From the July 2006 issue of Investment Advisor • Subscribe!

Getting It All Done

Wealth management covers much more than just how much money the client has

F. Scott Fitzgerald was certainly onto something when he said, "The rich are different from you and me." The difference is a bit more complicated, however, than Hemingway's famous retort, "Yes, they have more money," because they have a whole lot more money.

According to "Private Wealth Groups," a new report from Cerulli Associates, the high-net-worth and ultra-high-net worth segment of the population, which the report defines as having more than $5 million in investable assets, accounts for some $5.4 trillion, or 18% of total U.S. wealth. According to the 2005 World Wealth Report from Merrill Lynch and Capgemini, the number of individuals in the U.S. and Canada with more than $1 million in assets is expected to grow by more than 8% a year through at least 2009. These wealthy individuals are used to receiving highly personalized service wherever they go--be it a restaurant, hotel, boutique, or auto dealer--and expect to pay for it.

A growing number of advisors has realized they would be better off by focusing on a few of these very wealthy clients than they would serving a larger number of individuals with only a few hundred thousand dollars each, and have transitioned from being financial planners or investment advisors to wealth managers. But just calling yourself a wealth manager doesn't make you one.

Is "wealth manager" simply a marketing term designed to appeal to wealthier potential clients? Some of the evidence, such as the recent renaming of PNC Advisors as PNC Wealth Management, might point in that direction. According to Alan Aldinger, senior specialist, corporate communications, at PNC Financial Services, PNC is "one of the nation's largest wealth management firms with more than $50 billion in assets under management and 300,000 clients." While those are in fact big numbers in aggregate, when you do the math, it works out to an average of less than $167,000/client, considerably below the $1 million or even $5 million that most advisors practicing at this level consider the minimum for wealth management clients.

According to the description in the 2005 FPA Compensation and Staffing Study conducted by Moss Adams, wealth management is the "application of a holistic approach to financial planning." In concrete terms advisors say that means being involved in, or at least aware of, all of the client's money issues--investments, retirement and estate planning, insurance, mortgages and real estate, taxes, business opportunities, charitable donations, intergenerational wealth transfer and everything else having to do with dollars and cents--as well as interacting with all the client's other professional advisors.

Wealth Managers Speak Up

How do advisors who consider themselves as providing wealth management define the term? "Unfortunately, wealth management has become a buzzword. It means different things to different firms to suit their own needs. It has become increasingly difficult for the public to understand which service providers are acting in their best interests," says William Supper, an advisor (CFP) in Morristown, New Jersey.

"An investment advisor, as the name implies, focuses on managing a client's investments and therefore is judged upon their performance relative to some benchmark. Very little, if any, attention is given to the rest of the client's [overall] financial picture," adds Robert Smith, an FPA member and CFP in Exton, Pennsylvania. "A wealth manager is...all about helping the client live the best life that they can. Therefore, a great deal of time is spent helping the client understand what is really important to them." It is only then, according to Smith, who says he has been a practicing wealth manager for more than 15 years, that a comprehensive financial plan can be developed to "serve as a guide to help make informed decisions as to which strategies are best suited to enable the client to obtain their financial and non-financial goals." Investment management is covered but so is cash flow, debt management, taxes, risk management, retirement, business issues, philanthropy, and estate planning.

K. Esther Szabo of KK Wealth Advisors, a Los Altos, California, firm that manages $100 million for "a select clientele," says she has been providing wealth management services for seven of her 14 years in the business. "Investment advice is one part of my service, which starts with keenly understanding the client, spending time in depth on what each client fears as well as desires, what motivates clients in their lives and why, what their own money messages are and why," she says. "I spend a lot of time listening to my clients. It is not unusual that we don't get to a numbers discussions until we've met several times. Once we've forged this level of relationship, the investment and financial plan has a higher probability of long-term success because a client will be more deeply committed to all aspects of what it takes to be financially successful. Further, they will have more understanding of themselves in relation to their finances. In addition, we provide comprehensive financial planning incorporating insurance, cash flow, and tax and estate planning."

Ultimately what separates the wealth manager from the financial planner and investment advisor is not only the higher net worth of the average client, but the breadth and depth of services offered to those clients in a highly personal way. The relationship is not only a business one, but personal.

A good example of integrating wealth management into an advisory practice is how it's handled at Evensky & Katz in Coral Gables, Florida. In the information available to potential clients on the firm's Web site (www.evensky.com), the difference between investment advisory services and wealth management is clearly spelled out. The former represents the basics and for that, the firm charges a percentage of the assets under management, with the minimum being $12,500/year. Wealth Management clients pay an additional premium ($3,000 the first quarter; $1,500 in each subsequent quarter) for a range of services which includes all of those offered to investment advisory clients, plus a whole lot more.

Pressure on Profits

While for many advisors taking the wealth management route is a no-brainer, it's not without potential pitfalls. One possible hiccup was outlined in the Cerulli Private Wealth Groups report. The very wealthy expect continually improved and updated services, but as more firms compete for their business and their assets grow the wealthy may have the ability to negotiate lower fees for those services. This in turn could put a strain on the margins of those firms looking to serve them as costs for compliance, staff compensation, and new technology continue to rise.

Like other aspects of the advisory profession, the definition and role of the wealth manager will continue to evolve in the coming years, but whatever specifics it entails, the underlying principle will remain individualized service that relieves some of the financial headaches that affect the very wealthy.

Managing editor Robert F. Keane can be reached at bkeane@investmentadvisor.com.

For a more on Wealth Management, including our directory of wealth management service providers, go to "Web Extras" at www.investmentadvisor.com.

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