Private Wealth Management
What is Private Wealth Management?
Private wealth management (PWM) refers to financial services such as investment advisory, tax guidance, retirement planning, estate planning, and risk management that are provided to high-net worth individuals by a family office, wealth management firm, or a private bank. The main goal of private wealth management is to help clients create and preserve wealth for future generations.
Client goals can range from paying for college tuition, philanthropic goals (donating to charity), and transferring assets to future generations upon death.
When developing a strategy to achieve these goals, taxes must be taken into consideration. If there is an attractive investment opportunity available, but the tax consequence is significant, it may not be worth it to pursue the opportunity.
Private Wealth Management: Products and Services
Private wealth managers provide a variety of services to their clients, for instance assisting a client exit a company they started many years ago. To accomplish this goal the wealth manager would explore a variety of options and products, such as, potentially, implementing an employee stock option plan (ESOP) that gives employees some ownership of the company over time.
Depending on the client's goal a different service and product will be used. Below we will list possible services and the goals they may help achieve along with some products associated with some of these services.
Private Wealth Management: Services
Services that are usually offered in private wealth management are investing, tax guidance, retirement planning, estate planning, and risk management. Since PWM takes a holistic approach when it comes to client needs, which means that one private bank or firm usually provides all of these services for each of their clients.
Here are some of the services a private bank or firm may provide.
|Investment Management||Invest in a diversified portfolio to meet goals and generate wealth for future generations.|
|Retirement Planning||Help individuals develop a plan to invest and save to meet future spending needs in retirement.|
|Tax Guidance||Help individuals achieve goals and transfer assets while minimizing the tax consequence.|
|Estate Planning||Help individuals efficiently transfer assets upon death to avoid probate (assets go to a court for distribution) and minimize taxes on the estate.|
|Risk Management||Plan for untimely death and injuries that could cause financial setbacks.|
Private Wealth Management: Products
To accomplish the services they provide, private wealth managers have several products at their disposal. For instance, a trust can be used in estate planning to transfer assets to heirs, effectively avoiding the probate process (assets go to a court).
|Investment Management||Derivatives, mutual funds.|
|Retirement Planning||Retirement accounts (IRA, 401k).|
|Tax Guidance||Tax deferred or tax-free investment accounts.|
|Estate Planning||Trusts (revocable/irrevocable).|
|Risk Management||Life insurance and disability insurance.|
Private Wealth Management: Clients
Private wealth management clients range from high-net-worth (HNWI), i.e., someone with at least $1 million dollars in investable assets, to ultra-high-net-worth, i.e., someone with at least $30 million in investable assets.
High-net-worth individuals differ from mass affluent individuals, who are those with less than $1 million, because they may require custom strategies to meet their specific needs.
Depending on their time horizon, risk tolerance, and asset size, alternative investments such as private equity or venture capital may be suitable investments due to their higher expected return. The client-to-manager ratio is typically smaller for HNWI due to the size of the portfolios and custom strategies.
Ultra-high-net-worth individuals and families may create their own family office or team up with other ultra-high-net-worth families and have one firm provide all of the financial services. One such firm is ICONIQ Capital, which is known to provide financial services to Mark Zuckerberg of Meta Platforms and Jack Dorsey of Block, Inc.
The main goal for the ultra-high-net-worth is to create and maintain wealth to pass on to future generations. Alternative investments such as private equity and venture capital will be an asset class within such investment portfolios due to the size of financial assets.
High Net Worth Individuals vs. Institutional Investors
Private wealth management mainly caters to mass affluent, high net worth, and ultra high net worth individuals. It does not meet the needs of institutional investors such as university endowments, foundations, and pension funds due to differences in investment objectives, scale (size of financial assets), risk tolerance and time horizon. These differences are broken down below.
|High net Worth||Institutional Investors|
|Investment Objective||Broadly defined such as transferring assets out of the estate upon death or planning for retirement.||Very specific such as earning a real rate of return of 5% over a benchmark while reducing volatility of returns.|
|Time horizon||Short term: < 5 years to Long term: > 10 years||Perpetual life|
|Taxes||Must account for taxes with every strategy and trade.||May be tax exempt.|
|Risk Tolerance||Varies, but becomes lower as a person ages.||High risk tolerance due to perpetual life.|
|Investments||Stocks, bonds, commodities, real estate. Alternative investments may not be appropriate.||Venture capital, private equity, hedge funds, private credit, private real estate, stocks, bonds.|
Individual investors may not have access to alternative investments such as venture capital, private equity, hedge funds, and private credit due to the size of their portfolios, risk tolerance and time horizons.
Investments in alternative asset classes may only be appropriate for high-net-worth and ultra-high-net-worth individuals and families.
For instance, an investment in private equity could take upwards of 5 years before seeing any return on investment, and on top of that, there are capital calls that must be met within the first few vintage years.
Institutions must invest in alternative investments due to the higher expected returns associated with these investments, and therefore carry more risk. Not allocating funds to alternative investments and bagging the increased returns means the institution might not be able to meet future spending needs or liabilities.
How Do Private Wealth Managers Make Money?
Private wealth managers generate income from advisory fees and fixed fees on products and services that they offer. The main source of income for private wealth managers comes from advising clients on investment management, estate planning, and tax planning.
