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What is Wealth Management? Meaning and Definition

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What is Wealth Management?
May 10, 2024

Table of Content

 

Wealth management is a comprehensive strategic approach to managing your financial goals. Proper wealth management is essential at an early age to let your investments grow over time. With proper money planning, you can sustain your lifestyle even when you are unemployed or retired. Furthermore, if you have financial goals like buying a car or a home, you need to invest your money. 

Thus, to make your financial dreams come true and avoid losing the value of your investments, you should avail wealth management services from a qualified professional. Continue reading this blog to learn the meaning of wealth management, its objectives, features, and so on.

What Is Wealth Management?

Wealth management is the strategic process that guides an individual to reach their desired financial goals. It involves financial services along with proper financial planning to families and a wide variety of clients catering to their unique needs. 

It primarily focuses on building and preserving wealth over a long period. To assist clients, comprehensive financial planning services are provided considering the financial goals and choices of individuals. Wealth managers, investment managers, and financial planners are the different entities providing such services.

If you are a novice financial planner, consult a wealth manager to assist you with creating a financial plan to let you stay away from worries and experience a smooth financial journey ahead. These wealth managers and financial planners have years of experience that let them create a customised plan for safeguarding your wealth or achieving your life goals.

How Does Wealth Management Work?

Wealth management is a kind of financial advisory service offered to individuals and companies regarding financial-related decisions. This includes investment, taxation, estate planning, and other financial services.

The wealth management process works following the below-mentioned steps:

1. First, the wealth manager examines your risk appetite and financial goals.

2. Next, the manager advises you on a unique strategy plan. In this step, correct strategies are suggested, considering liquidity preferences, tax liabilities, and investment plans.

3. In the third step, your investment plan is executed. You will be advised to invest your money in a suitable financial instrument, and the wealth manager will consider your investment strategy.

4. In this last step, the wealth manager modifies your plan according to the changes in your preferences.

Key Objectives of Wealth Management

The primary objectives of wealth management are as follows:

  • Managing investments and financial-related decisions
  • Helping clients to maximise their wealth overall
  • Setting desired financial goals and implementing strategies to achieve them
  • Lowering the impact of taxes on wealth-building
  • Planning strategies for transferring wealth from one generation to another (known as estate planning)

Features of Wealth Management

Here are some distinctive features of wealth management:

  • Wealth management services are tailor-made as per the needs and preferences of clients. Before offering any services, a wealth manager will assess your income, expenses, investment horizon, risk appetite, assets and liabilities.
  • Services are offered to meet the specific financial needs of individuals and their families. The key considerations highlighted in this regard are tax management, insurance investment, retirement planning, and more.
  • Apart from providing you with financial advice, a wealth manager explores opportunities to create wealth, cross-checks your investment plans regularly, and so on.

Advantages of Wealth Management

The demand for wealth management services is increasing rapidly. This is due to its many advantages, including:

  • Reduces Financial Stress

    • Wealth managers assist you with any financial uncertainties and help you make critical decisions during times of emergency. With their assistance, you can easily make financial decisions even when the market is highly volatile. Thus, you can stay stress-free and make well-informed financial decisions.

  • Offers a Systematic Financial Plan

    • When you need strategic management of your funds, wealth managers can create an optimal plan considering your needs. With proper advice, it is possible to generate wealth systematically over a long period. With the power of compounding, a systematic financial plan can multiply your gains over time.

  • Flexible Investment Strategy

    • New investment strategies should always be initiated to make you better off. To benefit investors, wealth managers offer flexible investment strategies meeting the needs and demands of their customers. It becomes possible to create a route map considering the ups and downs in the market to help you achieve your dreams.

Understanding Wealth Management with Example

To understand the meaning of wealth management, let us consider an example:

Ajay aged 40 years has a savings plan to manage finances for his daughter's marriage and purchasing his dream home within the next few years. Suppose, he has saved Rs. 2 crore in this savings account and he has an income of Rs. 50 lakh annually. Let’s say he needs around Rs. 5 crore to fulfil all of these dreams. 

Considering all these factors, a wealth manager or financial planner will outline a financial strategy prioritising his risk appetite and present financial conditions. After telling him to invest his savings and Rs. 1 crore (Rs. 20 lakh annually) from his income, the wealth manager will recommend a portfolio that has demonstrated returns of 12% or more, depending on market conditions.

This plan will also offer tax benefits with which the client can minimise his tax liability. Over time with the growth of assets, the wealth manager suggests portfolio management periodically as per the financial goals of the client. With this, the client will be able to achieve his goals within 5 years.

Depending on the wealth manager and financial advisor, as well as other factors, this can be subjective.

Wealth Management Strategies

Wealth management strategies are implemented to help individuals manage, protect, and grow wealth. The strategies however depend on wealth managers looking at the financial goals and risk appetite of each investor.

Some common wealth management strategies are discussed as follows:

  • Diversification: This strategy is associated with a diversified investment portfolio to ease out any risk event. With diversification, you can limit exposure to loss in any investment.
  • Allocation of Assets: This strategy implies division of the investment portfolio into various categories of assets that include bonds, stocks, and cash. To determine which asset to include in your portfolio completely depends on your risk appetite and objectives of investment.
  • Retirement Planning: This considers your retirement income goals and the necessary actions to adapt to achieve those goals.
  • Tax Planning: To lower the liability of taxes, this strategy implements certain tax laws. It takes into consideration tactics such as tax loss harvesting and the use of various deductions under the Income Tax Act.
  • Education Planning: If you have plans to finance your children's education expenses, managing your money prudently is crucial. A proper wealth management plan can help you achieve this goal.
  • Managing Debt: This strategy lets you understand the debt you possess and its impact on your desired financial goals. If necessary, create a plan to pay off debts in an efficient manner.

How Much Money Do You Need to Hire a Wealth Manager?

Before hiring their services, it is important to understand the difference between a financial advisor and a wealth manager. The main role of a financial advisor is to instruct clients on a wide range of financial topics, including investment management, tax planning, budgeting, retirement savings, etc. On the other hand, if you are categorised as a high or ultra-high-net-worth individual, you will need the assistance of a wealth manager. 

Considering this, if you have Rs. 5 crore or more to invest, you are under the high-net-worth individual category. This calls for the hiring of a wealth manager. The needs of high and ultra-high-net-worth individuals are somewhat different from those of regular investors. To safeguard their income from high taxation and losses, HNIs and UHNIs require the services of professional wealth managers.

How to Choose a Wealth Manager?

Before choosing a wealth manager, there are several things you need to look into. Here are the factors you must consider before you proceed to choose a wealth manager. 

Firstly, some wealth management firms choose a specific category of clients. If the client criteria don't match with you, you should look for another wealth manager or wealth management firm. Secondly, take a look at the qualifications of the wealth manager. Here are the necessary criteria to consider in choosing a wealth manager:

  • Experience of the wealth manager in the respective field
  • Services offered by the firm
  • How frequently do you want your wealth manager to communicate with  you?
  • Professional designations of your wealth manager
  • Fees charged by the wealth manager

Credentials for Wealth Managers

It takes a lot of time to complete a wealth management course. Here are the credentials you need to become a wealth manager:

  • Passing the 10+2 board examination is a must with completion of courses such as LL.B, PhD, Foundation, Chartered Financial Analyst (CFA), etc.
  • Complete your master's or bachelor's degree in business administration, commerce, arts, technology and others.
  • Pass intermediate courses from the Institute of Cost and Management Accountants of India (ICMAI)

Alternatives to Wealth Management

There are several online services and apps you can opt for if you find yourself not being a good fit for a wealth manager. These online services and apps will provide you with a wide range of services, starting from basic financial advice to other aspects of wealth management. If the minimum fees charged by wealth management firms appear costly to you, here are some services you can opt for:

  • Private Equity: This is categorised as capital investment made into private companies or those that are not listed on public exchanges like the Bombay Stock Exchange and the National Stock Exchange.
  • Hedge Funds: These funds consider various strategies with the aim of earning higher returns on investment. Skilled and highly trained hedge fund managers can execute strategies like hedging and arbitrage to fulfil investment goals. Furthermore, you can invest in alternative investments with the help of a professional.
  • Private Debt: Private debt is implemented when companies need capital to let their business grow. These debt securities issued by companies are termed private debt funds.

Investment Options in India for Wealth Management

In India, wealth managers have a plethora of investment strategies to offer, catering to their client's financial goals. The following are the best investment options for different wealth management strategies:

1. Accumulation Strategy

Following this strategy, you can get more returns than expected and build up a strong base to get higher returns from the power of computing in the long run. Here are some of the best investment options for this strategy:

  • Mutual Funds: Mutual funds are focused primarily on industry type and stock indices. Choose the fund you want to invest considering the risk appetite and return.
  • Unit Linked Insurance Plan (ULIP): This is similar to mutual funds because ULIPs also invest in equities. ULIP however is a beneficial options, as it combines life insurance coverage with investment options. In addition, it provides tax benefits on maturity and invested amount, allowing you to save taxes.
  • National Pension System (NPS): This is the most beneficial as it enables you to invest in a diversified portfolio of debt securities and equities. Because of its diversification, there is less risk, and you can enjoy safe returns on investment on maturity. 60% of the accumulated amount can be withdrawn as a lump sum. The remaining amount has to be used to purchase an annuity plan.

