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Wealth Management

Money Manager | Monday, September 15th, 2008

Wealth management – what exactly does that phrase mean? How does it differ from financial planning and investing? While it may sound like just another buzzword, wealth management actually is an approach used by financial advisors to manage the wealth of their top tier clients who have more money than the average investor. There is no hard and fast rule as to the amount of financial assets a person must have to be included in the wealth management category, but when a person accumulates over $1 million in assets, he and his financial advisor should consider shifting their focus from typical financial planning to the idea of wealth management.

What Wealth Management Is and Is Not

So what exactly is wealth management? Wealth management involves the planning, investing, and managing of the assets of those of you with over $1 million to your name, excluding the cost of your house. When you reach $1 million in assets that is the time to start shifting your financial thinking from plain old banking to wealth management.

What makes wealth management different from regular financial planning? Wealth management involves private banking, estate planning, asset management, legal resources, and investment management all provided by the same investment firm. For much of the 20th century, providing all of these services together by one firm was outlawed by the Glass-Steagall Act, so all clients had to use an investment firm for investing in assets like stocks and bonds but use a separate commercial bank for checking services and an insurance company for insurance services. Now, investment firms can provide all of these services to their clients.

Wealth management is not necessarily the best approach for each investor. Again, if you have less than $1 million, your financial planning needs can probably still be best served by using separate banks, insurance companies, and an investment firm for long term financial goals. However, for those in the top tier of wealth, having one firm provide all three services in one place gives you both convenience and an edge in managing your wealth.

How Wealth Management Became an Investment Strategy

Wealth management as a strategy was not an option until the Glass-Steagall Act was abolished. For much of the 20th century, the Glass-Steagall Act prohibited an investment firm from providing investment, insurance, and banking services at the same time. The Glass-Steagall Act was a holdover from the Great Depression of the 1930′s that was passed in response to the stock market crash of 1929. It established the FDIC and prohibited the mingling of commercial banking and investment banking. Provisions in the Glass-Steagall Act were slowly whittled away as the 20th century progressed until it was finally repealed entirely in 1999, allowing investment firms to start providing insurance services typically provided through an insurance company and banking services that clients previously had to use commercial banks for. As a result, investment firms that had previously provided services such as buying and selling stocks could now offer services previously permitted to commercial banks, such as checking accounts. The result was the ability to focus on wealth management of top tier clients and provide these clients with all their financial and banking services through one firm.
Why Worry About Wealth Management?

How hard can it be to plan for the future? Just deposit your checks into your bank account, and occasionally move any excess money into a savings account, or maybe purchase a Certificate of Deposit that pays a good interest rate. Then, in twenty or thirty years, you’ll have enough, plus your social security, to retire and live comfortably for the rest of my life. Sorry, but it’s not quite that simple.

Each person’s situation is different and there is no absolute right or wrong time to begin using the services of a financial advisor. However, if the above description typifies your outlook on your financial future, you may be in for a rude awakening when you are ready to retire. Meeting with a financial advisor can give you access to his expertise, and you can explain your goals and together you and the advisor can make investment decisions that will help you achieve those goals. There are several reasons to consider engaging the services of a financial advisor.
Reasons to Use a Financial Advisor

Knowledge. Financial advisors have vast knowledge of the myriad of investment choices available, from IRA’s to Educational Savings Accounts to stocks and bonds. Unless you are prepared to do quite a bit of research on your own, a financial advisor will be able to recommend a course of action after discussing your finances and explaining these options to you. Relying on a financial advisor’s knowledge will allow you to make smart investment decisions more quickly than if you had to research all these investments on your own.

Taxes. Financial advisors also know the tax rules that affect investments and can help you avoid costly mistakes and make decisions that will reduce your tax liability now and in the future. For example, did you know there is phase out of the amount of money you can contribute to Roth and Traditional IRA’s when you reach a certain income level? Your financial advisor will understand these rules and help you adjust your investments accordingly. Tax rules and laws can be very complicated, as we all know, so paying a financial advisor for his expertise in this area is well worth the saved time and effort on your part.

Objectivity. Financial advisors can also provide an objective opinion on your situation. They are mostly free of personal involvement in the details of your personal situation, so they can give financial advice from a neutral perspective and show you options that you may not have been able to see for yourself.

Peace of mind. A financial advisor can take the worry and fear out of investing. Financial advisors deal with these issues every day, so you can have peace of mind knowing that you made good investment decisions after discussing your situation with your advisor and relying on his input and recommendations, rather than trying to go it alone.

Wealth management and financial planning are significant aspects of your finances that are most likely best handled with the guidance of a financial advisor. To make your money work for you and to meet the goals you have made for yourself, you and your financial advisor can determine a wealth management strategy that best suits your personal situation.

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