The market disruptions caused by stocks such as GameStop and the cryptocurrency Dogecoin at the beginning of 2021 were indicative of how tricky it is to manage your investments in a technologically advanced and highly connected world. Both investments started off as memes and then went on to become a mania that had a rippling effect on global markets, making the SEC and other government regulators sit up and take note.
Understanding what financial goals you want to achieve, choosing the right investments, adopting efficient tax management, adjusting your investment portfolio, comprehensively undertaking estate planning, keeping track of market fluctuations, etc., are financial responsibilities that take considerable knowledge and effort in themselves. Moreover, if you are a high-net-worth individual (HNI) with investible assets larger than $1.5 million, preserving wealth and investing wisely can take even more time and effort and can be challenging to manage on your own. Hence, it is advisable to work with a professional wealth manager to ensure that your money is invested in the right places at the right time and that all your wealth matters are taken care of.
Typically, wealth managers are a subset of financial advisors. Both professionals offer nearly similar services, but their level of expertise and clientele are what sets them apart. Wealth managers primarily focus on providing a wide array of services essential for managing the finances or wealth of high-net-worth and ultra-high-net-worth individuals. These managers work closely with their clients, offering services such as investment management, financial planning, tax management, retirement planning, legal consultancy, philanthropic funding, estate management, succession planning, etc.
Wealth managers charge a fee for their services, which is usually based on the Assets Under Management (AUM). Some may consider this fee to be a high cost as it is a percentage of the total funds that the advisor manages. However, the value-add of their services and the growth in wealth when you hire a qualified wealth manager may make the expense worth the investment.
In this article, we will discuss what you should know about wealth managers, their fee structures, how they add financial value through their services, and if they are worth the cost.
What is wealth management, and who is a wealth manager?
Wealth management is one of the most advanced forms of financial planning services. Mostly catering to high-net-worth and ultra-high-net-worth investors, wealth management encompasses comprehensive planning of large assets to protect and grow one’s corpus. For reference, the US Securities and Exchange Commission (SEC) describes a high-net-worth individual as a person with a minimum of $75,000 in assets under management (AUM) or an individual with a net-worth of $1.5 million or above.
If you are a high-net-worth investor, working with a wealth manager may be in your interests to safeguard your assets and your wealth. A wealth manager will work closely with you to understand your specific financial needs and will accordingly create a personalized strategy to manage your wealth through a range of financial services.
Your wealth manager will provide guidance on all your wealth-related matters, taking quite a load off your shoulders. They will coordinate with different experts, such as your accountant, legal representative, trustees, etc., on your behalf to provide holistic money management solutions for your current and future needs. In the end, the ultimate objective of wealth management is to preserve and grow your wealth over the long term.
What services do wealth managers provide?
Most wealth managers are equipped to provide any of the services within the financial space, but some may be specialized in specific streams. The specialization may be based on the expertise of the professional or the chief focus of the business in which the wealth manager operates.
Some of the most common offerings of a wealth manager include:
- Money management
- Investment advice and management
- Estate planning and trust services
- Tax planning
- Retirement planning
- Philanthropic planning
- Insurance planning
- Succession or family legacy planning
Wealth managers can choose to offer all of these services or one or a combination of these services.
How much do wealth managers cost?
Different wealth managers may charge differently from their clients. Most often, their fee models are similar to those of a financial advisor. Generally, wealth managers use the Asset Under Management (AUM) fee model to charge for their services, i.e., the advisor levies fees based on a percentage of your overall AUM. In this regard, AUM refers to the market value of your investments managed by the wealth manager on your behalf.
On average, you can expect to pay around 1% of the assets under management as your wealth management cost. However, this fee model works on a sliding scale. This means that as your AUM value increases, you may expect to pay less for the same wealth management services. According to industry observers, if a wealth manager charges 1% for $1 million worth AUM, the fee may come down to 0.50% at $10 million AUM and 0.10% thereafter. So, in all, if your AUM value is $10 million or more, you can expect to pay around $50,000, which is feasible compared with the returns you may make on your investment portfolio.
Alternatively, some wealth managers also levy a fixed annual fee for their services. As per an industry study, typical fees in this arrangement are $12,500 for a $1 million client and $55,000 for a client worth $7.5 million or more. The annual fee arrangement is also in line with the AUM method. However, in the latter method, you have to pay the fixed amount each year, whereas, in the former, your outflow is dependent on AUM as per a sliding scale.
The least common method that wealth managers use to charge their clients is an hourly rate. In this fee model, you hire a wealth manager for a specific number of hours for their services. The more help you need, the more you will pay. While this medium might appear cost-effective, it has several drawbacks. Firstly, you need to inform your wealth manager of all of your financial information and details every time you set up a meeting with them. This will lead to more hourly consumption of services and, thereby, higher charges. Secondly, you cannot be sure if the advice offered by the wealth manager is in your best interest. This is primarily because there is no long-term engagement, and hence, you cannot be sure of how your wealth manager operates, earns income, charges commission, etc. Also, you will essentially be doing the coordination and mediating between the other financial advisors, which a wealth manager could have otherwise done if they were hired for a long-term engagement.
That said, in some cases, wealth managers combine two fee methods to charge for their services. For instance, your wealth manager can agree to take a specific percentage of the AUM for the investing services while levying a per-hour fee for advice related to estate or succession planning.
