Wealth Management
Key Points:
• Wealth management refers to the comprehensive financial planning services provided to high-net-worth individuals by qualified financial advisors.
• Individuals with highly complex financial situations benefit from wealth managers, as working with a single, broadly knowledgeable professional is preferable to culling advice from many different specialists.
• Wealth managers advise on an extremely broad range of financial areas, including investment guidance, estate planning, tax services, philanthropy, and retirement planning.
• Fee-only wealth managers tend to be preferable to fee-based wealth managers, as fee-only wealth managers are fiduciaries, who are legally and ethically prohibited from conflicts of interest between themselves and their clients.
• Many wealth managers have achieved additional certifications, including CFP® certificants and CFA® charterholders.
Wealth management refers to the comprehensive financial planning services provided to high-net-worth individuals (HNWIs) by qualified financial advisors. While all financial advisors and financial planners provide services geared towards cultivating and sustaining wealth, wealth managers specifically work with individuals who already have substantial stores of wealth — typically at least $1 million — and whose financial needs are extremely diverse and complex. Most individuals and firms who offer wealth management services have some kind of required net worth minimum, sometimes as high as $10 million for the most complex plans.
The primary value proposition intrinsic to wealth management is that, unlike other, more specialized kinds of financial advising, wealth management clients work with a single advisor with a broad range of expertise, as opposed to multiple advisors who specialize in different areas. Furthermore, wealth managers often coordinate with outside experts on their clients’ behalves, liaising with attorneys, accountants, and more, in the event that clients would benefit from their specific expertise. For clients, this means a single point of contact, and significantly less responsibility on their plates.
Because wealth management benefits individuals who have already accumulated large stores of wealth, it is considered the highest level of financial advising. As such, wealth managers themselves tend to undergo rigorous certification processes, attaining credentials most commonly including Certified Financial Planner™ professional (or CFP® certificant) and Chartered Financial Analyst® (CFA® charterholder) — distinctions between these certifications are explained below. When searching for wealth managers, individuals should vet each wealth manager deeply, looking for these certifications as part of the process.
Wealth managers operate in a range of contexts, sometimes affiliated with small, boutique firms, sometimes part of a broader wealth management team at a large-size company. The most coveted wealth managers operate on a fee-only basis. This means they are paid according to a flat fee, whether yearly, monthly, or based on a percentage of their assets under management (AUM). This contrasts with fee-based financial planners, who, in addition to being paid by a flat fee, can legally accept commissions from product sales and financial transactions. The conflict of interest inherent to this pay structure is what drives many potential clients to fee-only wealth managers.
Like all financial advisors, wealth managers tend to abide by a common process when working with clients. Early in the process, wealth managers will develop a thorough understanding of their clients’ financial circumstances, life goals, family dynamics, and risk tolerance. They will use all of this information to develop a plan tailored to their clients’ preferences, and conduct regular meetings to evaluate the extent to which the plan is working. Indeed, wealth management is an ongoing, intergenerational process, so individuals should anticipate an involved, intimate relationship with their wealth manager.
What Services Does Wealth Management Comprise?
Unlike more limited forms of financial advising, wealth management comprises a broad range of financial advice. Being able to provide comprehensive financial guidance is a requirement of every wealth manager, and as a result, wealth managers are capable of providing sound advice on many subject areas.
• Investment Guidance. Many people erroneously think of wealth managers as exclusively investment advisors — that is, people who help construct sound investment portfolios, and little more. While investment guidance is surely a major component of wealth management, it is far from the only component. All the same, as part of any relationship, wealth managers will assemble investment portfolios calibrated to clients’ risk tolerance levels, financial objectives, and liquidity circumstances.
• Estate Planning. Estate planning refers to the process by which people decide how their assets will be distributed upon their incapacitation or death. It also includes arranging for end-of-life medical care, care for minor children, assigning powers of attorney, and more. Since HNWIs stand to face steep estate taxes, wealth managers work with their clients to address all of these issues, ensuring a smooth and tax-optimized transfer of wealth between generations.
