How Clients Make Decisions on their Wealth and Investments
When it comes to managing hundreds of millions and billions of assets, institutional clients or corporate clients have a pre-defined investment methodology.
For example, sovereign wealth funds and pension funds typically invest for the longer term and have a professional asset management approach with portfolio allocation models into asset classes, that are measured by risks, duration, expected yield and many other factors. They carry the serious responsibilities of not just growing the assets, but also to protect and safeguard the assets (which often involves national interests).
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But for individual clients, rich, affluent or poor, how do they make decisions on their wealth and investments?
No. 1 Most generally don’t and do not have a process
Most consumers or clients do not and do not have a process for making decisions on investments or managing their wealth.
Clients think randomly:
- How should i manage my money?
- Would it grow if I invest?
- Should I leave it to the investment expert?
- Which investments give me better returns?
- What if I need the money?
- Should I learn how to do it myself?
- I have a lot of money, so I don’t have to worry about managing money.
- Is buying blue-chip stocks the best?
- When interest rate goes up, bond prices come down, so is this the time to invest?
No. 2 Save and Save
Saving (Spend less than they earn) is the most effective method to manage money and accumulate wealth. The bank account balance that grow over the years is likely due to prudent expenditure, savings and good budgeting.
This is an area the general population (clients) are good at. Most will also add a few insurance products and a few popular stocks. Professionally, this may be considered financial planning. And certainly, clients are typically good at deposit rates comparisons.
Most clients are good savers but give little thoughts to managing their wealth & investments.
No. 3 Holistic Approach
Some clients (affluent, HNW) choose to manage their wealth & investments holistically. This means having a total overview and management of all their money.
Example of a Holistic Approach:
| Assets | Type |
| Cash | Bank Accounts, Cash on Hand, Safe Boxes |
| Investments | Stocks, Exchanged Traded Funds, Bonds, Unit Trust |
| Personal Investments | Luxury Watches, Gold, Club Memberships |
| Housing | Assets, Loans |
… … and found their excel sheet or notes providing them a holistic overview and a good snapshot rather than being able to manage their wealth & investments.
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For the more explorative clients, they might map out an income and expense tracksheet, which they naturally stop updating once they get busier, stray away from the projected income and expenses or receive a lump size bonus or windfall (vice-versa uneventfully, a large outgoing expense).
Income & Expense Table:
| Income | Expenses |
| Salary | Fixed |
| Investments | Variable |
| Others |
No. 4 Isolated Approaches
Most clients are very good at using isolated approaches to manage wealth & investments – a consistent and simple technique by identifying problem and applying a solution.
| Thoughts | Process | Action |
| Have a Sum of Money | Buy a House | Calculate Budget, Downpayment and Installment |
| Buy a House | Calculate Budget, Downpayment and Installment | Find the sum of money, Save to have the sum of money |
| Invest in Stocks | Single Stock, a few stocks or Portfolio of stocks | Set up Brokerage Account, Call Broker, Invest a small amount |
| Be a Millionaire | Learn how to be rich | Sign up for courses, look for wealth or investment advisor, follow the rich |
| Manage Wealth | Save & Invest | Organize Bank Accounts, use extra money to invest |
No. 5 Follow the Rich and Successful
The secret of getting rich and successful is to follow the rich and successful. But what if your clients are rich and successful? Do they need your advice to manage their wealth & money?
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There are good principles in following what are the effective ways from the rich to manage wealth & investments. But clients tend to read, learn and follow too much that they forget: Managing wealth & investments, and getting rich are two different matters.
No. 6 Follow what everyone is doing
The most common, popular and proven way to manage wealth & investments: Follow what everyone is doing.
What clients do (in Asia):
- Setup Bank Accounts for savings and salary crediting
- Invest in Real Estate (Residential or Investment)
- Take Mortgage for Real Estate (Borrow for Housing Loan)
- Buy Stocks (sometimes bonds), Funds
- Try trading FX, Gold or Futures
- Buy Insurance Savings and Protection Policies
- Use Credit Cards for expenditure
For example, Private Equity and Hedge Funds are not for everyone. They come with different set of risks, less liquid (unable to cash out anytime), have sometimes long duration (3 – 10 years) and are offered typically to not just accredited investors but also offered to their preferred investor base.
So even if clients want to access such investments, they have few avenues to get in. If they do, they have little clue what are really Private Equity or Hedge Funds.
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No. 7 Ask, Learn, and Read
Most clients will start asking, learning and reading more about managing wealth and investments at some point in their life, especially when the following situation occurs:
- Buying a House
- Getting Married
- Planning for Children’s Education
- Planning to Gifting, Will & Estates
- Planning for Retirement
- Lost a Sum of Money on Investment
- Receive a Windfall
Most give up after a while as managing wealth & investments isn’t as simple as buying a house or car and paying monthly instalments. They generally do pay more attention when the need arises, do catch-up reading, and ultimately adopt what their friends and others do.
No. 8 Trust the Experts
The experts must be right, otherwise they wouldn’t be expert – isn’t it? This is what many clients think.
By delegating the decision-making to the experts means clients do not have to go through the tedious process of learning, understanding, executing and managing the financial transactions.
Worst, they might have to do filing and administrative work to keep track of the cash flow.
No. 9 Trust their Advisors
This is where Wealth Managers, Relationship Managers, Private Bankers and Asset Managers come in – to take the complex work out of clients’ life.
Which client could possibly understand global tax rule, W8BEN, re-investment on dividends, rights issue, AGM votes and the consequences, BID or OFFER on AUD/SGD or SGD/AUD, Sell Put on AUD/SGD 1.000 expiry 3rd March 2018 0% Yield or Bond price of 97.236 with YTM 4.7% Callable 2029, Step-up Coupon after 2021 Libor 3 Months + 2.75% … …
So clients (especially affluent, HNW, UHNW clients) typically have Wealth Managers or Advisors to manage their wealth & investments. In other words, they do not actively manage and monitor their wealth & investments, but leave it to their advisors.
No. 10 Experiment
Perhaps how clients really make decisions – by experimenting. Since managing wealth & investments is really about managing an uncertain future, forecasting the future and likely events – clients will experiment with different ways to manage their wealth & investments.
Along the way, clients gain knowledge while knowing what they can or cannot manage. Depending on their life journey and the phase of life they are in, they adjust and adapt the way they manage their money.
And the only way they are able to execute financial transactions are via banks, brokerages and financial firms, they will have to rely on the financial professionals either for advice or receive guides on how to execute the transactions.
Are these the 10 ways clients make decisions on their wealth & investments?
Certainly, this doesn’t apply to all clients. There would be clients that might manage money better than a professional, and some even achieve extraordinary returns from investments in stocks, options, forex trading, real estate, or excelling in their work and receiving massive salary and bonus payout.
There are also clients that are do not put much thoughts on managing their wealth & investments.
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