By Mark Moehlman, MBA
Wealth management? What is this new buzz phrase captivating the imaginations of providers and consumers alike in the early years of the third millennium?
In an era when a U.S. president (a Rhodes Scholar, no less) has trouble defining "is," it should come as no surprise that a phrase such as "wealth management" could have a multitude of meanings.
Like much nomenclature, the meaning of wealth management can vary, depending on the context. In its narrowest sense, wealth management is merely the latest synonym for investment management, asset management, or portfolio management. A broader definition would be the comprehensive, coordinated process by which the personal financial affairs of busy, affluent people are managed. Any number of other connotative meanings could be inferred from the barrage of electronic and print media advertisements, which extol the virtues of firms purportedly engaged in wealth management.
Is wealth management simply a 21st century version of 20th century financial planning? Is it nothing more than Madison Avenue rhetorical spin? How can domestic and foreign banks, national securities brokerage houses, insurance companies, accounting and legal firms, and an assortment of independent practitioners all claim to be in the wealth management business? Is it any wonder that consumers are already as confused by the term as they were by the comparable term "financial planning?" As a private practitioner of wealth management since my father's sudden death in 1965, I view this subject as much more than a semantic distinction without a difference.
While opinions may differ on a precise denotative definition, most practitioners would agree that wealth management is a professional service that:
1) focuses primarily on process, rather than products (although products are vitally important);
2) is mostly fee-based, rather than commission-driven (although many manufacturers — especially insurance companies and certain mutual-fund families — dictate that providers be compensated by commissions);
3) is comprehensive, rather than fragmented, in nature.
Wealth management involves the entire spectrum of personal financial issues and activities — from monthly bill paying to long-range estate planning. It encompasses income tax planning and return preparation, investment management (stocks, bonds, real estate, etc.), risk management (insurance coverages), retirement planning, funding, and administration, traditional estate planning (including philanthropic and charitable strategies) and — in the case of closely held businesses and professional practices — continuity and disposition planning and implementation. While the majority of practitioners/providers limit their activity to one or two of these areas, most claim to be wealth managers engaged in wealth management.
Professionally practiced, comprehensive wealth management begins with a thorough evaluation of a client's condition. This diagnostic phase — to use a health analogy — consists of gathering and analyzing recent income tax returns, investment portfolio statements, insurance policies, and estate planning documents (wills and trusts). Business agreements and retirement plan documents also are reviewed. Objective data gathered from printed materials — taken in conjunction with subjective information obtained in an initial client consultation — allows an experienced wealth manager to start forming professional judgments about a client's value system, needs, desires, and goals.
The second phase of the wealth management process can be called the planning phase (hence, the commonly used phrase "financial planning"). This phase is composed of a series of in-person and telephone conversations with clients and their cadre of advisers (attorney, accountant, business consultant, insurance agent, investment broker or manager, retirement administrator, etc.). The result of this extensive dialogue should be the creatation and presentation of a formal, customized, printed plan — whether modular or comprehensive — with recommendations tailored to circumstances and objectives of each client. Depending on the complexity of his or her situation, a client should expect to pay $1,500 to $15,000 by the time a tax and wealth plan is delivered. Standard industry procedure calls for half of this planning fee to be requested at the conclusion of the initial consultation, with the balance due and payable upon delivery.
Too frequently, this is where so-called financial planning ends. Largely because of the inadequacies of software programs, fragmented approaches, and premature sales tactics by providers — and a myriad of hidden agendas and other factors — most consumers lack the confidence and trust to proceed with the implementation phase of the wealth management process. Consequently, for consumers and providers alike, financial planning becomes the proverbial exercise in futility. More often than not, all parties end up feeling abused.
The counterproductive aspect of the foregoing scenario is that it is during the implementation phase that critical choices regarding the "Four Is" (income taxes, investments, insurance, and inheritance) get made. If a lack of candor, discipline, and trust undermine the process, much stands to be lost. Income taxes don't get minimized; investment returns aren't optimized; hazards and risks don't get protected against; and wealth gets distributed by default rather than by design. A commitment on the part of all participants to the integrity of the process is essential to cost-effective and time-efficient wealth management.
Once sound choices have been made and integrated strategies are in place, they are monitored and modified (as needed) in the "review phase." Dynamic lifestyles can render the most sophisticated static plan irrelevant or self-defeating. Clients should meet with their accountants at least twice each calendar year, even though personal tax returns are mandated to be filed annually. Investment portfolios should be monitored no less than quarterly. Insurance coverages need annual reassessment. Estate planning documents should be reviewed every few years, or in anticipation of, or in response to, major legislation or life-changing events such as marriage, divorce, childbirth, and death.
Nearly four decades of involvement in comprehensive wealth management has convinced me that the barriers to financial independence are largely psychological. Providers are guided too frequently by business expediencies, and consumers are often guilty of believing in "free lunches." Each of these biases leads to a perversion of the process that is so essential to a successful outcome. The greatest enemy of financial independence is the basic human nature of providers and consumers.
No longer is comprehensive wealth management the exclusive birthright of the ultra-wealthy. As the pace of modern life becomes more frenetic, impacting legislation more complex and ubiquitous, and securities markets more volatile, all individuals who strive to accumulate, preserve, and distribute wealth in a systematic manner would be well advised to engage a trustworthy wealth manager to coordinate their personal financial affairs.