Is a Wealth Manager right for you?

3 October 2023

Understanding Wealth Managers

Managing one’s finances can often be a daunting task. Deciding on financial goals, making investment choices, handling taxes, and maintaining a balanced portfolio can overwhelm those without expertise in finance. This is where experts come in, professionals who specialize in providing financial advice. These individuals, commonly known as financial advisors, offer insights into suitable investment options based on your circumstances. However, when you require someone to make investment decisions on your behalf, a wealth manager is the right choice.

Wealth managers not only offer tailored financial advice but also execute the entire plan on your behalf. You entrust your funds to them, and they handle the investments. It’s that straightforward. Additionally, wealth managers assist in other aspects of financial management, such as setting up trusts for your children, tax planning, and insurance. In essence, they provide a comprehensive wealth management service.

Historically, wealth management was accessible mainly to the ultra-wealthy. However, increased competition and the emergence of new financial products have made these services more accessible to a broader range of people. If you’re seeking ways to optimize your financial assets, you’re in the right place. We will elucidate how wealth managers justify their fees, elucidate their services, and help you decide whether hiring one is the right path for you.

Key Takeaway: Wealth management involves providing financial advice and actively managing your investments.

Financial Planning

Money, in and of itself, holds little utility. While characters like Scrooge McDuck may enjoy swimming in pools of coins, most individuals need their wealth to serve specific purposes. Financial planning plays a pivotal role here. Many individuals make the mistake of prioritizing short-term gains over long-term financial stability. Wealth managers work closely with you to identify your goals, considering both short-term objectives like buying a house or funding a wedding and longer-term plans like early retirement or building substantial savings.

A significant component of financial planning revolves around retirement preparation, whether it involves setting up a pension or selecting appropriate investment vehicles. Wealth managers excel in tax planning, which can be instrumental in preserving your wealth for future generations through strategies such as trusts and pre-death gifting.

Wealth managers also factor in your financial constraints. For example, if you earn a modest income of $30,000, saving for a substantial pension will require different strategies compared to someone earning $100,000. Similarly, if you anticipate covering your children’s college tuition, this additional expense must be considered when planning your savings. Financial planning entails striking a balance between your aspirations and your limitations.

To craft an effective financial plan, wealth managers harness the power of compound returns. Compounding ensures that your returns generate additional returns, accelerating the growth of your wealth. The sooner you start investing and the more you contribute, the faster you’ll reach your financial goals.

It’s important to remember that small sacrifices in the present can yield significant rewards in the future. For instance, if you begin saving at 40 with the goal of retiring with a $1,000,000 pension at 60, you would need a portfolio of $400,000 generating 5% returns. However, starting at 20 would require only $150,000. While it can be challenging to accumulate substantial savings at a young age, a wealth manager can assist you in budgeting and implementing tax-efficient strategies to make the most of your resources.

Your financial plan invariably involves investments as a means to grow your wealth and achieve your objectives. But how do wealth managers decide where to invest?

Key Takeaway: Wealth managers create financial plans that consider both short and long-term goals, constraints, and the power of compound returns.

Determining Investment Strategies

Once you’ve identified your financial goals and established a plan to reach them, the next step for your wealth manager is to determine the optimal investment strategies to execute your plan successfully. This begins with assessing your risk profile, which takes into account both your willingness and ability to tolerate risk.

For instance, if you have a stable financial position and a high level of investment experience, your risk tolerance may be higher than that of the average investor. Conversely, as you approach retirement, you might need a more conservative approach to safeguard your savings, as you have less time to recover from market downturns. Additionally, individuals who can endure the prospect of their investments halving in value overnight may be better suited for riskier investment options compared to those who react with anxiety to such possibilities.

Wealth managers use your risk profile to allocate your assets within a portfolio, either by tailoring an existing portfolio to your profile or by constructing a customized portfolio from scratch. A riskier profile typically includes more volatile assets with higher growth potential, such as emerging market equities, while a conservative portfolio may emphasize safer options like government bonds and corporate bonds, albeit with potentially lower long-term returns.

Some wealth managers offer “modeled” portfolios, where they provide predefined templates for various risk levels, assigning you the one that aligns with your profile. Others offer bespoke portfolios, tailored exclusively to your unique circumstances. While bespoke portfolios are typically more expensive, they may be worthwhile if your financial situation is distinctive.

The portfolio your wealth manager recommends will consist of a variety of investment products, which could include passive index funds that track entire markets, or active funds managed by professionals who seek to outperform the market by selecting individual stocks. Wealth managers often have access to these funds at more favorable rates than individual investors. Additionally, your portfolio might include investments that are not readily available to retail investors, such as private equity or venture capital investments in startups.

