A Closer Look at Asset Wealth Management Technique

It’s safe to say that from time to time, everyone could use help managing their money. But while many people in the society can get by with limited assistance, some may benefit from a hands-on approach. People with a high net worth in the millions may want to work with an asset wealth management firm. 

If you fall in this category or aspire to, this article will help you determine which type of professional help is right for you.

asset wealth management

Image source

Table of Contents

    What Is Asset Management?

    Asset wealth management is the practice of increasing total wealth over time by acquiring, maintaining, and trading investments that have the potential to grow in value. Asset wealth management professionals perform this service for others. They may also be called portfolio managers or financial advisors. Many works independently, while others work for an investment bank or other financial institution.

    Understanding Asset Wealth Management

    Asset management has a double-barreled goal: increasing value while mitigating risk. That is, the client’s tolerance for risk is the first question to be assessed. For instance, a retiree living on the income from a portfolio, or a pension fund administrator overseeing retirement funds, is (or should be) risk averse. A young person, or any adventurous person, might want to dabble in high-risk investments. Most are somewhere in the middle, and asset managers try to identify just where that is for a client.

    An asset manager’s role is to determine what investments to make and avoid, and to realize the client’s financial goals within the limits of the client’s risk tolerance. Investments or investable assets include stocks, bonds, real estate, commodities, alternative investments, and mutual funds, among the better-known choices. 

    Asset allocation is how investors divide their portfolios among different assets, which might include equities, fixed-income assets, cash, and its equivalents. Investors ordinarily aim to balance risks and rewards based on financial situations, risk tolerance, and the investment horizon. The asset manager is expected to conduct rigorous research using both macro and microanalytical tools.

    This includes statistical analysis of prevailing market trends, reviews of corporate financial documents, and anything else that would aid in achieving the stated goal of client asset appreciation.

    Choosing an Asset Manager

    When choosing an asset manager, check the manager or platform (if you’re using a robo-advisor) credentials. It’s important to determine whether a manager operates by a suitability standard or a fiduciary standard, with the latter method benefiting you most.

    Beyond that, cost may be your biggest factor. Some investors can save by using passive management options, while others may want a more personalized approach that could cost more.

    Key Takeaway

    • The goal of asset management is to maximize the value of an investment portfolio over time while maintaining an acceptable level of risk.
    • Asset management as a service is offered by financial institutions catering to high-net-worth individuals, government entities, corporations, and institutional investors like colleges and pension funds.
    • Asset managers have fiduciary responsibilities. They make decisions on behalf of their clients and are required to do so in good faith.

    Types of Asset Managers

    There are several types of asset managers. Each type of asset manager has a different level of asset class they provide responsibility to and for the client. So, it is important to understand a manager’s obligations before deciding to invest.

    Registered Investment Adviser

    A registered investment adviser (RIA) is a firm that advises clients on securities, exchange commission trades or even manages their portfolios. Investment adviser representatives (IARs) are licensed and authorized personnel who work for investment advisory companies and are permitted to work with clients.

    The primary responsibility of an Investment Adviser Representative is to provide investment-related advice as a financial advisor for financial planning. To become an Investment Adviser Representative, candidates must pass the appropriate licensing exams and register with the appropriate regulatory bodies. Investment Advisers are regulated and are required to register with the SEC if they manage more than a hundred million in assets.

    Investment Broker

    A broker is an individual or firm that acts as an intermediary for their clients, buying stocks and securities, exchange commission and providing custody over customer assets. Brokers generally do not have a fiduciary duty to their client’s access, so it is always important to thoroughly research before buying.

    Financial Advisor

    A financial advisor is a professional who can recommend investments to their clients, buy, and sell securities on their behalf. Financial advisors might have a fiduciary duty to their clients, so it is always important to ask first.

    Many financial advisors specialize in a specific area, such as tax or estate planning. Financial advisors view investment vehicles as asset-class categories that are used for diversification purposes. Each different asset class is expected to reflect different risk and return investment characteristics and performance differ in any given market environment. Investors interested in maximizing return often do so by reducing portfolio risk through asset class diversification.