• Tax Services. Part of the certification process for CFP® certificants and other credentialed advisors is learning the ins and outs of the U.S. Tax Code. Individuals with complex financial situations are subject to a wide array of taxes, which wealth managers can help them navigate and optimize. This can include reallocating some assets to donor-advised funds, which are designed to make charitable contributions as impactful and tax-efficient as possible.
• Philanthropy. As Andrew Carnegie said, “It is more difficult to give money away intelligently than to earn it in the first place.” Many people consider philanthropic giving central to their legacy, and enjoy the tax benefits that they reap as a result. Many wealth managers are well-versed in what it takes to give well, and can help their clients gift their hard-earned cash in the most all-around beneficial ways.
• Retirement Planning. Everyone has different retirement objectives. Some intend to work well into their 60s to support large and growing families; others hope to stop working at 40, supporting only themselves. Whatever their clients’ specific intentions, wealth managers can help envision a range of possible futures, setting spending, saving, and investing guidelines to help their clients achieve their goals.
This is a sampling of the major areas in which wealth managers most commonly provide comprehensive guidance. But every wealth manager is different. Some, by virtue of the firm they work for, tend to work with individuals within a particular age range, with similar sets of objectives — millennials hoping to retire before 50, say. Others work with a diverse array of clients with many different objectives. When looking for a wealth manager, one should be sure to evaluate their own financial needs, and find someone with relevant expertise.
How Are Wealth Managers Paid?
As mentioned in the introduction, there are two major pay structures to which wealth managers adhere: fee-only, and fee-based. Here, we’ll break down the major differences between them, and the implications they tend to carry for clients.
Fee-Only Wealth Managers
Fee-only wealth managers make money according to a flat fee, which may be based on an annual or monthly amount, or calculated as an AUM percentage. The median AUM fee wealth managers charge to clients with ~$1 million is 1%. As AUM rises, this percentage actually tends to decrease, as wealth managers can make as much if not more by offering a lower percentage take.
Fee-only financial advisors work according to the fiduciary standard, which means that they are legally and ethically bound to act in their clients’ best interests, 100% of the time. As a result, they are not permitted to accept commissions from product sales or financial transactions. This reduces potential conflicts of interest between wealth managers and clients nearly to zero.
As a result, fee-only wealth managers have become increasingly desirable among HNWIs. A number of online organizations help people find fee-only wealth managers in their area, including the National Association of Personal Financial Advisors (NAPFA), the Garrett Planning Network, the XY Planning Network (whose advisors tend to work with Generation X and Y clients), and the Alliance of Comprehensive Planners. All of these organizations require that member advisors adhere to the fiduciary standard. Each has its own individual requirements as well.
Fee-Based Wealth Managers
As with all financial advisors, certain wealth managers are paid according to a fee-based structure. Don’t be fooled by the seeming synonymity with “fee-only” — fee-based is much different. While fee-only wealth managers adhere to the stringent fiduciary standard, fee-based wealth managers adhere to the much more lenient suitability standard, which means that advice and recommendations are legally permissible so long as they can reasonably be deemed “suitable” for clients. That is, they don’t have to be ideal, they just have to be suitable.
Most importantly, that means clients can never be entirely sure whether the advice they receive from fee-based wealth managers is entirely in their best interest. The room the suitability standard allows for conflict of interest makes fee-based wealth managers much less desirable than their fee-only counterparts.
Wealth Manager Certifications
CFP® Certificant
Wealth managers become CFP® certificants by completing various educational, experiential, and ethical requirements. Namely, CFP® certificants must accrue 4,000 hours of relevant work experience, pass the six-hour CFP exam, and have a proven track record of adhering to the fiduciary standard. The CFP exam is the most grueling portion of this; candidates often prepare for multiple years.
CFA® Charterholders
Like CFP® certificants, CFA® charterholders must complete educational, experiential, and ethical requirements, but their testing comprises three rounds, none of which has a pass rate in excess of 56%. Upon completion, CFA® charterholders are qualified to hold senior- and executive-level roles.
Wealth Management New York City