Once your wealth manager has determined the investment components of your portfolio, they need to manage those investments effectively.

Key Takeaway: Wealth managers tailor your investment portfolio based on your risk profile, which may include assets not accessible to individual investors.

Managing Your Investments

Wealth managers typically offer two types of services: advisory and discretionary.

In advisory wealth management, your wealth manager provides recommendations, but you retain the final decision-making authority. Discretionary wealth management, on the other hand, involves granting your wealth manager full control over buying and selling investments on your behalf. While discretionary management saves you time, it comes at the cost of reduced control over your portfolio. However, as we’ll explore in the next section, this lack of control can be advantageous.

Since wealth management primarily focuses on long-term returns, frequent trading is usually avoided. Frequent trading can incur additional costs, including transaction fees and bid-ask spreads. Instead, wealth managers construct portfolios designed to be held over extended periods.

Nevertheless, your portfolio will not be left untouched. When establishing your portfolio, you will likely establish certain rules, such as maintaining a specific percentage of your assets in equities. However, if your equities perform exceptionally well and exceed this allocation, your wealth manager may need to rebalance your portfolio. This involves selling some of your equities to bring the allocation back in line with the agreed-upon range. This ensures that your risk level remains consistent, regardless of short-term market fluctuations.

Furthermore, wealth managers continuously monitor the broader investment landscape. They often collaborate with in-house research teams dedicated to analyzing market trends and economic conditions. This “buy-side” research assists wealth managers in making informed investment decisions. It’s important to distinguish this research from “sell-side” information, which aims to encourage specific transactions with particular firms. Buy-side analysts work to help wealth managers make the right choices based on your portfolio and risk tolerance.

These analysts pay attention to global events and adjust your portfolio accordingly. For example, if an impending recession appears likely, they may reduce your equity holdings and increase allocations to safer assets like bonds. During an economic recovery, they’ll reallocate your assets to maximize returns.

Your portfolio should evolve as your circumstances change. As you age, your risk tolerance may decrease, prompting a shift to more conservative investments. Additionally, you must consider tax implications; a sudden increase in income may necessitate adjustments to your portfolio to minimize taxation.

Now, the only question remaining is how to determine if a wealth manager is the right fit for you.

Key Takeaway: Wealth managers manage your investments either in an advisory or discretionary capacity, ensuring that your portfolio aligns with your risk profile and financial goals.

Pros and Cons of Wealth Management

At Exirio, we frequently emphasize the importance of becoming financially savvy. However, there are compelling reasons to consider hiring a personal wealth manager if you have the means. Firstly, certain financial aspects, such as taxation, can be exceedingly complex, and expert guidance in these areas may ultimately save you a significant amount of money in the long run.

Perhaps even more crucially, investing can be emotionally taxing. Behavioral biases often lead individuals to make irrational decisions during market volatility. For instance, when markets decline, the natural instinct for many investors is to sell, even if it’s not the most rational course of action. This tendency affects both amateur and professional investors. By outsourcing decision-making to a wealth manager who remains emotionally detached from the market’s ups and downs, you can benefit from more objective and rational investment choices.

While robo-advisors, which utilize algorithms to manage investments, offer similar emotional detachment, wealth managers provide a tailored approach based on their understanding of your unique goals and circumstances. This contrasts with the one-size-fits-all approach of robo-advisors.

However, it’s essential to acknowledge the potential drawbacks of wealth management, primarily the associated costs. Wealth management services can be relatively expensive, with fees including:

  1. Management fee (typically 1-1.5% of your portfolio’s value annually).
  2. Advisory fees (either one-time charges or an additional percentage of your assets).
  3. Trading fees.
  4. Fund manager fees.
  5. Custody fees (around 0.2% per year for assets held with a private bank).

Collectively, these fees can substantially reduce your overall returns. Deciding whether to engage a wealth manager depends on your confidence in their expertise and whether the financial and psychological benefits outweigh the costs. If you are prepared to invest the time and effort, managing your own investments can also be a rewarding endeavor.

In summary, in this post, you’ve learned:

  • Wealth managers offer financial advice and actively manage your investments to help you achieve your financial goals.
  • They create a financial plan based on your short and long-term aspirations and financial resources.
  • Wealth managers tailor your investment portfolio to your risk profile, potentially including assets that are not accessible to individual investors.
  • Your portfolio evolves over time due to portfolio rebalancing and strategic investment decisions.
  • Wealth management services can be costly, but they offer expertise and emotional detachment that may enhance your financial outcomes.

Related posts