The term “wealth management” sounds impressive, but in reality, few people actually know what it means. How does wealth management differ from the services of a regular financial advisor or financial planner? And, is it right for you?
Wealth Management is Big Business
A wealth manager’s purpose is to help you preserve and grow your assets. That starts with organizing your financial situation, clarifying your goals and creating a financial plan. That plan then acts as a road map to help get you where you want to be financially.
Many people use the services of wealth managers. Worldwide, the private wealth management industry was valued at $1.25 trillion in 2020. It is projected to grow to a staggering $3.43 trillion by 2030. 1
Wealth managers oversaw over $112 trillion of investor assets in 2020. 2 These are serious numbers, illustrating the sheer size of this industry. More importantly, let’s take a look at what these professionals can do for you.
What Services Do Wealth Managers Provide?
Wealth managers provide a comprehensive range of services including:
- Financial and retirement planning
- Investment management
- Cash flow planning
- Estate planning
- Tax planning
- College planning
- Insurance strategies
- Long-term care planning
- Social Security and Medicare strategies
In addition, many wealth managers will also help you with other financial questions such as refinancing your mortgage or maximizing your employee benefits program.
Who’s Who in Financial Services
So how are wealth managers different from others you’ll encounter in the financial services industry? Here’s a quick summary of the differences of each resource.
- Traditional financial advisors, sometimes referred to as stockbrokers, focus primarily on investment strategy and asset allocation. Most also provide some upfront financial planning, which is usually somewhat limited.
- Financial planners focus on detailed financial planning that addresses many aspects of your financial health. They can help you create a plan to achieve your financial goals, manage risk and pass on your wealth tax- efficiently.
- Asset managers primarily focus on growing your investment wealth by offering specialized investment advisory services. Clients of asset management firms are usually institutions or very high net worth people.
- Private wealth managers combine all of these disciplines to deliver a convenient, all-in-one solution. Many wealth managers are financial planners, or they may be investment managers with a dedicated financial planner on their team. Rather than charging planning fees, they may incorporate both planning and investment management fees into a single advisory fee based on assets overseen.
Do You Need Wealth Management?
The term “wealth management” may scare people off, but if you have saved for retirement, you have wealth that needs managing. Or, if you haven’t yet achieved your goals, a wealth manager can help you start taking the right steps so you have a better chance of success. Although the term sounds exclusive, most wealth managers regularly work with people with assets ranging from $250,000 to $1 million (and of course, much more). Please note that many managers may have a minimum asset requirement.
Professional Help for Your Investments
One of the biggest reasons to use wealth management services is to get a qualified double-check on your finances. Everyone talks about desiring true financial independence, but achieving this can be difficult. Even those with high income and assets experience painful setbacks.
And that’s understandable. Managing your own money is not easy, and in today’s fast-moving markets, expensive mistakes are all too common. A professional wealth manager can be a check and balance to minimize mistakes and instead, help you keep what you’ve built.
For retirees, wealth management is even more important. Doing it yourself may have worked in the past, but once your income stops, you have much less margin for error. Managing your money without professional assistance can be stressful, especially when the market gets volatile. This can be worsened by the natural cognitive decline that happens through aging. This heightened emotion and mental slowdown are compelling reasons to have a professional overseeing your retirement income strategy and investments.
What is the Typical Fee for a Wealth Manager?
Wealth managers charge differently than many traditional financial advisors and financial planners. Most wealth managers charge a flat advisory fee that is based on the amount invested with them.
While advisory fees can vary depending on the services provided, you can expect to pay about 1% of your total investable assets under management per year. Smaller accounts may pay a larger percentage, while larger ones may pay less. This is an annual fee you will typically pay in quarterly installments.
Is it Worth Paying a Wealth Manager?
Working with a wealth manager can be similar to seeing a doctor or other specialist for a health problem. Yes, you could try to deal with the issue yourself, but is that the smartest decision? Seeing a specialist is wise, since your financial health has the potential to limit your quality of life in retirement. In most cases, this professional can help you minimize mistakes and make the most of your wealth for years or even decades.
What is the Difference between a Wealth Advisor and a Wealth Manager?
While the difference in titles can be subtle, a wealth advisor provides guidance on how to grow and preserve your wealth.