2. Preservation Strategy

As you approach your retirement years, preserving your wealth becomes your top priority. Here are the best investment options for capital preservation:

  • National Savings Certificate (NSC): These function similarly to tax-saving FDs of five years. More importantly, they provide higher returns than FDs as they are market linked instruments. The invested amount is eligible for tax deductions of up to Rs. 1.5 lakh under Section 80C. The amount invested has a lock-in period of 5 years.
  • Life Insurance Savings Plans: Having life cover is essential for investors in the long run as it protects their dependents. Policyholders can also get guaranteed1 return benefits with bonuses. Alongside, the maturity benefits are free of taxes with some limits. Thus, you can protect the amount you invest in from taxes and inflation.
  • Guaranteed Return Plans: Many Savings and Investment plans offer Guaranteed1 returns, which provide an assured amount after maturity. Like fixed deposits, they provide a fixed rate of returns after certain tenure, regardless of market conditions. Also, you can avail tax benefits under Section 80C and Section 10 (10D).

3. Distribution or Income Strategy

This is another important strategy to adopt after your retirement years when income from your job decreases. For this strategy, you can opt for:

  • Life Insurance (Annuity): By annuity, it means an investment plan in the long run where your investment is converted into payments periodically. Alongside, it offers life insurance coverage.
  • Bank and Post Office Fixed Deposits: You will avail the same kind of interest from both bank and post office fixed deposits. If you are a conservative investor, a fixed deposit will be an ideal choice for you. In rare cases, interest rates exceed the rate of inflation, but the person stays assured that the deposit amount is safe and secure.
  • Monthly Income Plans: This plan will provide you with an income every month. Thereby, it is beneficial to look at the long-run perspective.

Difference between a Wealth Manager and Financial Planner

The first and foremost difference that exists between a wealth manager and a financial planner is that a wealth manager prioritises high-net-worth individuals while a financial planner assists clients with financial planning. A financial planner doesn't remain confined to just high-net-worth individuals.

Here is a table underlying the differences between a wealth manager and a financial planner:

Wealth Manager

Financial Planner

Assists mostly high net-worth families and individuals

Assists a wide variety of clients with financial planning

Takes into consideration financial planning, managing investment, and tax preparation services

Considers financial planning services and how to manage investment 

Have more experience than any other financial advisor

Trained specifically in providing investment services

Charges more fees than financial planners

Charges fees as a commission

Conclusion

By now, you must have a clear understanding of wealth management and how it works. Wealth managers, to assist clients meet their desired financial goals, take into consideration several investment and financial strategies. A financial planner or wealth manager provides the essential service of protecting the assets of clients and reducing their financial risks. Individuals with large wealth should opt for wealth managing services.

Frequently Asked Questions

1. What do you mean by wealth management?

Wealth management is an investment service that allows individuals to protect, preserve, and expand their wealth. It includes debt management, budgeting, tax planning, investment, insurance and other financial services.

2. Why do we need wealth management?

Wealth management is necessary to figure out a systematic plan for growing and protecting your assets. It also allows a reduction in taxes and proves to be beneficial for wealth creation for the upcoming generations.

3. What does a wealth manager do?

The main role of a wealth manager is to guide you in every aspect of your financial journey, including planning after retirement years, estate planning, and risk management.

4. What are the five steps of wealth management?

The five steps of wealth management are collecting financial-related data, establishing financial goals, analysing your portfolio, recommending a financial plan, and finally implementing the plan.

5. How much do wealth managers earn?

The salary of a wealth manager ranges between Rs. 3 lakh to Rs. 12 lakh. The average salary of a wealth manager is around Rs. 7.1 lakh.

6. What are the types of wealth management?

The different types of wealth management are asset allocation, estate planning, financial planning, asset management, and tax accounting.

7. Are financial advisors worth it?

A financial advisor is worth it if you don’t have much expertise in handling your finances. Moreover, if you have a high-net-worth or you need complex financial services such as complicated tax filing, you will want their services.

8. What is the difference between asset management and wealth management?

Asset managers focus primarily on the expanding client's assets for maximising returns. On the other hand, wealth managers offer their clients a wide range of financial services especially for high net-worth individuals.

References

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ARN: ED/04/24/11166

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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