The Key Aspects of Wealth Management - Essay Example

Wealth Management Name: Lecturer: Course: Date: Table of Contents Wealth Management 1 Table of Contents 2 Introduction 3 Wealth management and what it aims to Achieve 3 How They Are Remunerated 4 Mass affluent segment 5 Clients Types in Wealth Management 5 Whole of market advice, restricted advice, and summary of discretionary service 7 Restricted advisers 7 Whole market advice 7 Discretionary advice 8 Authorization of Firms and its Significance 8 Influence of macroeconomic environment and legislation on investment industry 9 Conclusion 10 Reference 11 Introduction Wealth management depicts combination of services such as investment advice, legal counsel, accounting and estate planning for a fee (Jain & Jhala 2012). This report looks at what “wealth management” seeks to achieve and how firms which offer this service are authorized. It further examines the term “mass affluent.” Also examined include analysis of clients who use the wealth management services and the differences between the concept of “whole of market”, “restricted” advice and discretionary service. The report further examines how firms offering the service are authorized and a critique of the main issues concerning the macro-economic environment and legislation in the UK. Wealth management and what it aims to Achieve Wealth management refers to an array of services, including investment advice, legal counsel, accounting and estate planning for a fee. As an investment advisory discipline, wealth management integrates a range of aggregated financial services such as investment portfolio management and financial planning. The services are normally targeted at high-network individuals (HNWIs) and small businesses or families that need help with certified financial advisory professional (Pompian & Longo n.d.). Wealth management is aimed at enabling individuals achieve lifestyle maintenance. A significant factor influencing planning objective is to help individuals maintain their lifestyle as well as promote financial independence. This is since reality and perception of wealth are major obstacles to effective financial planning. Wealth management defines what is required to adequate liquidity and lifestyle (Brunel 2006). Wealth management also aims at enabling individual savers access capital market. It enables retail investors to access standardized wealth management in the form of managed savings or investment plans. It also aims at enabling savers who are less wealthy to access capital markets, since all investors -- whether small or large -- have the same chance of participating in the bond, equity, real estate and derivatives markets. Additionally, savers who are unsophisticated are able to access capital markets. Wealth management also aims at delivering performance. Risk aversions and expectations mostly influence decisions by investors. Wealth managers take these factors into perspective in advising the investors through asset-liability management (ALM), enabling investors to realize higher returns. Additionally, wealth managers can exploit market inadequacies using arbitrage transactions (Jain & Jhala 2012). Wealth management also aims at achieving effective retirement planning for the young and the elderly. Making investment decisions for long-term financial wellbeing presents a major challenge as the decisions need to incorporate savings needed to meet the long period of retirement. This is particularly due to the increase in life expectancy, inflation and investment risks. Since asset managers have the expertise in managing risks and providing some level of downside protection (Jain & Jhala 2012). How They Are Remunerated The advisers charge for service offered in financial planning as well as any other expected level of customer service. In doing this, firms have to balance profitability and customer value proposition in delivery of the right offering to the clients at the right or agreed price. Mass affluent segment Mass affluent describes the high end of mass market. According to Deloitte (2011), they comprise of individuals who have total household investible assets of $250,000 to $1 million. Investible assets include investments in college savings plan, retirement plans, money market accounts, annuities and exchange traded funds. Some financial experts describe mass affluent as those individuals who save more than they can invest for their future or spend. Mass market is a significant target market for wealth management institutions. For instance, while they may be concerned about replacing their paycheck retirement as well as be encouraged to spend more during their years of retirement. They may be provided with customized combination of wealth management and lifestyle extras (Deloitte 2011). In the UK, a huge opportunity to penetrate the prevailed market is expected to continue growing for a long time. It is estimated that untapped pool of suitable assets in the UK is about £1trillion (PA Consulting Group 2013). The size of mass influent continues to grow in the UK and globally because of the increasing size of the super-rich. In the US, it is estimated that some 33 million mass market households exist, owning an estimated 37 percent of the country’s liquid financial assets. Clients Types in Wealth Management Wealth management is viewed as an integrated set of financial products such as asset management, cash management, credit protection, retirement and estate and tax planning aimed at distinct segments of client-base, such