This differs from a wealth manager, who takes a more hands-on role in helping you implement all that advice. A wealth manager will typically provide similar advice, but also help you carry out those plans.
Find a Wealth Manager Experienced with Your Needs
Working with a firm who specializes in your demographic is essential. For example, our firm serves retirees and those approaching retirement. So we’re very well versed in retirement income generation, managing risk, Social Security, Medicare and tax planning. The planning on the front end related to all these topics informs the implementation on the back end, so you want those most experienced with the challenges you face.
Wealth Management Before and During Retirement
The most critical time for hiring a wealth manager is as you approach retirement. Ideally, you want to make the right moves to secure your income and protect your wealth before you leave your job or sell your business.
Our firm employs a unique process called the 4 Buckets Income Strategy that helps our clients create predictable retirement income. With this process, your income needs are matched with a strategy that helps you feel financially secure no matter what the stock market is doing. Then, we also look for ways to lower your tax bill, which also helps your bottom line and your beneficiaries’.
How We Do Wealth Management at Lohr & company to Help you Secure a More Confident Retirement
The 4 Buckets Income Strategy is the planning framework used to create consistent, sustainable retirement income. Here’s a quick rundown of each of the Buckets and their purpose towards retirement income:
Bucket 1: Emergency Reserves
We are all familiar with the concept of emergency funds. We use them for big needs or purchases as they arise. What sort of bigger needs could a retiree have? It may be medical bills, renovating a home to make it more suitable for aging in place. If nothing else, it’s a good security blanket. For a retiree, the security of cash on hand is particularly important as they actively take income from their portfolios. Additionally, a solid cash buffer can be used strategically to manage realized income and tax brackets in retirement.
Assets in this bucket may be considered cash on hand, money markets, C.D.s and bank accounts. Anything generating a yield beyond that of C.D.’s would be reflected in Bucket 3.
Bucket 2: Pensions & Social Security
For retirees across the wealth spectrum, one of their favorite sources of income is Social Security. Why? Because of the guaranteed elements embedded in it. Social Security remains one of the primary sources of guaranteed income for retirees. But is it really guaranteed? We don’t get into the speculation of all of that. But we do know that social security benefits constitute at least half of retiree’s income for 50% of the eligible population. 3 If this income disappears you could envision the sort of wealth destruction that happens during depressions or civil wars. So, to keep things light, let’s assume it’s here to stay for your retirement.
Additionally, some retirees still have access to company pensions. While those with pension benefits have become fewer over time, it’s a very valuable element to include in Bucket 2. This bucket plays an important role in a retiree’s income confidence.
Bucket 3: Stable Income
Fixed income investments as well as real estate both directly owned and through investment vehicles often reside in this bucket. Many investors do not have exposure to real estate directly and investment vehicles like REITs should not be a core asset class for retirement income. Most investors then turn to bonds and cash equivalents. However, with historically low rates on bonds and positive correlation to stock prices we are a proponent of bond alternatives for stable income.
Bucket 4: Growth & Legacy
Retirees still need to have an allocation towards growth assets like equities. When we discuss equities we’re talking about an array of investment vehicles like individual stocks, mutual funds or exchange traded funds used to give exposure to company ownership both domestically and abroad. Bucket 4 is important to supplement income, keep up with rising inflation and has unique wealth and tax advantages. Levels of allocation in this bucket depend on how effectively the income need is being met by Buckets 2 and 3.
Wealth Management within the 4 Buckets
Once a client has completed the 4 Buckets Income strategy, we implement our recommendations as their new wealth managers. The question then is, how do we perform this duty day to day? The answer to that question is dependent on the bucket we’re working with.
Bucket 3
For retirement savings allocated to Bucket 3, these assets are often placed in an annuity.4 By pooling longevity risk (the risk of retirees outliving their money), retirees can have the assurance of lifetime income. We recommend two types of annuities for this bucket – an income annuity or a variable annuity. An income annuity is pure insurance and the outcomes are contractually fixed. These annuities pay a pre-determined monthly amount based on the underlying insurance contract. Annuitants exchange a principal sum of money for guaranteed lifetime income.
A variable annuity is a different type of annuity and has an underlying investment component. The annuity owner retains control of the assets. As wealth managers, we invest the underlying funds into various sub-accounts consistent across all our annuity-owner clients. In exchange for greater liquidity and potentially higher lifetime income, variable annuities have all-in costs between 3-4% per year.
As wealth managers, we allocate a client’s retirement savings in Bucket 3 based on their preference for liquidity and guarantees when determining the type of annuity selection.
Bucket 4
Assets allocated to Bucket 4 are managed according to our proprietary model of exchange traded funds (ETFs). 5 We use index ETFs in particular to gain broad diversification 6 in different market sectors and to minimize fee drag and adverse tax consequences. This is an actively traded model incorporating minimal turnover and tactical investment decisions called “tilts.” These are small investment decisions based on perceived market opportunities. For example, domestic equities may be in favor over international, or growth may be in favor over value. We strive to tilt our portfolio towards these currently favorable trends.
This is designed to be a high-growth equity model and will not have lower than 90% in core equity sectors. We do not try and time macro developments in the market. When clients have implemented the 4 Buckets strategy, they have committed these assets to be long-term growth assets. There is not concern about secular market trends, but rather maintaining appropriate balance across the 4 Buckets to meet retirement income needs. This level of discipline is hard to achieve for both advisor and client unless a commonly shared strategy is in place. Clients typically have a smaller percentage of their retirement income contributed by this bucket, with the primary purpose for long term needs, larger periodic withdrawals, and unique tax efficiencies.
Fees for our management of these assets operate according to a blended schedule 7and will include trading costs and expense ratios of the underlying ETFs. See example below:
$500,000 Portfolio
Management Fee (first $1,000,000) = 0.95%
Transaction Fee (blended schedule) = 0.10%
Weighted Average of Expense Ratios = 0.21%
All-in = 1.26%
Monitoring the plan
Once the 4 Buckets Income Strategy is in place and we have been chosen to serve as your wealth management team, our role has several additional responsibilities beyond management of your investments. First, we help clients stay committed to the strategy based on current needs. If needs have not changed, then outside influences whether they be stock market, political, or global should not cause deviation from the plan. If material changes develop for a client, then we revisit our 4 Buckets allocations and adjust accordingly.
As time goes on there will be various tax and estate considerations along the way. How do you want assets transferred to beneficiaries? How will your spouse be taken care of in the event of your passing? What are income tax implications for you long term based on your current strategy? What are potential tax consequences for your heirs? We, along with local attorneys and accountants have the expertise to guide those decisions comprehensively for our clients.
Should You Do It Yourself Instead?
With so much at stake, yes, you could do it yourself, but what would be the potential cost? Whether it is setbacks from poor investment decisions, ignorance of tax and estate law, or inadequate financial planning, there are many financial hazards out there. Wealth management can help you avoid missteps so you can feel more confident about your entire financial picture and future.
Footnotes
- https://reports.valuates.com/reports/ALLI-Manu-0S76/wealth-management
- https://www.pwc.com/ng/en/press-room/global-assets-under-management-set-to-rise.html
- Center on Budget and Policy Priorities “Top Ten Facts on Social Security.” https://www.cbpp.org/sites/default/files/atoms/files/8-8-16socsec.pdf
- Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Guarantees are based on the claims-paying ability of the issuer. Withdrawals made prior to age 59½ are subject to a 10 percent IRS penalty tax, and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available subaccount portfolios will fluctuate, so the value of an investor’s unit, when redeemed, may be worth more or less than the original value. Optional features available may involve additional fees.Ð_
- Exchange-traded funds (ETFs) are subject to market volatility, including the risks of their underlying investments. They are not individually redeemable from the fund and are bought and sold at the current market price, which may be above or below their net asset value.
- Diversification does not assure a profit or protect against loss in declining markets, and diversification cannotÐuarantee that any objective or goal will be achieved.Ð_
- ANNUAL FEE: PPS Custom Program (Transactions) Account clients will pay an annual management fee, as outlined in the blended fee schedule. The management fee is negotiable and billed quarterly, and, unless otherwise agreed, shall be based on the value of assets in the Account. In addition to the annual management fee, PPS Custom Program clients may pay transaction charges, administrative charges, and miscellaneous account fees and charges, as described in the Master Services Agreement (MSA) or PPS Client Agreement (as applicable) and Commonwealth’s ADV Part 2A Brochure.
