Asset management & wealth management are the terms that are used interchangeably in the financial world. However, they both serve different purposes and have different goals. In this blog, we will discuss the differences between asset vs wealth management, core concepts, main functions, strategies, and how they can contribute to your financial growth.
Asset Management: Core Concept
Asset management deals with the management of your assets. Assets like stocks, bonds, real estate, mutual funds, ETFs, and other assets to achieve the investment objective of a client. The main aim of asset management is to grow the investment portfolio of clients while managing risks.
Major Functions of Asset Management
1) Investment Research and Analysis: Every client has a unique financial life and sets financial objectives accordingly. Asset managers focus on extensive research and analysis of various asset classes to suit client’s conditions. Both qualitative and quantitative approaches are used to evaluate the potential risks and returns of various investment assets.
2) Portfolio Management: Asset managers create and manage a portfolio that aligns with the client’s aims based on his risk tolerance, investment capability, and financial objectives. This step involves strategic planning, asset allocation, market volatility, and security selection.
3) Risk Management: This is a critical step as it deals with various types of risks involved in asset management. Risks like market risk, credit risk, liquidity risk, and interest rate risk. Asset managers also use strategies and tools like diversification, hedging, and derivatives to protect their clients’ portfolios.
4) Performance Evaluation and Analysis: Asset managers may do regular analysis of market trends and provide reports to their clients, showcasing the performance of the client’s investment compared to objectives. They also provide a detailed analysis of the deviations from the expected performance and make adjustments accordingly.
Need for Asset Management
Asset management focuses on growing the financial resources of the clients. Hence, investors with substantial financial resources that need professional management need asset management and hire asset managers. Asset management clients are generally High Net worth Individuals (HNIs). These HNI clients have a specific investment objective which could be asset preservation, income generation, or growth, and these need tailored investment strategies.
Strategies in Asset Management
1) Direct and Indirect Management: Direct or active management means to make changes in the portfolio based on the market conditions vs. Indirect or passive management means to duplicate the performance of a benchmark index by investing in a similar portfolio of assets.
2) Planned Asset Allocation: This is a strategic approach to help a client meet its financial objectives. This step involves setting target allocations for various classes of assets. A manager realigns the client’s portfolio periodically by making investment decisions considering the client’s need, purpose, and risk tolerance.
3) Tactical Asset Allocation: Majorly, this is to avoid market risk. When there is a change in market conditions, the manager will make tactical changes in the asset mix to avoid loss and optimize capital gains, if any.
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Wealth Management: Core Concept
Wealth Management is a holistic approach that helps preserve, protect, and grow high-net-worth clients’ wealth. Wealth Management is the highest level of financial planning services and focuses on growing and preserving wealth. It includes strategic planning for various financial issues such as investment planning, tax planning, asset planning, retirement planning, succession planning, and so on. It aims to design a close-knit strategy that helps client manage their wealth, secure their future, and achieve their financial and life goals.
Major Functions of Wealth Management
1) Comprehensive Financial Planning: First, a wealth manager will assess the client’s financial situation and understand his financial goals. He will understand the assets, liabilities, income sources, and expenses and then design a customized plan that aligns with the client’s objectives.
2) Investment Management: It develops and implements strategies to manage investments which also includes guiding to invest in various financial instruments that can help the client to achieve their financial goals.
3) Tax Planning: Tax planning is a critical part of wealth management. Tax liabilities can reduce the potential income of the investor hence it is essential to have a plan in place to minimize these liabilities. A wealth manager must be aware of current tax policies and identify the tax-saving areas. This also includes utilizing tax-advantaged accounts and implementing tax-efficient withdrawal strategies.
4) Estate Planning: Estate planning helps in stress-free retirement. Through estate planning, wealth managers often guide clients in the distribution of assets. Effective estate planning is taken care of by creating wills, trusts, and other legal instruments that make sure the asset is distributed as per the wish of the owner with minimum tax liabilities.
5) Retirement Planning: Every business owner wants to have a stress-free retirement and wealth managers help them to plan their retirement considering their present income needs, lifestyle, future healthcare expenses, and travel expenses if they desire to travel in retirement. This includes the selection of appropriate investment products such as RAS, 401K, and suitable insurance and encouraging them to invest in these accounts.
6) Philanthropic Planning: Many clients have a strong desire to contribute to charitable causes. Wealth management helps clients to structure donations in a tax-efficient manner and align philanthropic value with financial objectives.
