8 Reasons Why Wealth Management is Not for Everyone
Wealth Management is an expensive service and most people either can’t afford or don’t need it. For many, access to basic financial services may be sufficient since their main wealth growth is driven by their income and savings.
” To invest and get returns higher than the benchmark means you have to hire people who may beat the benchmark. Do you have the money to hire the people who may invest better, or worser? “
No. 1 Most People Will Need Basic Financial Services:
Most financial services are on a needs-based approach. In other words, if clients have excess funds or is in need of a financial service, then the transaction will occur.
Example of Basic Financial Services:
- Banking Services: Deposits and Loans
- General Insurance: Travel & Car Insurance
- Life Insurance: Death, Total Permanent Disability, Critical Illness and Medical & Hospitalisation Plans
- Investments: Unit Trust, Bonds and Stocks
- Tax Filing and Planning
- Will Writing
There are numerous financial service providers that have the skills and knowledge to provide these transactions quickly. The solutions are usually homogeneous for many clients, and can be quickly duplicated with other financial advisory firms. In other words, while clients’ financial needs and problems are different, the solutions differing slightly, the core products remains the same.
” Everyone has the brainpower to follow the Stock Market. If you made it through fifth-grade math, you can do it ”
No. 2 Not Many Will Need Professional Wealth Management Services
Example of Professional Wealth Management Services:
- Portfolio Management
- Asset Management Services
- International Tax Planning
- International Estate Planning
For Wealth Management Services, it is likely driven by a problem-based approach. For example, without International Tax Planning, the client may be over-paying tax by allocating assets in a high-tax jurisdiction or simply be unaware of tax-savings filing process.
Or in investments, the nature of the investments could face larger systemic or liquidity risks such as emerging market debts, luxury real estate or art collections, which may result in poor cashflow for clients during difficult economic periods.
This service is highly specialised, requiring strong understanding of global financial markets. There are few financial service providers able to adequately provide this service. The result of such professional wealth management advice could mean huge savings, well-managed cashflow and financial leverage for clients. This service is expensive, and what clients need to pay for in good times and bad times.
No. 3 Affording Advisory Fees or Relationship Fees
Over the long-run, Advisory or Relationship fees of 1.5% to 2% for most clients mean a considerable loss of returns over time, especially on a compounded basis.
The mass market just can’t afford or don’t need expensive advisory or relationship services – unless they have above average rate of wealth growth, where time becomes more expensive.
And since the value of a Wealth Manager grows with time, having better knowledge, skills and network, most clients would not be able to grow their wealth at the same rate. (A wealth manager typically don’t look for clients with lesser assets, they look for clients with more assets) Read More: The Turnover Rate of Good and Bad wealth Managers, will always be High.
Factors to consider before Wealth Advisory becomes beneficial:
- Tax Rate, Tax Savings, Tax Filing Process
- Risk-Free Interest Rates, Domestic Interest Rates
- Accessibility to Basic Financial Services (Banking, Insurance, Stocks, Investments)
- Growing Income and Wealth
- Risks, Dispute & Legal Issues
- International Assets, Business etc.
No. 4 The Same 2% Fees in United States, Europe, Australia, Brazil, Indonesia, India, China is different from 2% Fees in Singapore and Hong Kong
In United States, many countries in Europe and in Australia, tax filing is extremely complex. There are tax on interest earned, tax on capital appreciation, stock gains and dividends, gift and inheritance, and tax-deductibles on donations, retirement funds contribution, losses in stocks and assets. Paying a 2% professional fee could mean an efficient asset allocation and possibly huge savings over time.
|Tax Reasons||Growth Opportunities||Expertise|
In other countries, it could be for accessing limited investment opportunities such as in Brazil, Indonesia, India and China where many government bonds are already paying above 10%. For Singapore and Hong Kong, clients could be paying for international financial expertise.
The Wealth Management fee of 2% means differently in different country.
