The financial landscape has changed significantly over the past few decades, and we are now living in the age of robo-advisors and exchange-traded funds (EFTs). Some argue that hiring a wealth manager is outdated in today’s financial environment, but the opposite is true. The benefits of wealth management and independent advice are significant. Ultimately, it can make all the difference when it comes to your financial wellbeing.
When should you hire a wealth manager? This guide will answer your questions about knowing when the time is right, how to shift your investment focus from building wealth to preserving it, and what to look for in a manager.
Table of contents
- What is wealth management, and what do wealth management firms do?
- What is the difference between wealth management and financial planning?
- When should you hire a wealth manager?
- What is considered high net worth?
- Moving from self-directed investing to a wealth manager
- How much do wealth managers cost?
- How do wealth managers get paid?
- How to pick a wealth management firm
- Considerations before hiring a private wealth manager
What is wealth management, and what do wealth management firms do?
Wealth management involves holistic advisory services for the financial benefit of individuals. With a focus on building and protecting net worth, wealth management can involve a variety of services, including, but not limited to:
- Investment advice
- Financial planning
- Tax liability management
- Retirement funding
- Estate preparations
As clients require different types of support, services and costs change.
Wealth management firms have a roster of advisors with differing skill sets. These advisors help clients grow and preserve their wealth in a tax-efficient manner. A key part of these firms is how advisors cultivate relationships with clients. As a result, advisors better understand client objectives and behavioural biases. Becoming a trusted financial coach means an advisor can help their client overcome emotional hurdles associated with investing and wealth building. Investors are less likely to fall prey to cognitive or emotional biases when an independent advisor is coaching them and providing expert advice.
What is the difference between wealth management and financial planning?
Financial planning and wealth management often go hand in hand, but they are far from the same thing. As outlined above, wealth management involves advisors overseeing all aspects of a client’s finances. This includes managing the client’s liquid, investable assets.
On the other hand, financial planning is the process of discovering financial goals and developing a strategy for accomplishing them. A financial plan is a roadmap that can show clients how to get to where they want to be.
For example, a client in the discovery phase of the financial planning process may identify a comfortable retirement as their number one priority. The planner can work with the client to see if they are on the right track with their current savings strategy. If not, the financial planner can recommend steps to help them achieve their goal and the next steps.
A quality financial plan is essential for financial health and can help the overall wealth management process. Financial planning is only one aspect of wealth management, though, and the terms are not interchangeable.
Related Reading: Asset Management vs. Wealth Management: What is the difference?
When should you hire a wealth manager?
Anytime! Ideally? The earlier, the better.
Generally, it is wise to hire an investment advisor when you have enough assets to qualify for ongoing counselling. Regardless of your liquid assets, you can still hire a wealth advisor for a check-in. They can offer advice based on your current situation and long-term goals.
Whether you hire someone for a single appointment or ongoing coaching, the sooner you start, the better off you will be in the long run. The value of expert advice is compounded throughout your lifetime.
What is considered high net worth?
Individuals accumulate wealth over their lifetime. Some will reach the point where they are considered high net worth. A high net worth individual is someone with liquid assets of over one million dollars.
The classification for high net worth can be broken down even further into the following categories:
- High net worth: an individual with investable assets in the range of $1 million to $5 million
- Very high net worth: an individual with investable assets between $5 million and $30 million
- Ultra-high net worth: an individual with investable assets worth over $30 million
Those who fall into any of the above classifications may benefit from extra wealth management services. The higher the wealth, the more beneficial these services can be. For example, tax liability planning will be more useful for an ultra-high net worth investor than an investor with a few hundred thousand dollars saved and invested within tax-advantaged accounts.
It is important to note that the definition of high net worth focuses on investable assets and, in this case, would not include a principal residence. Investors can determine their net worth by subtracting outstanding loans or liabilities from total liquid, investable assets.
Moving from self-directed investing to a wealth manager
When you first start building wealth, self-directed investing can be advantageous. With lower costs and little initial savings required, it can be a valuable tool. By allowing those in the early stages of their investment journey to grow their net worth, self-directed investing has its place. This is especially for those willing to put in a bit of time and energy to learn the basics.