as the young affluent, old affluent, expatriate clients, businesses or niche institutional clients and families. They are all High net worth (HNW) clients, who require excellent customer service as well as expect their advisors to have expertise in financial matters. Niche institutional clients will often need non-discretionary investment management, fiduciary services and international trust, discretionary investment management, fund administration, private credit and banking, financial protection and discretionary investment management. Expatriate clients are those working in foreign countries. They need a range of services such as global financial securities and protection, collective fund execution settlement and delivery of investment and reporting of foreign exchange. They may also need services offered to niche institutional clients. Older affluent customer segment are less interested on the features of a product. Rather, the products must meet certain basic requirements and not the components of the services surrounding the product. They may also need services offered to niche institutional clients and expatriate clients, except for non-discretionary investment management. In addition, the affluent customer segments are not exceedingly complex. Advisory relationship is however most significant for this segment. Clients who are approaching the retirement age need advice on estate planning and retirement as critical elements of their financial strategy. They also need advice on living in their postretirement lives in comfort while taking care of their grandchildren or children in financial security. Personal touch and perception is also important for this group, and they need constant assurance. They also have a lower affinity for technology and their required services that involve personal touch. The young affluent customer segment are averagely young and of high average income. Compared to older affluent segment whose wealth is accumulated due to years of savings, their status is determined by high average income. They also have high affluence for technology and are greatly self-directed. They spend substantially and hence credit and cash management is essential. To serve this segment, retail banks need to have multichannel access, integrated information and expert advice. In addition, they expect to access services and perceive aggregated account data in order to be able to manage their wealth conveniently and in a timely manner. In case the retail banks fail to provide these services through high level of performance, this customer segment will go elsewhere. Whole of market advice, restricted advice, and summary of discretionary service Restricted advisers Restricted Advice refers to personal recommendation to a client in regards to retail investment product that is not a basic advice or independent advice. Restricted advisers or companies offering this service only serve to recommend specific product providers or products, or in some cases both. Advisers offering this service have to plainly explain the form of restriction (FCA 2014a). Whole market advice Whole market advice are independent advices given by firms that recommend or consider all forms of retain investment service that could meet a client’s needs or objectives. Adviser offering this service considers all products from the entire firms that operate across the market. They have to give unrestricted and unbiased advice (FCA 2014a). Differences Unlike whole market advisers, restricted advisers tend to operate with a single product provider and will only take consideration of the products offered by that provider. However, although they may consider products from several product providers, they do not consider all products from the providers in the industry as done by whole market advisers. Whole market advisers are required to make fair and comprehensive analysis of the market as well as offer unrestricted advice. This requirement does not apply in the case of restricted advice (FCA 2014a). Another difference between the two is that while restricted advisers are permitted to recommend one or some types of products, they cannot recommend all retail investment products. Additionally, they may only focus on specific market such as pensions although they consider all products in the market. In which case, service offered by restricted advisers cannot be described as independent as in the case of whole market advisers. In both case however, they have to explain the type of services they offer (FCA 2014a). Discretionary advice Discretionary advice is a type of financial advice determined by the special needs and objectives of a client. It may include expert advice on complex issues like proper investment or inheritance tax. This kind of advice may prove effective for individuals who need to hand over total control of their investment to an adviser. The advice is less personal. In addition, investors may have to incorporate one approach for all approaches to make it less personal and bespoke. Overall, it is more expensive than advisory (HSBC 2013). Authorization of Firms and its Significance Firms offering advisory services on wealth management must get authorisation to operate. Under Section 19 of the Financial Services & Markets Act 2000 (FSMA), any individual or company carrying out regulated activity in the UK must get authorisation from FCA. In which case, for a company to operate any regulated service such as dealing in investments as an agent or principal or managing investment, an