Wealth Managers: Where Do They Invest Your Money?

Wealth management is a financial advisory service that provides investment advice and financial planning to high-net-worth individuals. Wealth managers offer a range of services, including investment management, financial planning, tax planning, estate planning, and retirement planning. They typically work with clients who have a minimum of $2 million to $5 million in assets and charge a percentage fee based on the client's assets under management. The goal of wealth management is to help individuals achieve their financial goals, maintain and grow their wealth, and preserve their legacy.

Investment management

Wealth managers work with clients to develop an investment strategy tailored to their goals and risk tolerance. If the manager is a licensed investment advisor, they may also select and manage investments on the client's behalf, often in exchange for an annual fee.

Some of the most common investment strategies employed by wealth managers include:

• Asset allocation: Dividing an investment portfolio among different asset categories, such as stocks and bonds.
• Diversification: Investing in a variety of assets to minimize the impact of losses in any one particular asset.
• Rebalancing: Realigning a portfolio's assets to maintain the original risk/reward ratio when things shift.
• Tax-loss harvesting: Minimizing capital gains taxes by selling securities that have experienced losses and replacing them with similar investments.

Wealth managers may also provide access to a wider range of investments than regular financial advisors, such as hedge funds and private equity offerings.

The investment strategy employed by a wealth manager should match the individual investor's risk tolerance and financial goals. For example, if a client is nearing retirement, a wealth manager might shift the focus to safer investments that can help maintain their wealth.

Wealth managers can charge for their services in several ways, including annual, hourly, or flat fees, as well as commissions on the investments they sell. It is important for clients to understand the fee structure before signing with a wealth manager.

Financial planning

• Understanding Client Needs: Wealth managers start by thoroughly understanding their client's financial situation, goals, and risk tolerance. This includes assessing their income, assets, expenses, and any specific priorities such as retirement planning, saving for education, or buying property.
• Developing a Financial Plan: Based on the client's current financial situation and goals, wealth managers help develop a tailored financial plan. This includes setting saving and investing goals, as well as planning for major life events and expenses. The plan should be flexible and periodically reviewed to accommodate changing circumstances.
• Investment Strategy: Wealth managers work with clients to create an investment strategy that aligns with their goals and risk tolerance. This may involve diversifying their portfolio across different asset classes, such as stocks, bonds, hedge funds, and private equity offerings.
• Tax Planning: A critical aspect of financial planning is minimising tax liability. Wealth managers advise clients on structuring their finances and investments to optimise their tax position, especially if they have multiple income streams or own a business.
• Estate Planning: Wealth managers assist clients in creating a plan for their assets after their death. This includes will and trust creation, designating beneficiaries, and ensuring their wishes are carried out.
• Regular Reviews: Financial planning is an ongoing process. Wealth managers meet regularly with clients to update their financial goals, rebalance their investment portfolios, and assess if any additional services or adjustments are needed.
• Risk Management: Wealth managers employ risk management strategies such as asset allocation, diversification, and tax-loss harvesting to protect the client's wealth and minimise losses.
• Specialist Services: Wealth management firms often provide access to a range of specialist services, including accounting, insurance, legal assistance, and philanthropic planning.
• Fee Structure: It is important to understand the fee structure of wealth management services, which may include annual fees, hourly fees, flat fees, or a percentage of assets under management (AUM).

Tax planning

Wealth managers can help high-net-worth individuals keep their tax bill down by suggesting a range of tax mitigation strategies that are completely legal and commonly used. They can also advise on relevant international tax laws, which become more complex when an individual's affairs are cross-border.

Tax Breaks at the Time of Investing

Investments in certain financial products, such as ELSS (tax-saving equity mutual funds) and PPF, can offer tax deductions of up to a certain amount in a financial year.

Tax on Income Earned

Wealth managers can help minimise taxes on income earned from investments. For example, by diverting funds from a bank fixed deposit, which is taxable at a high rate, to the growth option of a debt fund.

Tax at the Time of Sale

Wealth managers can advise on staggering sales over multiple financial years to save on taxes. They can also help strategically sell off securities held at a loss to set off gains made in another, a strategy often used by those nearing retirement to rebalance their assets in a tax-efficient manner.

Tax-Efficient Investment Vehicles

Wealth managers can advise on tax-efficient investment vehicles such as pension plans, ISAs, Venture Capital Trusts and Enterprise Investment Schemes.

Succession Planning

Wealth managers can advise on the tax-efficient transfer of family wealth to the next generation. This may include suggesting tax-efficient investments or charitable donations to reduce inheritance tax, or using vehicles like trusts to pass on family assets.

Structuring Investments for Tax Efficiency

Wealth managers can time investment strategies for maximum short-term efficacy and also look to the future when an individual's estate will pass to the next generation. They can position an individual's affairs to take advantage of any changes to tax rules, such as accelerating income when interest rates are rising or putting off investments in readiness for future tax breaks.

Estate planning

Wealth managers can also help you plan for the unexpected, such as if you become incapacitated and are unable to make financial and medical decisions for yourself. For example, your estate plan should include advanced healthcare directives and a healthcare proxy so that someone you trust can make medical decisions on your behalf if you become incapacitated. If you have children and die before they turn 18, you can name a guardian in your estate plan.

A well-designed estate plan can give you peace of mind by addressing your concerns and providing important benefits. It can ensure the accurate and timely distribution of assets, maintain your privacy by avoiding probate, protect your assets, and reduce potential taxes.

To achieve these goals, there are several steps you can take. You can appoint a durable power of attorney (POA) to take charge of financial and legal matters, as well as those involving your property, after you become incapacitated. You can also consider a healthcare power of attorney (HCPA), which allows your agent to determine medical treatment, and appoint a Health Insurance Portability and Accountability Act (HIPAA) release agent to access your protected medical information. Additionally, you can complete a living will, also known as an advance directive, to indicate your wishes regarding life-sustaining treatments. Creating a revocable trust and drawing up a guardianship declaration are also important steps to ensure your wishes are carried out.

When creating your estate plan, it's crucial to hire a qualified professional who will act in your best interests. Do your research, ask questions, read reviews, and discuss your goals with your chosen representative.

Retirement planning

Setting Clear Retirement Goals

The first step in retirement planning is defining your long-term financial goals and risk tolerance. It's essential to consider what you want your retirement to look like, including travel, hobbies, and desired lifestyle choices. This will help you determine the amount you need to save and invest to achieve those goals.

Identifying Income Sources and Expenses

Choosing the Right Retirement Savings Accounts

Utilize tax-advantaged retirement savings plans, such as an Individual Retirement Account (IRA) or a 401(k) account. These accounts offer tax benefits that can maximize your savings. Additionally, consider employer-sponsored plans like 401(k) or 403(b) plans, which may include employer matching contributions, further boosting your savings.

Diversifying Your Investment Portfolio

Wealth managers can guide you in diversifying your investment portfolio to minimize risk. This may include investing in stocks, bonds, mutual funds, exchange-traded funds (ETFs), or alternative asset classes like gold or commodities. Diversification helps balance your portfolio and protect it from market volatility.

Regular Review and Adjustments

Seeking Professional Advice

Consider consulting a wealth manager or financial advisor, especially if you have a high net worth. These professionals can provide personalized advice, investment strategies, and comprehensive financial planning services. They can also assist with tax planning, estate planning, and insurance needs, ensuring that your retirement plan is well-coordinated and optimized for your specific situation.

Frequently asked questions