As your net worth continues to grow, one of the best ways to preserve it is with the guidance of a wealth manager. They can provide you with additional services, such as tax planning and financial planning — vital to protecting your hard-earned savings. More complex strategies are also available for higher net worth clients, and an advisor can help implement them within the portfolio.
How much do wealth managers cost?
While wealth managers provide significant value, there is no such thing as free personalized financial advice. The cost of wealth management is highly dependant on the client, though. How much money the client has, plus their wealth planning needs, are both factors.
Wealth management costs are usually a percentage of the client’s assets held with the advisor. The fee for wealth management services has an inverse relationship with assets. As the client has more assets with a wealth advisor, the percentage tends to go down. High net worth clients will usually pay less, in percentage terms, than those with fewer liquid assets. Those with ultra-high net worth can secure the most significant discount on wealth management costs.
How do wealth managers get paid?
Most managers are paid a percentage fee. This is based on assets under management (AUM). The percentage fee-based pricing model aligns the interest of the wealth manager with that of the client. If they make more money for their clients, they have more assets, and the advisor collects a more considerable amount in dollar terms.
Typically, wealth managers require a client to have a minimum portfolio size to qualify for a percentage-based pricing model. Some portfolio managers will take on clients with liquid assets of a few hundred thousand dollars, especially if they are high-income earners. Many financial advisors, though, prefer to offer percentage-based pricing to high net worth clients.
While many wealth management firms use the percentage model, some wealth managers charge clients for each transaction. For example, some investment managers will charge the client commission on any trades made in their accounts. In some cases, this can benefit the client — especially if they do not often trade within their accounts. Untrustworthy wealth advisors can take advantage of the commission-based pricing model, though. By “churning” the account, it is possible for the advisor to make unnecessary trades in the portfolio to drive up commission costs rather than earn money for their clients. This is just one of the reasons why you need to know what to look for when choosing a wealth manager.
How to pick a wealth management firm
There is no shortage of wealth management firms in Canada, but quantity does not always equal quality. When searching for a wealth manager, be sure that you consider whether the advisor has a fiduciary duty to their clients. A fiduciary is required by law to make all investment decisions in their client’s best interests. In other words, they’re putting client interests above all else. This means that regardless of the pricing model, you can rest assured that they are not trading within your accounts to turn a profit for themselves. A fiduciary will make every decision and recommendation with your best interest at heart.
In Canada, not every wealth management firm is legally bound to act as a fiduciary. Hiring a wealth manager without that responsibility could open you up to additional risk and higher costs. When picking a firm, confirm the level of care that you will receive from the advisory relationship and the legal obligations that the firm has to its clients.
Considerations before hiring a private wealth manager
Before hiring a wealth manager, consider the benefits of working with an independent, private wealth manager with the proper credentials and bound by a fiduciary duty to act in your best interest. Developing a personal relationship with an independent manager is key to managing your behavioural biases.
It can sometimes be more challenging building a trusting relationship with a more prominent wealth management firm. For example, larger firms with a higher AUM may provide clients with added benefits, though the level of personalization and client contact may be minimal. The main advantage of seeing a financial advisor is that they can provide support, especially during more volatile economic periods and the stock markets. A firm or advisor with too many clients may not always be able to provide this.
To preserve the wealth you have accumulated, make sure you find a wealth management advisor who looks out for your best interest and has expertise in managing your wealth. Not every investor has the same wealth management needs.
For more of our top tips on finding a wealth manager in Canada, click here.
Deciding to hire a wealth manager can be a daunting task, especially when looking for the best wealth manager possible. And while you may have some reservations, starting your search is the most significant step. This is because hiring a wealth manager to obtain independent financial advice is key to building and protecting your net worth.
The best day to hire a wealth manager was yesterday, and the next best day is today. Start as soon as possible and watch your wealth grow.
Read More: Estate Planning in Canada: A Checklist