Overview of Private Wealth Management
Overview of Private Wealth Management
Introduction
Private wealth management refers to investment management and financial planning for
individual investors. The private wealth sector has grown considerably as global wealth has
increased and as individuals have taken on more of the responsibility for managing their own
financial resources. Private wealth managers can help individual investors seek the benefits
as well as navigate the complexities of financial markets.
This reading introduces candidates to the process of designing and executing an investment
plan or strategy for the individual investor. We discuss the tools and techniques used by
private wealth managers and how the wealth manager interacts with the client to serve the
client’s needs. Section 2 examines the key differences between private clients and
institutional clients. In Section 3, we discuss how the wealth manager gains an understanding
of the client and identifies key attributes of the client’s financial situation that are relevant to
the wealth management process. Section 4 covers investment planning, including capital
sufficiency and retirement planning. Section 5 discusses the investment policy statement,
including its various underlying parts. Section 6 analyzes portfolio construction, portfolio
reporting, and portfolio review. Finally, in Section 7, we discuss the practice of private
wealth management, including ethical considerations for private wealth managers,
compliance considerations, and the various client segments that private wealth managers
encounter.
Reflecting the variation in industry terms, we use the terms “private wealth managers,”
“wealth managers,” and “advisors” interchangeably. We also refer to “individual investors”
as “private clients” or, simply, “clients.” In practice, private wealth managers typically
operate either independently or as representatives of organizations, such as wealth
management firms, banks, and broker/dealers.
Learning Outcomes
The member should be able to:
l. recommend and justify portfolio allocations and investments for a private client;
p. discuss how levels of service and range of solutions are related to different private
clients.
Summary
Private clients and institutional clients have different concerns, primarily
relating to investment objectives and constraints, investment
governance, investment sophistication, regulation, and the uniqueness
of individuals.
Information needed in advising private clients includes personal
information, financial information, and tax considerations.
Basic tax strategies for private clients include tax avoidance, tax
reduction, and tax deferral.
A client’s planned goals are those that can be reasonably estimated or
quantified within an expected time horizon, such as retirement, specific
purchases, education, family events, wealth transfer, and philanthropy.
Unplanned goals are those related to unforeseen financial needs, such
as property repairs and medical expenses.
When establishing client goals, private wealth managers consider goal
quantification, goal prioritization, and goal changes.
Risk tolerance refers to the level of risk an individual is willing and able
to bear. Risk tolerance is the inverse of risk aversion. Risk capacity is
the ability to accept financial risk. Risk perception is an individual’s
subjective assessment of the risk involved in an investment decision’s
outcome.
Wealth managers often utilize questionnaires to assess clients’ risk
tolerance. The result of a risk tolerance questionnaire, typically a
numerical score, is often used as an input in the investment planning
process.
Wealth managers need both technical skills and non-technical (“soft”)
skills in their advisory roles. Technical skills include capital markets
proficiency, portfolio construction ability, financial planning knowledge,
quantitative skills, technology skills, and in some situations, foreign
language fluency. Soft skills include communication skills, social skills,
education/coaching skills, and business development and sales skills.
Capital sufficiency analysis, also known as capital needs analysis, is
the process by which a wealth manager determines whether a client
has, or is likely to accumulate, sufficient financial resources to meet his
or her objectives.
Two methods for evaluating capital sufficiency are deterministic
forecasting and Monte Carlo simulation.
Wealth managers use several different methods to analyze a client’s
retirement goals, including mortality tables, annuities, and Monte Carlo
simulation.
An investment policy statement (IPS) for an individual includes the
following parts: background and investment objective(s); investment
parameters (risk tolerance and investment time horizon); asset class
preferences; other investment preferences (liquidity and constraints);
portfolio asset allocation; portfolio management (discretionary authority,
rebalancing, tactical changes, implementation); duties and
responsibilities; and an appendix for additional details.
Two primary approaches to constructing a client portfolio are a
traditional approach and a goals-based investing approach.
Portfolio reporting involves periodically providing clients with
information about their investment portfolio and performance. Portfolio
review refers to meetings or phone conversations between a wealth
manager and a client to discuss the client’s investment strategy. The
key difference between portfolio reporting and portfolio review is that
the wealth manager is more actively engaged in a review.
The success of an investment program involves achieving client goals,
following a consistent process, and realizing favorable portfolio
performance.
Ethical considerations for private wealth managers include “know your
customer” (KYC), fiduciary duty and suitability, confidentiality, and
conflicts of interest.
Several global regulations have relevance for private wealth managers.
Key private wealth segments include mass affluent, high net worth, and
ultra high net worth.
Robo-advisors have emerged in the mass affluent client segment.
These advisors have a primarily digital client interface. Robo-advisor
service providers generally charge lower fees than traditional wealth
management firms. Scalability of technology has enabled robo-advisors
to service investors with relatively small portfolios
#1 Generate Income
#3 Tax Management