What is wealth management? Why is it important? Many people assume that wealth management is only for the wealthy. That depends on your definition of wealth. Our definition includes the use of all our resources in creating a sense of well-being and abundance while providing for present and future needs. To create a rich life requires pulling together our resources, assets and our values in a meaningful way. If this is our intention we need to bring a conscious approach to getting there…thus wealth management.
Here is the Financial Times definition of wealth management: “Wealth management is a practice that in its broadest sense describes the combining of personal investment management, financial advisory, and planning disciplines directly for the benefit of high-net-worth clients. But it is also an increasingly popular self-branding reference that advisors and financial representatives of many different stripes adopt, often to describe a wide range of possible functions and business models.”
This quote is interesting because it starts with a traditional definition, stating that wealth management is for the “high net worth”, or wealthy. It also combines several disciplines: “investment management, financial advisory and planning disciplines”. But then it describes wealth management in its more modern sense as a “self-branding reference” which professionals can apply to their various services. Curiously, it could be used, at its worst, as a marketing tool or a gimmick.
Includes investment management and financial advice
Ideally, the most basic wealth management is comprised of investment management and financial advice, with the goal of providing for one’s present and future financial needs. More comprehensively, it may include accounting and tax advice, estate planning, philanthropic counseling, banking, lending and even legal advice.
“Personal investment management” refers to the process of deploying financial assets to meet people’s objectives. Financial assets include; stocks, bonds, mutual funds, exchange traded funds (ETFs), CDs and most any other financial instrument. Professional investment managers help people clarify goals, assess their ability and willingness to assume risk, and come up with a suitable strategy to meet the goals. This also entails recommending an asset allocation, or the percentage mix of stocks, bonds, etc., the diversification of which helps control risk. The next step is the selection and purchase of the securities and the periodic monitoring of them. The purpose of monitoring the investments is to determine how well the portfolio of investments is meeting the objectives set by the client.
The “financial advisory and planning disciplines” refer mostly to financial planning and tax advice. Managing one’s wealth in a tax efficient manner involves selecting the best financial vehicles in each type of account. And, in taxable accounts, using strategies to save on taxes each year (such as tax loss harvesting).
Financial Planning an Essential Component
Good financial planning weaves investment management and tax strategies into the fabric of an overall plan. For individuals, this often takes the form of a retirement plan. A good financial plan will start by predicting your income streams and your spending many years into the future. Then, determine the best way to spend, save and invest today to meet your future objectives. It may also include an estate plan. Once you accumulate some wealth it is smart to ensure it is passed on to those you love and care about, or left to charitable causes that are near and dear to your heart.
I’ve had people say to me, “When I have some wealth, I’ll be sure to come talk to you!” But as we begin to earn money, spend it, save it and invest it, there comes a time when ‘managing it’ needs to be a crucial part of our process, and it may be sooner than you imagine. Having a plan for your future will encourage you to make good choices, and to bring more wealth into your life. Wealth management will make it more likely your current assets will generate future well-being and security.