A person with a complex portfolio structure often needs the help of a professional to choose the best strategy for further development. The assistance of an expert will be useful for beginners who are just taking their first steps on the stock market and want to avoid common mistakes. It should not be rejected by middle-income people who want to secure their retirement.
The financial industry offers two types of services, the differences between these services are not always obvious. We will compare the concepts of asset management vs wealth and consider their similarities and differences. We will also tell you how to understand what kind of expert a particular person needs. Let us give advice on choosing an asset or wealth manager.
Table of Contents
Defining the Terms
Both asset management and wealth management, are about maximizing the value and efficiency of a person’s resources. But these concepts have several issues. As such, the target audience of these services differs.
What is Asset Management?
An asset is any object that in theory can be profitably converted into cash. There is another characteristic – the ability to generate cash flow greater than that required to service it. But it is not mandatory. For example, gold bars generate no passive income, but are classified as investment instruments.
Asset management focuses on maximizing income from investments in the stock market or mutual funds. This category includes the following services:
- selection of optimal asset allocation;
- individual investment recommendations on specific instruments;
- assessment of investment risk;
- searching for ways to optimize taxation of the income received from the portfolio;
- monitoring of the portfolio’s condition.
Asset management is not always a permanent support service. The service may be of a one-off advisory nature.
What is Wealth Management?
Wealth is the total value of all assets excluding liabilities. Wealth management services is a complex that includes many more elements than investment advice. It fully covers all areas of a person’s financial life.
Wealth management includes:
- investment management (as one of the activities, not its main essence);
- tax planning (not only in terms of reducing tax on income from securities, but taking into account all profits and expenses, including charity);
- selection of optimal insurance products;
- retirement planning;
- property management;
- dealing with legacy planning, etc.
As you can see from the above, people who have reached a certain level of wealth need wealth management. This is not a one-off service, but involves the ongoing involvement of a financial advisor. The advisor should consider both short-term and long-term goals of the client. Their function is to ensure the preservation of capital and its effective utilization to meet their objectives.
It is usually about dealing with the issues of a wealthy family rather than an individual. A financial advisor does not usually provide these services alone. A financial advisor works as part of a wealth management team. They coordinate the actions of many specialists – a stock market investment expert, a property lawyer, etc.
Key Differences Between Asset Management and Wealth Management
Let’s look at the main points of the asset vs wealth management comparison.
Scope of Services
The key difference in comparing asset vs wealth management is that the second service is more extensive. The task of an asset manager is to ensure the highest possible profitability of investments on the stock market.
For a wealth manager, the client’s securities are just one of the many financial aspects to consider when creating a strategy.
The primary objective of asset managers is to maximize the profits a client receives from securities and other stock market instruments. For wealth managers, it is to preserve the wealth they have for many years to come.
Clientele and Their Needs
Wealth management clients are wealthy individuals with complex portfolio structures. They are not limited to investing in the stock market, owning real estate, private businesses, etc.
An asset manager provides services to people of all income levels and deposit sizes. It can be a member of a large team working for the owner of a large capital. There are also experts who are ready to cooperate with people with an average deposit and assist beginners in building their first portfolio. Fiduciary Responsibility
In simple phrase, fiduciary responsibility is the obligation to put the clients’ interests above one’s own.
An investment asset manager may not be bound by fiduciary responsibility. Such services may be provided by people cooperating in parallel with management companies and receiving remuneration from them for selling their financial products.
This does not mean that the expert offers exclusively favourable solutions. But such a risk remains when the only source of one’s income is commissions. Therefore, a frequent recommendation is to choose an advisor who works for remuneration from the client’s side.
Wealth management takes an expert’s mandatory fiduciary responsibility. Therefore, the remuneration of consultants is usually calculated on a percentage system. Less frequently, a fixed fee system is used. Such an expert should not receive income from recommending certain financial solutions.
Choosing the Right Service
In order to assess whether the experience and style of asset and wealth management experts is proper for an investor, it is useful to ask a few questions. In doing so, it is also important to understand your goals.
Questions to Consider
Topics to discuss with an expert before trusting them with your finances:
- Fiduciary obligations. When it comes to investments only, these are highly desirable. In the case of transferring full control over the client’s financial life, it is a prerequisite.
- Remuneration structure. It should incentivise the expert to deliver better results, rather than selling specific products.
- Expected working arrangements (methods of communication, frequency of consultations).
- The expert’s education and work experience.
- The level of satisfaction of current clients. It is best demonstrated by the average duration of cooperation.
Such questions will be relevant both when choosing investment adviser representatives and wealth managers. The main difference is that in the latter case you should place more emphasis on long-term financial goals.
It is also useful to discuss the expert’s working style. According to statistics, passive investing with rare rebalancing is often more profitable than active strategies. When an expert promises to “beat the market”, they should provide evidence that they have been able to do so consistently over several years.
Determining Your Needs
Whether a person needs an asset or wealth manager depends on their goals. When the only goal is to make a profit from investing, it is enough to turn to an asset manager.
When a person needs help with financial planning in general, and not just in choosing securities, a wealth manager will be useful.
It is important to remember that these are not mutually exclusive services. One person can turn to both specialists at once. Practically all large companies offer 2 options of co-operation, as well as their combination.
Can a firm offer both asset and wealth management services?
Yes, wealth management firms can offer different co-operation options. The client can use the service that is proper for them or both at the same time.
Who typically benefits more from wealth management services?
Rich people with complex capital structures benefit the most. Someone who owns many diverse assets may find it difficult to keep track of them with no help from an expert. Also, such an expert is useful for people with a large number of financial goals.
Is asset management only about investing in stocks and bonds?
In addition to stocks and bonds, an asset manager can work with mutual funds, exchange-traded funds and real estate investment trusts, and precious metals. Some experts are willing to advise their clients on trading futures and options on various underlying assets. Real estate or insurance products are not usually handled by such an expert.
Do wealth managers only deal with wealthy individuals?
Formally, having wealth is not a prerequisite for consulting an expert. But for a person with a small deposit and low income, the services of such a consultant will be unnecessary and unreasonably expensive.
How do asset and wealth managers charge for their services?
When it comes to asset or wealth management, the best option for the client is to be rewarded with a percentage of the amount under the expert’s control. Financial advisors working under such a scheme aim to maximize results. But it is also possible when an asset manager receives a fee for selling investment products to clients.
Is it possible to switch from asset management to wealth management as my financial situation evolves?
Yes. A person can turn to an expert who will analyze their financial condition as a whole. In this case, it is possible to terminate cooperation with the previous advisor, as well as to use asset and wealth management services in parallel.
How do I know if I need a wealth manager or an asset manager?
To determine your preferred type of financial management, you need to formulate your final goal. A wealth manager is needed when there is a need for advice on real estate, optimal use of insurance products, overall direction, and many more. Asset management services will only help solve a narrow task related to stock market investments.
Are asset and wealth managers regulated or certified?
The primary regulators of the wealth management industry are the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). The Federal Reserve, the U.S. Department of the Treasury, and the Federal Deposit Insurance Corporation (FDIC) also participate. The examiner must register and pass competency exams.
What is the difference between asset management and private wealth banking?
Private banking is a service for high net worth individuals who are looking for a personalized approach. It does not necessarily involve recommendations of specific investment assets and assistance in their purchase.
What is the difference between an asset manager and a financial advisor?
An asset manager seeks to maximize investment results. A financial advisor aims to help the client make the most effective use of their wealth. The financial advisor gives advice not only on securities, but also on the overall strategy for increasing the family’s capital.