The financial services industry comprises firms that operate across a range of sectors: Asset & Wealth Management, Banking & Capital Markets, and Insurance.
Business conducted by each firm varies but the scope of financial services generally includes the following:
- Asset Management: managing assets and investments for retail and institutional clients such as stocks and bonds, real estate, and other assets
- Wealth Management: providing services such as financial planning and investment strategy to sustain and grow the wealth of retail clients
- Retail & Small Business Banking: offering branch and online banking services, including chequing and savings accounts, personal and small business loans, credit and debit cards, and other financial products for individuals and businesses
- Wholesale Banking: playing the role of intermediary between corporate and institutional clients to offer corporate finance, trading, risk hedging, underwriting, market making, and M&A advisory services
- Insurance: providing insurance products for clients to allow them to mitigate or transfer the risk of financial loss due to death, injury, property damage, or other events
In this post, we will cover the basics of Wealth Management. By the end, you will be able to:
- Understand the difference between Wealth Management and Asset Management
- Describe the types of products and services offered by wealth management firms
- Understand how wealth management firms make money
- Identify key wealth management distribution channels
1. Wealth Management vs Asset Management
Many people interchangeably use the term asset and wealth management. While the two are closely interlinked, there are clear distinctions that separate the two.
Wealth Management is a comprehensive service that goes beyond investing and provides an individual with advice based on their financial position.
Asset Management, on the other hand, focuses on investments and helps clients pick the best-suited investment vehicle, portfolio composition, and asset allocation.
In simple terms, asset management firms are the ‘manufacturers’ of investment products (e.g., Blackrock is the leader in ETFs through their iShares products), while wealth management firms are the ‘distributors’ of these investment products to end clients (e.g., clients can purchase iShares on the RBC Wealth platform).
2. Value Chain
The full-service wealth management value chain is composed of four core components with key underlying functions:
- Client acquisition:
- Marketing
- Sales
- Planning and allocation:
- Wealth services
- Investment planning & advisory
- Portfolio strategy & management
- Financial health assessment
- Risk tolerance & suitability
- Asset allocation
- Portfolio construction
- Portfolio rebalancing
- Fee & commission disclosures
- Advisor & practice management
- Advisor recruitment
- Onboarding
- Training
- Practice management activities
- Research & content management
- Trading research
- Research publication
- Product inventory maintenance
- Trading and execution:
- Account management & trading
- Fund operations
- Investment operations
- Client service and after sales:
- Reporting
- Billing & accounting
- Performance measurement
- Data management
Additionally, there are enterprise functions such as strategy, finance, data, technology, HR, legal, compliance, risk, and procurement that run across the entire business.
Management consulting firms are generally hired to examine each function in order to identify core business and technology pain points and provide recommendations for optimization and elevated customer experience.
3. Products and Services
Wealth management firms deliver comprehensive and personalized solutions to meet client’s wealth management needs. Competitive positioning is largely determined by the client’s affluence, investment attitude, and preferences for digital versus in-person engagement.
The full suite of wealth services typically includes the following, which generally happens within the “Planning and Allocation” component of the value chain:
- Wealth planning
- Investment management
- Trust & estate services
- Tax planning
- Succession planning
- Concierge services
- Insurance
- Banking & lending
A wide range of investment products are generally offered to enable the wealth manager to provide investment management services in a way that allocates client funds to a portfolio of assets that appropriately match the client’s risk tolerance and investment return objectives.
The following investment products would typically be available, and are ordered below from low risk, low return to high risk, high return options:
- Cash and cash equivalents
- Money market accounts and funds
- Guaranteed Investment Certificates
- Treasury bills (T-bills)
- Fixed income
- Government and corporate bonds
- Debt mutual funds
- Equities
- Stocks
- ETFs
- Equity mutual funds
- Alternatives
- Real estate
- Commodities
- Private equity funds
- Venture capital
4. Business Model
Wealth management firms generate revenue by charging fees for various services they provide, including but not limited to the following:
- Advisory fees: These are fees for providing financial advice to clients and for the distribution of investment products. Generally charged as a percentage of assets that the client holds with the firm. These fees are typically the largest revenue driver for wealth management firms.
- Trading fees: Revenue earned as a brokerage fee in proportion to the value of financial assets traded on behalf of the client
- Other fees: Payment for order flow, ancillary fees, and other fees charged to the client
Wealth management firms incur various costs in running the business, with distribution and technology typically being the largest cost drivers:
- Distribution: Facilitating client interaction and providing access to financial services (e.g., branches, investor services)
- Technology: Handling technology and software platforms used throughout the organization
- Trading & Brokerage: Supporting trade processes via order creation, execution, and settlement, as well as through data management, client reporting, and portfolio management functions
- Marketing: Driving awareness, interest, and purchases from clients across traditional and digital marketing channels. This may involve investing in promotion, and paying fees or commissions to affiliates
- Institutional: Managing advisor partnerships and platform services to support advisors
- HR: Expenses related to compensation & benefits, recruiting & hiring, onboarding, performance management, training and development, and culture
- Risk: Managing risks faced by the organization including regulatory obligations
- Other Operations: Includes costs incurred in operating or procuring legal, finance, business development, and executive management services
5. Distribution Channels
The wealth management landscape consists of a range of distribution channels, ranging from high touch (i.e., client-tailored advice with a wide range of investment products) to low touch (i.e., standardized advice with a restricted investment product choice).
The core distribution channels include:
- Private wealth management: Large banks or independent firms that provide wealth management, private banking, and trust services to high net-worth clients
- Full-service brokerage: Large banks or independent firms that act as full-service investment dealers with a broad shelf of investment products: securities, deposits, and other investments
- Non-bank financial advisor: Advisors distributing financial products for mutual fund and securities dealers and insurance companies
- Branch advice: Bank branch advisors who provide investment and financial planning services, typically to affluent clients
- Branch direct: Front-line advisors at bank branches who provide savings, term deposit, and on-demand mutual fund products for deposit holders
- Direct seller / robo-advice: Fund managers that sell directly to investors and robo-advisors
- Online / discount brokerage: Orders execution only (OEO). Brokers focused on DIY investors and active traders while offering comparatively fewer services
The bottom line
Wealth management is a professional service that combines personal investment management, financial advisory, and planning services directly for the benefit of clients. It is distinct from institutional or prime brokerage, asset management, and banking.
A wide variety of firms now offer wealth management services. Large banks in particular are investing heavily in their wealth management divisions in order to diversify their earnings.
Given the continued uncertainty in global financial markets, the resilience of wealth management revenues and the sector’s relative immunity to macroeconomic shocks makes it an attractive complement for financial institutions that had formerly focused their attention on trading or investment banking.
Jason Oh is a Senior Associate at Strategy&. Previously, he was part of the Global Wealth & Asset Management Strategy team of a large financial institution and served EY and Novantas in their strategy consulting business with industry focus in the financial services sector.
Image: Pexels