- Why Access to Global Economic and Investment Opportunities is Never Equal for Everyone
- 5 Reasons why Wealth Management is harder in low-tax countries
No. 5 Ideas Without Means is Not Opportunities
5% deposit rates in India? How do you access the returns? Are India & Indonesia too high risks? How do you diversify the risks?
In basic financial planning, there probably wouldn’t be any solutions for this. Except, the discussion of such complexity eradicates the need to plan for this (the difficulty of execution). And the cost of doing so, may bewilder most clients.
Perhaps it would be safer investing in developed nations. In the 2000s, deposits were driven to Australia yielding 6 – 8%. Today, they face a depreciating currency and low-yield. Or to simply access a Unit Trust India Bonds or Equity Fund to partake in their development.
- 8 Reasons why building a Portfolio is Tough in Asia
- 3 Reasons why Good Investment Idea may be a Bad Idea
No. 6 Taking Risks with Wealth Managers Advice
Wealthy clients can afford to make mistakes with their enormous wealth. A client with $5 Million can lose $1 Million with a Wealth Manager and still maintain a high quality lifestyle. Whereas for a 60 years old client with $200,000, that is their only wealth for the remaining part of their life.
Non-wealthy clients are not able to pay high fees and take risks with their wealth.
” Insurance Co. and Pension funds can’t take high portfolio risks. Their duty is to protect wealth to distribute a fair returns over a long time “
And when it comes to taking risks, it is not only about investments. It could mean assets being frozen because of legal disputes or breakdown in bilateral ties between countries.
Read More: 7 Important Risks to manage for Clients
No. 5 Mistaking Frequent Trading, Credit & Leverage for Wealth Management Advisory
Trading provides potential for returns for clients as well as revenue for the bank. Clearly, leverage is used when a view is particularly strong or when a need occurs.
But, borrowings are usually temporarily for most people. If the economy is stable, having income and extra savings, with plenty of people borrowing, clients usually take more risks and put their extra savings or future cash flow at risks. They bet on stocks, FX, options, real estate or any investment opportunities. But when the economic downturn arrives, they stop most financial activities.
In other words, their need for wealth management services is highly correlated to their rate of wealth growth.
No. 6 Being Familiar with Financial Services has no bearing on being an Expert on Financial Services.
The former is a system user, the latter is a system creator. For example, when a stock exchange is suspended indefinitely, most wealth managers and clients will look to large financial institutions or regulators for guidance.
Professional Wealth Managers look for opportunities and solutions in the global financial industry, navigating the risks and opportunities as the saga unfolds. The former is passive while the latter is active. The experts of P/E ratios and cashflow during the heydays, is at the mercy of the system when it stops functioning.
And to have Wealth Management advice that is at the forefront of developments, the advice is extremely expensive.
No. 7 Wealth Management is an Expensive Service
Do clients or wealth management providers understand the basis of advisory fees? Why charge 1.5% to 2% to manage wealth? Why aren’t the fees 0.1%? Or why wouldn’t the fees be 5% or 10%?
Deconstructing the Basis of Fees – The Standard Factors:
- Revenue Scale (Profitability & Cost of Distribution)
- Basic Infrastructure
In other words, the thought-process of the fees utilizes the concept of “manufacturing production” in pricing the fees. Over time, most use Benchmark Pricing: What competitors are charging.
For clients who can afford the pay for Wealth Management Services, they know how to value the fees paid.
Read More: 7 Secrets to maintaining 2% for Wealth Management Services
No. 8 Wealth Management Equals Trust
The lack of trust means the expensive advisory or relationship fees would not be sustainable. This means clients are always going to question when things goes wrong. These often leads to a long-term failure in relationship.
On the hand, the Wealth Management Institution has to win the trust of clients. When economy is booming, it is not difficult to fulfil promises. But when economy is tumbling, the financial institutions that stands by clients, will earn the trust of clients.
During testing times, when trust is earned and Wealth Management Advice is valuable, that is possibly what Wealth Management is about.
These are 8 reasons why Wealth Management is not for everyone.