    Financial advisors will help investors to diversify their portfolios by combining assets from different asset classes that have different cash flow streams and varying degrees of risk. Investing in several different asset classes ensures a certain amount of diversity in investment selections. Diversification reduces risk and enhances your probability of making a positive return.

    Robo-Advisor

    The most affordable type of investment manager isn’t a person at all. A robot-advisor is a computer algorithm that automatically monitors and rebalances an investor’s portfolio, accordingly, selling and buying investments in line with programmed goals and risk tolerances. Because there is no person involved, robo-advisors cost much less than a personalized investment service. 

    Key Takeaway on Robo Advisors

    • Robo-advisors are digital platforms that provide automated, algorithmic investment services with minimal human supervision.
    • They often automate and optimize passive indexing strategies based on modern portfolio theory.
    • Robo-advisors are often inexpensive and require low opening balances, making them available to retail investors.
    • They are best suited for traditional investing and aren’t the best options for more complex issues, such as estate planning.
    • Robo-advisors have been criticized for their lack of empathy and complexity.

    Asset Management Costs

    Asset managers have a variety of fee structures. The most common model charges a percentage of the assets under management, with the industry average at about 1% for up to $1 million, and lower for larger portfolios. Others may charge a fee for each trade they execute. Some may even receive a commission to upsell securities to their clients.

    Because these incentives can work against the client’s interests, it is important to know if your management firm has a fiduciary duty to serve the client’s interests. Otherwise, they may recommend investments or trades that do not serve the client’s interests. 

    Costs to hire an asset manager can vary based on what kind of relationship you want. If you use a robo-advisor or work with wealth managers who charge passive management fees for portfolios that lean heavily on index funds, you can expect to pay or have paid between 0.25% and 0.50% of your portfolio value per year.

    These fees are often described as a percentage of assets under management (AUM). If you select active investment management, your fees will depend on who you hire and what investments are in your portfolio, but you can typically expect to pay 1% of your portfolio in annual fees. Additional fees, such as account fees ranging from $25 to $100 per year or brokerage fees as high as $50 per trade, may apply.

    What Is Wealth Management?

    A wealth manager is a financial advisor who specializes in working with clients who have high net worth. They also offer advice on a variety of financial aspects beyond your physical assets. As your wealth grows, your finances become more complex, which is where wealth managers can provide their tailored expertise.

    Wealth management might focus on retirement planning and tax planning alongside insurance protection, estate planning, and trust management. These professionals may also offer future services than the typical financial advisor to cater to the complex needs of their client’s financial situation. A wealth manager is likely to be a fiduciary but be sure to ask before signing on.

    Choosing a Wealth Manager

    Not all wealth management services or firms have the same strategy for every client. Depending on your situation, you may want to focus on growing your investments, optimizing your tax planning, or creating a succession plan if you own a business.

    These are all valid strategies, but your wealth manager’s expertise and tactics should match your goals and concerns. Wealth management services usually work with high-net-worth individuals or families. You probably don’t need wealth management services unless you already have a considerable amount of money in investments or have a large sum you are ready to invest. 

    Wealth management services may require $250,000; $500,000; or at least $1 million in investments to become a client. Minimums can vary by wealth management firm and service specialty. If you have a lower net worth but want to grow your money, it may be worth considering an asset manager instead of a wealth manager.

    Key Takeaway

    • Private wealth management is primarily useful to high-net-worth individuals.
    • Several types of institutions, from large banks to small family offices, provide private wealth management.
    • Private wealth managers generally charge a small fee based on the assets under management.
    • Private wealth managers can aid with tax strategy, retirement planning, estate planning, and major life events.

    Wealth Management Costs

    Since wealth managers handle a broader view of your finances, you might pay them flat fees by the hour, year or per type of service. Their fees may also be paid depending on how much of your money they manage, like the percentages an asset management service would charge.

    Life insurance in wealth management

    Life insurance is often an integral part of individuals’ wealth planning strategy. It can be used to provide a lump sum to families in the event of the policyholder’s death and also the payment of a capital sum or a regular income when the owner retires. It also has notable tax advantages over a standard investment portfolio.

