The term “wealth management” has been used fast and loose in defining the financial services business. Many in the industry seem to think it’s interchangeable with more generalist terms like “financial planning” or “financial advice.” The truth is, wealth management is a practice unto itself, and high-net-worth individuals and families who require wealth management services have more complex financial needs than the average Joe (in the sense that their needs are more intricate and sophisticated).
It’s this belief—that wealth management is a distinct practice with a distinct body of knowledge—that prompted the Investment Management Consultants Association (IMCA) to precisely define it. To do so, it commissioned Kryterion Test Services to survey 250 financial professionals who provide private wealth advisory services. The results concluded that while the fundamental processes followed in wealth management may be similar to those of financial planning or other client-centric advisor or consulting disciplines, an advanced and distinct set of tasks, knowledge and skills is required to effectively serve high-net-worth clients (those survey respondents with a net worth of $5 million or greater). This “knowledge and task analysis” resulted in 47 skill topics and 169 knowledge topics, which IMCA used to refine its Certified Private Wealth Advisor (CPWA) education, exam and ethics requirements. Most of these changes have gone into effect as of March 2014.
So what’s different about high-net-worth clients? At the risk of stating the obvious, they have more money. And remember what Notorious B.I.G. sang: “Mo Money Mo Problems.”
Practitioners who are committed to advanced competency in private wealth advice are able to effectively address the problems high-net-worth clients face—and therefore the skills required to serve them.
Human Dynamics
Anyone who has ever bickered with family members over money knows that it can create tension. With large sums of money, and often many branches of the family tree engaged in conversations about money, the tension multiplies. Wealth advisors need to be able to navigate intricate relationships and family histories—and tension among competing parties—to execute effective financial strategies that work for their clients.
And there aren’t just personalities and moving parts to deal with on the client side. High-net-worth clients often employ multiple financial professionals, including advisors, attorneys, CPAs and tax specialists—making it highly likely that advisors will need to work as part of a team. That requires both a cooperative personality and a deep level of subject matter expertise in many areas, as well as the ability to recognize when to assume a leadership position and when to defer to another professional.
Legacy Planning
While many people work with a financial professional primarily to accumulate wealth and plan for retirement, high-net-worth individuals, by definition, already have wealth. As a result, distributing wealth is more of a focus for this group than it is for other clients. High-net-worth clients often divide their assets among many beneficiaries and charities, requiring multiple trusts and estates and other complicated vehicles for divvying up assets. Additionally, their wealth may be tied up in a diverse assortment of assets, such as a family business, real estate holdings, investments and company stock options. Wealth advisors need to understand the logistical, legal and tax implications of estate distribution and charitable giving among multiple beneficiaries and assets. They also need to be well versed in the numerous strategies employed to protect assets from creditors, to minimize taxes and to maximize client control over assets.
Tax Management, Investment Strategies And Asset Preservation
Because high-net-worth individuals already have wealth, they are also more likely to be concerned about preserving the assets they have to extend their wealth to future generations. Managing portfolio risk, therefore, is more important than it might be for a client who is focused on maximizing returns. High-net-worth clients are more likely to invest in alternatives. Advisors need to be well versed in these types of investments to be able to offer high-net-worth clients the full breadth of investment options that are available. “If you don’t understand it, you shouldn’t invest in it” might be a smart financial planning adage for mass affluent investors, but high-net-worth clients expect more from their advisors.
Taxes are another important component of asset preservation. Wealth advisors need to know the tax code inside and out to be able to manage client assets and investments in a way that minimizes their tax burden.
These are just a few of the many characteristics and scenarios that make high-net-worth clients unique. Anyone who wishes to work with them must have the necessary knowledge, expertise and training to do so. Because of IMCA’s efforts in this specialty field of practice, volunteer practitioners in our CPWA certification program have now established an objective, fair and transparent education and assessment process to qualify their peers who demonstrate advanced competency in advising high-net-worth clients … otherwise known as wealth management.
Sean Walters is executive director and CEO of the 9,200-member Investment Management Consultants Association, which administers the Certified Investment Management Analyst and Certified Private Wealth Advisor certifications. To download IMCA’s white paper, Defining Wealth Management: Serving HNW Clients with a Distinct Body of Knowledge, visit www.IMCA.org.