firm. Market behaviour dictates the revenue stream of investment management firms. This direct connection means that the company’s profits depend on market valuations. A major decline in asset prices can cause a decline in the firm’s revenue, especially if the price reduction is great compared to the ongoing and steady company costs of operation. Also, clients may be impatient during hard times and bear markets, and even above-average fund performance may not be able to sustain a client’s portfolio.

Some of the pros of investment management are: Professional analysis, full-time diligence, ability to time or outperform market, ability to protect portfolio in down times

Some of the cons of investment management are: Sizeable fees, profits fluctuate with market, challenges from passively managed vehicles, robo-advisors.

Since the mid-2000s, the investment management industry has also faced challenges from two other sources.

The increase of robo-advisors which are digital platforms that provide automated, algorithm-driven investment strategies and asset allocation

The availability of exchange-traded funds, whose portfolios mirror that of a benchmark index

The former challenge does not use human beings at all other than the programmer writing the algorithm. The latter hindrance increases the usage of passive management since human fund managers have to make a few investment decisions. As a result, both can charge far lower fees than human fund managers can charge. However, according to some surveys, these lower-cost alternatives will often outperform actively managed funds either outright or in terms of overall return primarily due to them not having heavy fees dragging them down.

The dual threat of competition requires investment management firms to hire professionals with the right skill set. Though some clients look at the performance of individual investment managers, others check out the overall performance of the firm. A top notch investment management company’s ability is measured by the money it makes its client during the good times, but also the losses it restricts during the bad.

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