A career in asset management or wealth management is enjoying a rise in popularity over recent years. Although both careers deal with finances, they offer clients different levels of service and products. An asset manager offers clients advice on investment decisions, while a wealth manager focuses more on clients’ overall financial health, including long-term goals. This article helps shed some light on some key difference between asset management and wealth management to give you a better understanding of these industries.
Asset Management is the management of investments on behalf of others with the goal of growing their portfolio and finance while mitigating risk. The term “asset” refers to different types of investments – stocks, bonds, commodities, real estate, private equity, etc. Asset management firms act to determine the investments that could be a strong fit for clients’ needs.
An individual or an institution is likely to approach an asset management firm when their income or investable assets is substantial. In such cases, asset managers are able to offer expertise across a wide spectrum of asset classes. They’ll allocate assets and diversify the investment portfolio to fall in line with one’s goals. For example, they determine what percentage of it should be built on stocks and growth products, and what should be based around fixed-income products like bonds.
Wealth management is a comprehensive approach which aims to enhance an individual’s or family’s financial situation and at the same time protect the financial wealth in the long run. Wealth management encompasses all financial aspects including accounting & tax planning, legacy planning, retirement planning, insurance, estate planning, charitable giving etc.
For example, a wealth advisor could help you figure out what to do with an old 401(k) by considering whether to leave the account in the old plan or move it to your new one, roll it over to an IRA (individual retirement account), or convert the account to a Roth IRA. This decision involves many financial planning considerations.
For example: Which option is best given your current and future tax situation? What are the investment options in each scenario? Do you plan to retire early? Would your Roth account be large enough to make a meaningful difference in your financial situation in retirement? What about asset protection? Wealthy individuals do not always have enough knowledge, time and effort to figure out these question themselves
3.1. Focus Area
The most significant difference between asset management and wealth management is the level of focus in both departments.
a) Asset Management
Asset management has a very narrow focus; it is all about the assets of a high net worth individual. It is majorly concerned with accumulating, growing, and protecting the individual’s assets. Depending on the asset management firm, its goals are usually tied to some number, and all efforts are directed towards achieving that specific target. It does not delve deeply into the other financial issues such as tax planning, estate planning or retirement planning. Asset management is a subset and one aspect of wealth management.
b) Wealth Management
While asset managers are wholly intent on taking care of a client’s investments, wealth managers take a broader look at their entire financial circumstances in order to optimize their money in a way that achieves individual goals in the long run. Wealth management is more than just investment advice: It can encompass all parts of a person’s financial life. It does include asset management, but it also includes a lot more than that. It takes a more holistic approach to asset management and ties it with other goals, such as retirement goals, short and long-term financial goals.
While asset management service is offered to a broad range of clients, wealth management is reserved exclusively for those with high net worth.
a) Asset Management
Typically, asset management firms are categorized according to the kind of clients they serve. Clients generally fall into one of three categories:
Institutional investors: These clients represent large pools of assets for government pension funds, corporate pension funds, endowments and foundations. Unlike investors in mutual funds, institutional clients have separately managed portfolios that, at a minimum, exceed $10 million. Also unlike mutual funds, they are all exempt from capital gains and investment income.
- Pension funds: Pension funds are pooled monetary contributions from pension plans set up by companies. In addition to the employer’s contribution, a pension plan allows a worker to put part of his current income from wages into an investment plan to help fund retirement. Asset managers invest the pool of funds on the employee’s behalf, and the earnings on the investments generate income to the worker upon retirement
- Insurance company: Insurance companies, by their very nature, accumulate substantial amounts of cash. The capital needs to be invested to mitigate any financial risk and ensure that the insurance companies are able to cover liabilities (legal costs and payouts) to clients in the event of accident or property damage
- Sovereign wealth funds (large pool of money owned by government), university endowments, charities and other foundations
High net worth individuals: Individuals with minimum investable assets of $1 million. These investors are typically taxable (like mutual funds but unlike institutional investors), but their portfolio accounts are managed separately (unlike mutual funds, but like institutions).
- Some asset management firms have re-tooled their businesses to increase their offerings and better serve smaller investors who are below the status of high net worth. Many of these companies create pooled structures such as mutual funds, index funds, or exchange-traded funds (ETFs), which they can manage in a single centralized portfolio. Smaller investors can then invest directly in the fund or through an intermediary such as another investment advisor or financial planner.
- Mutual Fund focuses on investments that perform better than market index (S&P 500 or AXS 100). Whereas, ETF (an offshoot of Mutual Fund) holds a basket of index portfolios that are traded on stock exchange.
Example: Vanguard, one of the largest asset management companies in the world, focuses on lower- and middle-income investors. These clients don’t need complex investing strategies or don’t have to worry about things such as asset placement. They might simply buy $3,000 worth of a Vanguard S&P 500 index fund and hold it for the long term.
b) Wealth Management
Wealth managements caters towards individuals and families who are:
- Ultra-high net worth: investable assets above $30 millions
- High net worth: investable assets at least $1 million
- Mass affluent: investable assets range between $100,000 – $1 million
Since wealthy individuals lack the time and knowledge to manage their wealth efficiently, they consult with wealth managers with significant experience in managing finances for private individuals.