Advisory fees can come in the form of asset-based fees and commissions.
Asset-based fees are fees based on a percentage of assets under management (AUM), which is usually stated in basis points. Fixed fees include flat annual fees for services and fees for products.
Commissions are fees that are usually charged for trades by brokerages and traders. Commissions have become less common due to conflicts of interest that may arise due to over-trading by the manager to earn a larger fee.
An example of an asset-based fee is charging an annual fee of 250 bps (basis points) for a portfolio of assets under management. Let's assume a private wealth manager manages a portfolio of assets worth $100,000 and charges an annual fee of 250 bps. At the end of the year, the portfolio grows to $120,000. The total asset-based fee the manager would receive would be $3,000 (.025 * 120,000).
Let's now assume a manager who specializes in tax planning charges $200 per hour. This manager spends 10 hours working on a tax deferral strategy for an inheritance. The total fee that the manager would receive is $2,000 (10 * 200). This is an example of a fixed fee on a service.
What Do Private Wealth Managers Do?
Private wealth managers use a holistic portfolio construction approach to address client wants, needs, desires, and risks. A wealth manager will usually specialize in a certain area such as investments or tax guidance, but outsource the remaining services to other wealth managers. The remaining services may include trust services, estate planning, and risk management (insurance).
Although the manager is outsourcing the rest of the services, they are still in charge of the process and where the assets are going.
The first step a wealth manager performs is to draft an investment policy statement (IPS) with the client, which dictates the clients' risk tolerance, time horizon, constraints, and asset allocation.
The IPS provides guidance to how funds are to be managed. Since wealth managers have a fiduciary duty (to put the clients' interest above their own) to the client, following the IPS is critical to avoiding investments and decisions that would not be suitable for the client. The IPS also provides discipline, allowing the wealth manager to implement the strategy by forcing the client to follow-through with the strategy. Once the IPS is signed by both the client and the wealth manager, the manager may begin to create and outline a financial planning strategy with the client.
Wealth Manager: Nice To Haves
To stand out as a good wealth manager, having an undergraduate degree is a normal prerequisite, but it is also common for wealth managers to have a graduate degree, such as an MBA, and other designations as well. Some common designations, or certifications, a wealth manager may have are:
Certified Financial Planner (CFP®): uses holistic approach to financial planning (investments, risk management, estate planning, etc.)
Certified Public Accountant (CPA): specializes in accounting and tax.
Chartered Financial Analyst (CFA®): specializes in valuation, asset allocation, capital markets, and financial analysis.
Certified Investment Management Analyst (CIMA): specializing in investment strategies for risk management.
Certified Estate Planner (CEP): specializes in end of life planning.
Please note that it would be unrealistic for an individual to have more than two or three of these designations. A designation alone doesn't make a good wealth manager. These designations coupled with good experience is what will ultimately make an advisor stand out.
Wealth Manager Vs. Financial Advisor
The main differences between a wealth manager and a financial advisor are the clients they serve and the services they provide.
High-net-worth and ultra-high-net-worth individuals and families will use a wealth manager because they require a more customized and comprehensive approach than what would be offered by a financial advisor. Due to customized and comprehensive strategies, the client-to-manager ratio for a wealth manager will be much smaller than the ratio for financial advisors. Financial advisors will serve a greater number of clients with less financial assets, so the services that are provided are not always tailored to each of their exact needs.
As mentioned earlier, a wealth manager oversees the entire investment process and is a one-stop-shop for a high-net-worth individual. For example, a wealth manager may specialize in equity investments, but may also offer tax guidance, estate planning, and risk management services. Although the wealth manager won't directly work on the other aspects, they will facilitate the handling of other services.
Private Wealth Management And ESG
Environmental, Social and Governance (ESG) are non-financial factors that clients want integrated into their portfolios and investment strategies. ESG is becoming increasingly popular in portfolios because clients are becoming more aware of the direct impact their investment decisions might have on the world.
Private wealth managers must perform non-financial due diligence on companies to see how their products, services, and behavior impacts society and the natural world around us. Below is a breakdown of what ESG stands for:
Environmental: How a company's operations impact the natural environment, for instance an oil company that is drilling for oil in a nature preserve.
Social: How a company's operations affect society or a specific group, for instance a private wealth manager may not purchase equity in a company that manufactures firearms.
Governance: Standards for how a company is run. For instance, a company with a strong moral compass and policies that prevent fraud and corruption will have good corporate governance.
The increased demand for ESG investments has sparked the creation of socially responsible exchange traded funds (ETFs). Two such ETFs are the Human Kind US Stock ETF (ticker: HKND) and the American Century Sustainable Equity ETF (ticker: ESGA).
Private Wealth Management Firms And Banks
All high-net-worth and ultra-high-net-worth clients have unique needs and there are several wealth management firms and managers to choose from. Some clients may utilize more than one firm or bank to diversify their assets.
Some factors to consider when choosing a PWM are the resources available, fees and expenses, experience, and strategy. Here are a few private banks and wealth management firms that provide services to high net worth individuals:
-Morgan Stanley Private Wealth Management
-Merrill Private Wealth Management
-UBS Wealth Management US
-Goldman Sachs Private Wealth Management
-Wells Fargo Private Bank
-J.P. Morgan Private Bank
-Wetherby Asset Management