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Need for Wealth Management
As wealth management is a specialized and customized financial service it is generally needed by individuals with complex financial situations or exuberant wealth and estate with them like Ultra HNIs who have inherited significant amounts of wealth, business owners, or executives. Wealth management firms provide advisory services such as investing in various financial products, helping you in managing your money, protecting your wealth, and transferring it to your potential heir.
Strategies in Wealth Management
1) Full-fledged Financial Planning: Wealth management tends to look at all aspects of the financial life of an individual. The wealth manager will look into the assets, financial debts, income sources, and expenditures of his client and design a holistic plan that will cater to the client to achieve their short-term goals and long-term goals.
2) Customized Investment Solutions: Wealth managers create complete customized strategies considering the client’s risk tolerance, time horizon, and financial goals. He might also give combined investment advice such as active and passive management as well as alternative investments.
3) Tax Efficiency: Wealth managers utilize different strategies to ensure that the client’s tax burden is reduced. He might encourage clients to invest in municipal bonds or advice on tax loss harvesting.
4) Succession and Estate Planning: Succession and developing estate planning strategies help a client have a stress-free retirement by helping him identify his heirs and transfer their wealth. An individual can identify his heir and train him to take the leadership position in the future and ensure that his values are aligned with the business values and the heir thinks about the family and business success.
5) Risk Management: Risk management is an important aspect to deal with for every individual. One of the main aims of investments is to manage risk and secure the future and one of the best ways to manage risk is to invest in insurance. Once you enter into a contract with an insurance company, you transfer your risk to the insurer which secures you from unforeseen situations.
Asset Management vs Wealth Management: What’s the Difference
Wealth and Asset Management are used in exchange for one another. However, there is a difference between wealth and asset management, and these differences are discussed below.
- Scope of Services: Asset management services mainly focus on the investment of financial assets, while wealth management includes a wide range of services, like financial planning, tax planning, and estate planning.
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Target Audience: Individuals and institutions with a sizeable amount of investment portfolio and want professional management of their portfolios can hire an advisor for asset management. Wealth management takes a much broader aspect into it. It best suits the high-net-worth and ultra high-net-worth-individuals.
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Approach: Asset management focuses on increasing returns while managing investments within the client’s risk tolerance. On the other hand, wealth management considers not only maximizing returns but also securing financial well-being and long-term goals.
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Customization: Asset and wealth management offers personalized services, wealth management is more focused on the client’s specific financial situations and life goals.
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Fee Structure: The fees of asset managers and wealth managers might differ due to the difference in scope in both these concepts. Asset managers often charge a percentage of your portfolio value managed by them and wealth managers may charge the same and include additional charges for other services.
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Selecting from Asset Management and Wealth Management
Whether to choose from wealth management and asset management depends on the client’s overall financial situation and needs. Individuals who have financial plans in existence or need to optimize the performance of their portfolio, you’re likely to choose asset management. However, if you are a business owner or individual with complexities in your financial situation then you’ll want to go for wealth management services. Wealth management would be a better choice as it provides a wide range of financial services from investment management to estate planning and beyond.
Evolution in Asset and Wealth Management
Due to technological advancements, regulatory developments, and changing client expectations, the finance management industries are evolving rapidly. Some of the major key trends are discussed below.
1) Digital Transformation: Management firms are utilizing technology to increase the client’s experience. They are using technology to improve efficiency and deliver fewer erroneous solutions. They are using AI for various functions such as investment analysis, robo-advisors, and digital platforms for client engagement.
2) Responsible Investing: With the growing awareness regarding the environment, individuals are showing interest in responsible or sustainable investing. Hence, financial advisors consider environmental, social, and governance (ESG) factors while advising related to investment opportunities and respecting the interests of their clients.
3) Customization: Nowadays, individuals want someone to hand-hold them and offer personalized solutions that can help them achieve their financial goals. Wealth manager offers more personalized plans as per the individual’s financial situation, goals, and values.
4) Law Modifications: The financial industry is subject to regulation updates and hence it is important for both the service providers to keep themselves updated with these regulatory changes. This will help them to provide transparency and protection to their clients.
5) Societal Transition: There is a shift in needs, values, and goals of the generation and this is bringing changes in the finance industry. Wealth managers are already prepared for these changes and can help their clients meet these changes and fulfill their goals.
Conclusion
Whether to choose asset management or wealth management depends on the financial need and situation of an individual. Asset management focuses on risk management and targeted investment growth and is ideal for someone already having a large portfolio. On the other hand, wealth management is best suited to business owners, executives, or someone with a large amount of inherited money as they would want to preserve, protect, and increase their wealth for future generations.