Nonetheless, even if your wealth manager only charges a percentage for the AUM, you might be paying more than that. The AUM model does not account for underlying expenses such as brokerage charges, trading fees, transaction costs, and account maintenance fees, etc. Hence, when selecting AUM as a method of payment, it is important to question and be aware of precisely how much a wealth manager costs and the fee structure included in wealth management.
What qualities must I look for in a wealth manager?
Professional wealth managers are worth their cost only if they possess the following qualities:
- Have necessary qualifications, educational backgrounds, and certifications such as a Certified Professional Planner (CFP), a Certified Private Wealth Advisor (CPWA), etc.
- Hold necessary expertise in the required wealth management area(s).
- Act as a fiduciary who places your interest above theirs and works diligently to disclose and minimize all possible areas of conflict.
- Has the ability to work closely with you to understand your financial situation, personal goals, risk appetite, life stage, and more.
- Dedicates adequate time and professionally answers your wealth-related and management queries.
- Is transparent and open about their fee structure and implies no hidden costs.
- Deploys efficient strategies to maximize returns and improve your wealth over time while minimizing taxes in the long run.
- Effectively communicates with you on a need basis to inform you of the market developments and takes appropriate measures to tap lucrative opportunities and minimize losses.
- Keeps things in perspective and does not resort to panic-based decision-making.
- Is the focal point of contact for all your wealth-related matters.
How to find the most suitable wealth manager for your needs
Finding the best wealth manager for your needs might seem like a daunting task.
Here are some steps that can help you find the right wealth manager for your needs:
1. Understand your financial requirements and priorities:
The first thing you must do is to understand what you want your wealth manager to do for you. Make an exhaustive list of services or areas of wealth management that would require the wealth manager’s expertise. It is advisable to create the list in order of your priorities. For example, if you are troubled with your tax liabilities, you might want to reduce taxes via efficient tax planning. Hence, in the list above, mention tax management services on the top.
2. Conduct a detailed search for a wealth manager:
Once you know your financial requirements, the next step is to find a reputed wealth manager or a firm that has the credentials, qualifications, and areas of expertise that you are looking for. You may take suggestions from your colleagues, family, and friends for recommendations on a suitable wealth manager. Alternatively, you could use websites such as Paladin Registry to find a wealth manager that fits your financial needs. Answer a few basic questions about yourself, and the free match service will match you with the 1-3 financial advisors that best fit the criteria you are looking for.
3. Screen and interview your shortlisted wealth managers before hiring one:
When you have a list of your prospective wealth managers, conduct thorough research on their background, customer reviews, investment philosophy, credentials, ethics, fee models, etc. This process is made easier for you when you use Paladin Registry to find a wealth manager. The website provides you with free access to advisor credentials, financial certifications, ethical standards, fee structures, and business practices. This information lets you review your options and make an informed decision after interviewing the advisors that have been matched to you.
4. Hire the most suitable wealth manager for your needs:
Once you interview the wealth managers you have shortlisted to hire, consider each of their qualities and drawbacks concerning your financial needs and requirements. Compare their expertise with their fees and assess if they are worth the investment. Also, understand if they follow the fiduciary standard and place your needs above theirs.
How do I verify if my wealth manager is worth the cost?
The best way to understand if your wealth manager is worth the cost is to assess the value-add they have contributed to your wealth through their services. A professional wealth manager offers a wide array of services, enabling you to set up and achieve your financial goals. Your financial goal could be to buy a mansion, reduce your taxes, create a trust for your kids, create a holistic estate plan, generate stable returns from your investment portfolio, etc.
If your wealth manager has helped you achieve your goals while ensuring your peace of mind regarding your financial security, then the money you are paying them is worth it. In other words, if your wealth manager provides holistic management of your finances, makes smart investments that give you satisfactory results, takes risk-mitigation measures, and efficiently manages your portfolio by continually monitoring, reporting to you, and rebalancing when needed, then the money you are paying for the services is justified.
Your wealth manager may help you make crucial money decisions as you progress in life too. For instance, you might have a successfully running business that you want to pass on to your kids and retire peacefully. However, do you know how much money you need for a comfortable retirement, and how you should distribute your assets amongst your children so that the division is fair? Your wealth manager can step in here to provide optimal solutions that fit your needs.
A wealth manager can help you create a comprehensive estate plan and determine the value of each asset that you wish to pass on to your kids. They can work actively with you to make sure there are no legal hassles and that the terms of estate functioning are clearly defined and explained to the stakeholders. They can also work with an attorney to discuss your will drafting process and handle documentation and processing if you wish to create a trust, living or otherwise. Moreover, they will aim to minimize your retirement and estate taxes. A wealth manager is also equipped to help you with issues like relocation, health care planning, etc.
The key to knowing if your wealth manager is worth the cost is to assess if the services offered by a wealth manager match up with the cost of wealth management. However, merely restricting your analysis to ‘how much does wealth management cost?’ is not a smart approach. The objective is to use the fee assessment as a starting point and eventually evaluate if your wealth manager can provide you peace of mind and confidence regarding your future financial security. You may also use Paladin Registry’s free match tool to find a vetted wealth manager who is competent and qualified to meet your financial needs and requirements, and provides you with the financial security that you are looking for.
To learn more about the author William Hayslett view his short bio.
Other posts from William Hayslett
The spectacular rise of Bitcoin since its launch in 2009 is often equated in investing circles to a...
The world is a lot different today than it was for the previous generations. The way your parents...
Choosing a financial advisor is not easy. The right financial advisor for your needs understands your financial goals...