The Informed Investor
What Exactly Is Wealth Management?
What exactly is wealth management? Many people are impressed by the term “wealth management.” It sounds important, official, and impressive. You might choose to work with someone whose business card reads “wealth manager” over someone who bills themselves as an “insurance salesperson.” After all, it seems like someone who manages wealth for a living must be trustworthy and dependable, right?
Maybe…but maybe not.
People who claim to be wealth managers might be honest and capable. On the other hand, they could be more concerned with making a profit than emphasizing dedicated client care. A person or company could provide various financial services—from estate planning to life insurance sales—and claim to be practicing wealth management. Why is that?
The term “wealth management services” can include many disparate services because it doesn’t have teeth. No one is regulating its usage or stipulating the requirements to become a wealth manager. There are no exams to pass, no oath to take, and no unifying guidelines. This lack of accountability can cause trouble for people seeking legitimate financial planning assistance.
Before we dive into the pitfalls of overusing the title “wealth manager,” let’s backtrack and discuss some basics, starting with defining this ubiquitous term.
What is Wealth Management?
Due to the imprecise nature of the term, it isn’t easy to pinpoint an exact definition of wealth management. I have seen it defined as:
“…the process of putting together a financial plan that supports you in achieving your life goals.” — Investec
“…a kind of financial advisory service for accredited investors and other people with high net worths.” — The Balance
“…an investment advisory service that combines other financial services to address the needs of affluent clients.” — Investopedia
“…the science of solving/enhancing [one’s] financial situation.” — Forbes
Many of these definitions are vague and not terribly helpful. In addition, they are not always consistent. Is wealth management for anyone, or just for high-net-worth clients? Is it about putting together a financial plan, improving one’s financial situation, or simply about “addressing the needs” of affluent clients?
When I think of traditional wealth management, I tend to divide the concept into financial planning and investment management.
Financial planning generally involves creating a personalized plan for an individual or couple which might include retirement planning, estate planning, tax strategies, insurance services, or investment planning. Hiring a qualified professional to aid in financial planning may benefit many people.
Investment management involves the implementation of financial planning. Often, when someone has worked with a financial advisor to create an individualized financial plan, that individual will implement the plan on their own. They’ll buy the prescribed index funds, set up the necessary bank transfers, and so on. They will then monitor their portfolio on their own in between meetings with their financial advisor.
However, investors can delegate the tasks for implementing a financial plan to an investment manager/wealth manager. Most people who hire a wealth manager are wealthy because these services can be costly. Some of these clients have worked for decades, have saved several million, and want to take a hands-off approach to their finances.
Let’s use my definition: a wealth manager oversees financial planning and investment management for high-net-worth individuals.
Most individuals do not need to hire someone to manage their investments, though some individuals can certainly benefit from this service. Outsourcing wealth management takes one more task off a person’s plate and allows them to pursue other interests. This setup requires a good deal of trust since a wealth manager handles many aspects of a person’s finances, such as implementing the financial plan, monitoring outcomes, and making necessary adjustments.
However, problems arise when people claim to be wealth managers, but their services fall well outside the above definition of wealth management.
How the Term “Wealth Management” Causes Trouble
Unfortunately, service providers may play fast and loose with the terms “wealth management” and “wealth manager.” For instance, a banker selling proprietary products might call themselves a wealth manager. An insurance salesperson could conceivably call themselves a wealth manager. So could an investment banker/stockbroker. These occupations might technically deal with “managing wealth,” but they certainly do not fit most definitions online.
Why would a private banker at a major bank call themselves a wealth manager? While it’s true that banking products relate to wealth, is it fair to call a banker a wealth manager when they really can only offer one set of products, no matter what your financial circumstances? To me, that’s stretching the definition and concealing the fact that they provide essentially the same products to all their customers. They are not really providing an individualized financial plan but enrolling you in proprietary banking products.
In my opinion, the “wealth manager” title has become little more than a marketing term. It is used as an umbrella concept, loosely tied to wealth and finances. People might take advantage of this prestigious-sounding title to position themselves as qualified financial advisors when their main goal is selling products.
Using the term “wealth manager” insincerely irks those who are engaged in financial planning and investment management. Too often, we hear about customers who have been duped by salespeople claiming to be wealth managers. Sometimes, investors end up losing quite a bit of money. More often than not, they often end up losing trust.
What Can We Do?
Education is key to combatting the widespread overuse and misuse of the term wealth management. Financial advisors can take the time to explain what true wealth management entails — financial planning plus investment management. Financial advisors should also strive for clarity and transparency in every aspect of their business. Everything from client contracts to website mission statements should be clear, accessible, and straightforward.
Consumers can also actively educate themselves about wealth management and whether this service is for them. Conduct research into a company and service providers before agreeing to work together. Look for transparent language and a clear commitment to a fiduciary standard of care. Reviews on third-party sites can also be helpful for learning other people’s experiences with the service provider.
Consumers deserve more protection when it comes to investment management. Independent regulatory agencies such as the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) regulate certain aspects of the investment industry. The SEC monitors investment managers and firms that provide investment advice for a fee, while FINRA regulates firms that sell investment securities like Broker-Dealers, Capital Acquisition Brokers and Funding Portals.
As an optimist, I do believe things are changing — although at a glacial pace! In the meantime, it is imperative for consumers to do their research and seek financial advisors who focus on their clients, provide salient, straightforward advice, and are committed to a fiduciary standard of care.
Learn more about David Bromelkamp
Hello! I’m Dave, the founder and chief executive officer of Allodium Investment Consultants, located in Minneapolis, MN. I am also the author of AdvisorSmart for the Individual Investor: Your Guide to Selecting a Financial Advisor to Get Better Financial Advice. I am dedicated to educating individual and institutional investors about financial planning and investing. When I’m not helping people make investment decisions, I enjoy traveling, hiking and spending time with my wife and family.
The information provided is for educational purposes only and is not intended to be, and should not be construed as, investment, legal or tax advice. Allodium makes no warranties with regard to the information or results obtained by its use and disclaim any liability arising out of your use of or reliance on the information. It should not be construed as an offer, solicitation or recommendation to make an investment. The information is subject to change and, although based upon information that Allodium considers reliable, is not guaranteed as to accuracy or completeness. Past performance is not a guarantee or a predictor of future results of either the indices or any particular investment.