The terms “financial planning” and “wealth management” are often used interchangeably, but there are some key differences that are important to understand.
Financial planning is, at its heart, about creating a plan that an individual or family can follow to reach their financial goals. As such, a financial planning largely focuses on setting goals and creating a plan to get you there. The plan will usually include strategies to invest for growth, insurance to protect you and your family, estate planning and other ways to help you make the most of your money.
Wealth management, on the other hand, is quite literally the art and science of managing wealth. When your assets grow to a certain level, you'll likely need more complex financial instruments and strategies to balance risk, growth, taxes and legacy considerations. In addition to financial planning considerations, you might need expert tax and legal advice, for example.
What's different about high-net-worth wealth management?
Here are a few key components you’ll find in a wealth management plan that’s customized for high-net worth individuals.
Highly personalized investment advice
As your finances grow in complexity, personalized investment advice can be incredibly beneficial. Wealth managers leverage their understanding of you as an individual, as well as their understanding of the broader investment landscape, to unearth opportunities and keep tabs on all the accounts where your money is invested.
Access to more complex investments
With deep understanding of both public and private markets, wealth managers may help clients discover truly unique opportunities to deploy capital.
With more investable dollars, you may have access to alternative investments that typically aren’t available to the broader retail investing market. Alternative investments include venture capital, private equity or debt, structured products, derivatives, real estate, commodities, collectibles, and hedge funds.
While alternative investments, or alts, have the potential for high returns, they also carry higher risk and can be complicated. They are typically less liquid than traditional investments, such as stocks and bonds, which adds to their risk but also the potential for returns. Oftentimes, alts require a higher initial cash investment to participate, and that cash may need to be tied up for several years before it’s accessible again. That’s why alts may not be a good fit for everyone’s financial plan.
Another reason to leverage the expertise of a wealth manager is to limit tax risk. As your net worth grows, so too does your tax exposure. Without a solid management strategy in place, taxes can significantly eat into your wealth over time. Capital gains taxes and gift and estate taxes are often of special concern.
Wealth managers limit tax risk by coordinating accounts, income sources and savings strategies to be as tax efficient as possible. They think critically about everything from the types of assets being held, the accounts that they are held in, and the timing of a particular asset’s sale.
Though people often don’t consider insurance alongside wealth management, it does play an important role limiting risk. The various benefits of permanent life insurance can be important tools for legacy planning, tax management and reducing the overall risk in your plan. A wealth manager knows how to blend investments and insurance into a long-term strategy that bolsters your financial security today and, perhaps, for generations to come.
Estate planning and legal services
Estate planning is an important consideration for most high-net-worth individuals, for a variety of reasons. First, there is more wealth and assets for heirs (and debtors) to allocate. That increases the risk that conflicts or confusion arises at a particularly difficult time. These issues can be even more complex if wealth was accrued as a business owner, which often adds a layer of complexity to issues of inheritance and succession.
Wealth managers understand this reality and work with other professionals, such as attorneys, to ensure that your final wishes will be followed and that your estate will be protected upon your death.
Is your financial picture growing more complex over time as your wealth grows? If so, working with a wealth manager can be an effective way of empowering your portfolio to grow without taking on an undue level of risk.
Financial Representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation.