The Promises and Perils of Wealth Management


During the past decade, the financial services industry has re-invented how it packages its products and services to their clients.

web-3690-101413-gs3690-(1).jpgIn the 1980s and 1990s, brokerage firms, banks and insurance companies talked a lot about their investment products. Nowadays, they are talking more about helping clients address a wider range of financial concerns.

This is not a new idea. For instance, banks have offered one-stop “private banking” to their wealthiest clients for some time.

The trend does, however, have a newly popular term – “wealth management” – that increasingly is being applied to the work of people formerly referred to as brokers, financial advisors, trust officers, insurance agents, accountants, lawyers and/or financial planners.
 
Generally, I view this as a positive development, but one to be handled carefully.

Some cynics might interpret the industry’s interest in “wealth management” as being fueled by a desire to appeal to the richest end of the wealth spectrum. Others might see it as a way for newly-consolidated banks, brokerage firms and insurance companies to market their products under a single brand.

While those forces may be at work, I think the financial services industry’s move in the wealth management direction also has a positive aspect to it – namely, the recognition that middle and upper-middle-income households need help managing a wide range of inter-dependent financial issues and are increasingly willing to pay for that help.

However, just because financial services companies see a demand for wealth management services does not mean that those companies know how to deliver it. And there are no legal standards associated with the “wealth management” label, which means that people looking for such services need to be very careful about who they choose to work with.
 
There are several factors to consider: scope, qualifications, compensation, and coordination/leadership.

The first question someone shopping for wealth management services needs to answer relates to the scope of help offered. Some people will be satisfied with firms offering help with just a basic array of financial concerns, including:

  • Investments
  • Insurance
  • Retirement planning
  • Taxes
  • Debt management
  • Estate planning
Others, especially those with higher net worth, seek help with a broader array of financial concerns, including:

  • Business planning
  • Career planning
  • Financial education of children and young adults
  • Philanthropy
  • Bill-pay and administrative services
  • Managing vacation, commercial, and natural resource property
Whatever the desired scope of service, customers also need to be clear about the range and depth of professional qualifications of any wealth management firm they are considering working with.
 
Many wealth management firms include professionals with advanced investment management, financial planning, legal, and accounting credentials taking years of study. However, some firms promising wealth management services provide advisors with very limited professional education or experience, even though some may have an alphabet soup of impressive sounding certifications (sometimes requiring only days or weeks of part time study) after their name. It is important to know the difference.

Another factor to consider is compensation. Some firms promising to deliver wealth management services are staffed with advisors who are compensated through commissions embedded in the mutual funds, life insurance policies, and annuities they recommend to people. Other firms are compensated based on a percentage of assets under management, while still others charge a flat or hourly fee. Some offer a combination of all three. All methods have their advantages and disadvantages, but as a general rule the more clearly disclosed the fee, the better.

A final consideration when shopping for wealth management services has to do with whether a person wants coordination – not just advice.

One of the main reasons that people do not take good care of their money is that they are simply too busy. The best wealth management firms therefore offer more than advice from qualified professionals with fully disclosed fees – like a good concierge, they also commit to coordinating the activities and people needed to ensure that clients are doing everything they can to manage their financial situation well.

Generally speaking, the broader the scope and depth of help with financial concerns offered, and the more willing to coordinate the actions needed to address those concerns, the more expensive the services. Some firms offer multiple levels of care – others not.

In conclusion, though the term “wealth management” signals a healthy trend in the financial services industry, the term means different things to different people. This makes it very important for people to think carefully about the kind of financial help they need before they starting paying for it.