Some firms distinguish between “private wealth management” for the wealthiest clients and “wealth management” for less wealthy clients. For example, Morgan Stanley Private Wealth Management and Bel Air Investment Advisors work only with individuals, families, and foundations that have $20 million or more in assets to invest.
Some wealth managers work with moderately affluent people, as they work to build their wealth. For example, TIAA-CREF Wealth Management works with clients who have a minimum of $500,000 in investable assets.
a) Asset Management
The role of an asset manager consists of determining what investments to make, or avoid, that will grow a client’s portfolio. Rigorous research is conducted utilizing both macro and micro analytical tools. This includes statistical analysis of the prevailing market trends, interviews with company officials, and anything else that would aid in achieving the stated goal of client asset appreciation.
They help with asset allocation, or choosing how to divide investable assets among different asset classes. Namely, this entails determining what percentage of clients’ portfolio should be growth investments versus fixed-income investment, depending on clients’ risk appetite. The aim is to maximize returns without assuming excessive risk.
Here are some types of investments within the scope of asset management:
- Stocks: small caps, large caps, blue chips, growth stocks, etc.
- Bonds: short and long maturity, corporate and government
- Commodities: oil, gold, silver, etc.
- Alternative investments: real estate, private equity, hedge funds, art, etc.
b) Wealth Management
Wealth management begins with crafting a holistic plan to help clients in achieving their vision of financial success. Wealth management takes shape through the process of advanced financial planning which addresses 4 elements:
- Wealth enhancement: The first assignment of wealth managers is to create new income and grow clients’ current wealth. Wealth managers help to produce the best possible investment returns consistent with clients’ level of risk tolerance while minimizing the tax impact on those returns. For example, they can help their clients invest in hedge funds and private equity funds that may not be accessible to less wealthy individuals.
- Wealth protection: Wealth management includes mitigating the risks associated with liabilities, creditors, predators and divorce. Wealthy clients are sometimes sued for numerous reasons, including succession, marital issues, and property disagreements, and they may be forced to compensate the other parties if they lose the lawsuits. The wealth managers ought to be ahead of the game and find ways to handle the lawsuits, either by stopping them from happening or by making favorable out-of-court settlements. They may also move a portion of the client’s wealth to offshore banks to protect it from being over-taxed.
- Wealth transfer: One major concern of wealthy individuals is the distribution of their legacy after death. In order to have a peaceful and orderly distribution, documents are sometimes not enough. A definitive, well-thought-out plan can help soothe potential conflict among remaining family members. Wealth managers can also advise on inheritance tax in order to mitigate the effects of the estate tax burden on clients’ beneficiaries.
- Charitable planning: Wealth managers can advise clients on the transfer of wealth into philanthropic endeavours, such as how to set up trusts and foundations, and how to manage charitable donations.
Services offered by wealth managers may include, but are not limited to: portfolio management, legal advice, annual income tax planning, legacy planning, estate planning, charitable giving plans, mortgage refinancing, insurance, retirement planning, 401k advisory services, etc.
3.4. Management Approach
a) Asset Management
Asset managers use their own financial expertise and knowledge of the market to help clients, so there’s rarely any outside input. In some ways, it’s a less complicated approach but also far less comprehensive than a wealth management strategy.
b) Wealth Management
Wealth managers seek synergy gains through coordination of inputs from necessary experts, such as attorneys, accountants, investment advisors, life insurance specialists, and people of other specializations required for the client’s overall wealth management plan.
Basis for Comparison
Refers to the management of the client’s assets
Refers to the management of all financial aspects of the client
More narrowly focused than wealth management
More broadly focused than asset management
Sets asset allocation (stocks, bonds, etc.), manages ongoing investment risk by diversifying, rebalancing, tax-loss harvesting
Includes asset management but expands to encompass financial planning, retirement planning, tax planning, and ongoing advice.
Is available in some forms for everyone, with 3 client categories: mutual funds, institutional investors, high net worth individuals
Reserved for individuals and families who are high net worth
Asset management firms are registered with the Financial Industry Regulatory Agency (FINRA) as their regulatory agency, and the asset managers are usually the broker or dealers
Wealth management firms are registered with the Securities and Exchange Commission (SEC), and the professionals work under title such as financial consultant, financial advisor, wealth manager
Sometimes we hear the terms wealth management and asset management used interchangeably, but there are important differences between the two services. Both may be used as a tool for managing and growing financial resources, but service users may require further expertise that stretches beyond their investments.
An asset management firm helps find the best investment options for clients’ portfolios to boost your profit margins in a strategic way, but leave all of the other parts of their finances to them. Whereas, a wealth management firm offers comprehensive financial planning and greater assistance in overcoming a range of financial hurdles in a way that simple asset management couldn’t compete with.