Private wealth management is the professional provision of specialist financial and banking support to affluent clients known as high net worth individuals (HNWIs).
Depending on the firm and its client mandate, this may not simply be about providing investment advice or investment management services – it is often about the holistic management, planning, and coordination of an individual's financial life, taking into account both their current and future needs.
Below are some of the key areas a wealth manager needs to understand to be successful in their role:
Private wealth management is the professional provision of specialist financial and banking support to affluent high net worth individuals (HNWIs).
Private bankers and wealth managers help their clients to preserve and grow their wealth, and assist them with their estate planning and philanthropy.
Wealth management is big business.
The industry facilitates the investment of trillions of dollars of individual and institutional money in a wide range of funds and other investment vehicles.
As with banking, the global financial crisis and its repercussions focused minds on the risks associated with the activities of wealth managers.
The consequence was a raft of new legislation and increased regulatory activity, as risk management in the financial sector came under greater scrutiny.
The inherent differences between wealth managers and banks – notably those related to financial stability risks – meant that the wealth management industry escaped the most onerous new rules.
However, wealth management firms today are expected to enhance the efficiency, stability, and resilience of the financial system.
Portfolio management encapsulates various elements of investing such as passive versus active approaches and behavioral theory.
Passive Versus Active Approaches
The world of investment management appears to be shifting inexorably toward a passive management style.
This is primarily because of the inability of active asset managers to consistently outperform the market – which is calling into question the fees demanded by those same asset managers.
Further, while active managers as a group cannot outperform the market on a long-term basis, the line between what is considered active and passive investment styles is not quite as rigid as might be supposed.
Traditionally, the emphasis of passive investment was on indexation while the emphasis of active investment management was on fundamental, technical, and quantitative analysis.
However, these days the distinctions between active and passive are increasingly less marked through the rise of smart beta and factor-based investing.
Behavioral Theory
Behavioral finance deals with the influence of psychology on investment and financial decision-making.
It has become an increasingly significant influence on finance and economics.
Behavioral finance applies theories of cognitive psychology and human behavior to traditional finance and economic principles to help explain why people make irrational financial and investment decisions.
Behavioral finance suggests that investor behavior, while generally rational, exhibits various non-rational or emotional influences that causes systemic biases in their thinking leading to suboptimal decisions being made.
In a wealth management context, the most powerful behavioral characteristic acting against optimal decision making is loss aversion, a trait that suggests that investors are disproportionately moved by the prospect of losses as opposed to gains.
Asset allocation is the process of deciding how an investment portfolio should be distributed across different asset classes.
Asset allocation has moved far beyond the traditional view of diversification. Sophisticated IT systems can process huge amounts of historical performance data which enables investors to construct optimal portfolios.
To build a market efficient portfolio or one that has the potential to generate an above-market return, the portfolio manager must be able to understand the risks, expected returns, correlations, and other characteristics of different classes of assets.
The approach to achieving such a return will vary according to the size and nature of different investors and their time horizon. Investors today are more sophisticated than ever before and have high expectations from fund managers.
The impact of market crashes, declining interest rates, and the advent of alternative investments has had a significant effect on the way asset managers invest funds across different assets classes.