    When the policy reaches maturity, the policyholder or their designated beneficiaries receive a lump sum amount, plus any growth in the assets. If the policyholder dies before maturity, their designated beneficiaries receive either the amount accumulated, or the guaranteed amount, depending on the type of policy.

    Whole life insurance offers coverage for life and includes a cash value component that lets people tap into the advantages while alive. Using the infinite banking concept, life insurance policies allow the policyholder to act as their own banker by using the whole life insurance policy as the bank.

    Wealth Management Services 

    Wealth managers offer a range of financial services tailored to the specific needs and goals of their clients. While the exact services may vary from one wealth manager to another, here are some common services provided by private wealth managers.

    • Financial Planning: Wealth managers help clients create comprehensive financial plans that consider their goals, risk tolerance, and time horizons. This includes retirement planning, education funding, and estate planning.
    • Investment Management: Wealth managers oversee and grow their clients’ investment portfolios. They select suitable investments, make asset allocation decisions, and continuously monitor and adjust the portfolio based on market conditions and client preferences.
    • Tax Planning: Wealth managers develop tax-efficient strategies to minimize clients’ tax liabilities. This can include strategies for capital gains, income, and estate taxes.
    • Estate Planning: Wealth managers assist clients in structuring their estates to pass on wealth to heirs or charitable organizations efficiently. This may involve the use of trusts, wills, and other estate planning tools.
    • Cash Flow Management: Wealth managers help clients manage their cash flow, including budgeting, expense tracking, and optimizing cash reserves for liquidity needs.

    Philanthropic Planning: Wealth managers assist clients in achieving their philanthropic goals by structuring charitable donations and helping with charitable giving strategies.

    How Asset Management Companies Work

    Asset management companies compete to serve the investment needs of high-net-worth individuals and institutions. Accounts managed by financial institutions often include check writing privileges, credit cards, debit cards, margin loans, and brokerage service.

    When individuals deposit money into their accounts, it is placed into a money market fund that offers a greater return than a regular savings account. Account holders can choose between federal deposit insurance company backed (FDIC) funds and non FDIC funds. The benefit, to account holders, is that all their banking and investing needs can be met by the same institution.

    These types of accounts have only been possible since the passage of the Gramm Leach Bliley Act in 1999 that replaced the Glass Steagall Act. The Glass Steagall Act of 1933, passed during the Great Depression, forced a separation between banking and investing services.

    Example of an Asset Management Institution

    Merrill offers a Cash Management Account (CMA) to fulfill the needs of clients who wish to pursue banking and investment options with one vehicle, under one roof. The account gives investors access to a personal financial advisor. This advisor offers advice and a range of investment options that include initial public offerings (IPO) in which Merrill may participate, as well as foreign currency transactions.

    Interest rates for cash deposits are tiered. Deposit accounts can be linked together so that all eligible funds aggregate to receive the appropriate rate. Securities held in the account fall under the protective umbrella of the Securities Investor Protection Corporation (SIPC).

    SIPC does not shield investor assets from inherent risk but rather protects those assets from the financial failure of the brokerage firm itself. Along with typical check writing services, the account offers worldwide access to Bank of America automated teller machines (ATM) without transaction fees. Bill payment services or paid services, fund transfers, and wire transfers are available.

    What Does an Asset Manager Do?

    An asset manager initially meets with a client to determine what the client’s long-term financial objectives are and how much risk the client is willing to accept to get there. From there, the manager will propose a mix of investments that matches the objectives. The manager is responsible for creating the client’s portfolio, overseeing it from day to day, making changes to it as needed, and communicating regularly with the client about those changes.

    Recap

    Asset wealth management firms provide the service of buying and selling assets on behalf of their clients. There are many types of asset managers, with some working for family offices and wealthy individuals and others working on behalf of major banks and institutional investors. To get the best one for you, consider your financial standing and preferences alongside their offerings to choose the one that is more aligned to your goals.

    DISCLAIMER
    Wealth Nation makes content available as a service to its customers and other visitors to be used for informational purposes only. While our best intentions are to provide accurate and timely information, you should always consult with retirement, tax, legal and financial professionals before taking any action.