application must be made for operating at FCA, detailing the activities to be dealt in and information on how their business can be monitored (FCA 2014b). To investors, authorisation means that they are assured that the service offered in wealth management are regulated and that the assets are invested and managed in compliance with the law. This assures them of safety and reliability. In selecting between regulated and non-regulated firms, investors would go for regulated ones as their property and investment are protected and enforceable by the law (FCA 2014b). Influence of macroeconomic environment and legislation on investment industry Macroeconomic environment and legislation have impacted the UK investment industry over the last 5 years in a number of ways. The UK investment management industry is estimated to serve millions of clients globally generating some 1 percent of Gross Domestic Product, and employing over 38,000 people in the UK alone. The central part of the UK financial sector is management of £4.9 trillion of funds and earning £12 billion annually (Bialowolski & Weziak-Bialowolska 2013). In spite of its significant position, it has lost ground over the last five years as fund domicile (HM Treasury 2013). Among the causes of decline have been competitive jurisdictions, with infrastructure and companies that are more market-oriented. Other factors have been the result of hostile legislations, as the UK government has been criticized for failing to secure comprehensive policies that can protect the home investment market as well as put barriers to entry in the industry (HM Treasury 2013). Another level of challenge for the UK investment industry has been the shift in position of the UK as a destination for domicile fund. In spite of UK’s dominant position, studies show that over the last ten years, much ground has been lost to Luxembourg. Market uncertainties after the 2009 Economic Depression also reduced levels of investments. Since investors appreciate transparency of information in market, uncertainties led to fear of risk, making firms and individuals to under invest (Abrego 2013). Despite of unfavourable macroeconomic environment and legislation factors, significant investments in equity and fixed income assets from countries such as China benefitted the industry by providing more opportunities to invest through European products and domiciles. In addition, Asian fund managers have over the last five years considered the need to have European-based investment managers. This has increased the potential for growth of the UK investment industry (HM Treasury 2013). In conclusion, the major macroeconomic environment and legislation factors that have affected UK investment industry include taxation, regulation and competition from other jurisdictions. Conclusion Wealth management is made up of an integrated set of financial products such as asset management, cash management, credit protection, retirement and estate and tax planning. The services are generally aimed at achieving financial security and sustainability. The customer segment targeted with the services include mass affluent, who include the young affluent, old affluent, expatriate clients, businesses or niche institutional clients and families. They are all High net worth (HNW) clients, who require excellent customer service as well as expect their advisors to have expertise in financial matters. Reference Abrego, M 2013, FCA warns over ‘whole of market restricted’ label, New Model Adviser, viewed 27 Feb 2014, http://citywire.co.uk/new-model-adviser/fca-warns-over-whole-of-market-restricted-label/a715593 Bhattacharjee, A, Higson, C, Holly, S & Kattuman, P 2007, "Macroeconomic Instability and Business Exit: Determinants of Failures and Acquisitions of UK Firms," Economica Vol. 76, p.108–131 Bialowolski, P & Weziak-Bialowolska, D 2013, External Factors Affecting Investment Decisions of Companies, Discussion Paper No. 2013-44 August 22, 2013 Brunel, J 2006, Integrated Wealth Management: The New Direction for Portfolio Managers, Euromoney Books, London Deloitte 2011, The mass affluent market: Changed perspectives, viewed 27 Feb 2014, http://www.deloitte.com/assets/Dcom-Guam/Local%20Assets/Documents/Financial%20Services/The%20Mass%20Affluent%20Market%20Changed%20Perspectives.pdf FCA 2014a, Different types of investment advisers, viewed 26 Feb 2014, http://www.fca.org.uk/consumers/financial-services-products/investments/financial-advice/independent-and-restricted-advisers FCA 2014b, Do I need to be authorised?, viewed 27 Feb 2014, http://www.fca.org.uk/firms/about-authorisation/do-i-need-to-be-authorised HM Treasury 2013, The UK investment management strategy, viewed 17 Feb 2013, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/258952/uk_investment_management_strategy_amended.pdf HSBC 2013, Discretionary investment management, viewed 27 Feb 2014, http://www.hsbcprivatebank.com/invest/discretionary-services Jain, D & Jhala, A 2012, "Preferences for Wealth Management Services: An Empirical Study In Udaipur, Rajasthan," Journal of Arts, Science & Commerce Vol. 3 Iss 3, p.16-22 PA Consulting Group 2013, Attracting the mass affluent – an opportunity in financial services, viewed 27 Feb 2014, http://www.paconsulting.com/our-thinking/attracting-the-mass-affluent/ Pompian, M & Longo, J n.d., The Future of Wealth Management: Incorporating Behavioral Finance into Your Practice, viewed Feb 27 2014, http://www.dartmouth.edu/~lusardiworkshop/Papers/FPA%20BEHAVIORAL%20BIAS%20PAPER.pdf Read More