Private Wealth Management

What is Private Wealth Management?

Private Wealth Management (PWM) involves the management of assets of high-net-worth individuals (HNWI) or accredited investors. Private wealth managers create a close working relationship with wealthy clients to understand their financial needs and to help build a portfolio that achieves the client’s financial goals. They provide a range of services, including portfolio management, estate planning, mortgage planning, asset protection, tax management, and other financial services. Private wealth management services are provided by large corporate entities, independent financial advisors, and portfolio managers who specialize in working with wealthy private clients.

Large U.S. financial institutions such as JP Morgan and Goldman Sachs run a specific private wealth management business unit with investment specialists and client advisors to cater to HNWI. Since wealthy individuals lack the time and knowledge to manage their wealth efficiently, they consult with private wealth managers with significant experience in managing finances for private individuals. The manager designs an investment strategy and proposes investment products that are in line with the client’s financial goals and risk tolerance. Most clients work with a single wealth manager, who takes inputs from the client’s attorney, accountants, and insurance agents.

Private Wealth Management – Who is a High-Net-Worth Investor?

A high-net-worth individual is an individual with a minimum of $5 million in liquid financial assets. A person with less than $5 million but more than $1 million is referred to as a super affluent investor. Mass affluent investors are those with investable assets less than $1 million but more than $100,000. Ultra-high-net-worth investors are those with over $25 million in investable assets. According to the United States Securities and Exchange Commission, individuals with liquid assets in excess of $1 million, excluding their primary residence, are referred to as accredited investors.

In 2016, there were approximately 13 million high-net-worth individuals around the world, with the United States leading with 4,400,000 individuals. The other countries with the highest number of HNW individuals include China, Japan, Germany, and the United Kingdom. London had the highest number of HNW individuals at 357, 200 in the cities category, according to the Knight Frank report.

Functions of Private Wealth Management

Private wealth managers leverage their expertise in various fields to help wealthy individuals manage their wealth efficiently. Here are some of the services offered by private wealth management:

#1 Generate Income

The first assignment of the private wealth manager is to create new income and grow the client’s current wealth. Due to inflation and the increasing number of high-net-worth individuals, the client’s objective is to stay at the top of the table and increase their purchasing power. With their wealth of experience in investments, the wealth managers must take advantage of various investment techniques that will bring in additional income annually. They can help their clients invest in hedge funds and private equity funds that may not be accessible to less wealthy individuals. Occasionally, they take the input of other investment experts, such as the client’s attorney and other advisors, to help them make well-thought-out decisions.

#2 Asset Protection & Capital Preservation

Private wealth management includes protecting client assets either from lawsuits, government authorities, or other threats. 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. The managers can advise their clients on how to set up trusts and foundations, and how to manage donations.

#3 Tax Management

Wealthy individuals strive to make the necessary tax payments in order to stay on the right path with Uncle Sam. Due to often having multiple streams of taxable income, clients want to choose the most efficient tax plan that will save them money and still comply with the authorities. A small difference in tax can bring huge differences in after-tax earnings, and a private wealth manager who understands tax regulations can help the client choose the most favorable tax combination. The private wealth manager can also advise on inheritance tax, where the client possesses inherited property or has passed some of their estate to other family members.

How Private Wealth Management Firms Operate

Most private wealth management groups operate as small segments within large financial institutions and are designed to offer specialized wealth management to individuals. They sell proprietary and non-proprietary investment products and services to high-net-worth individuals to help grow their assets and provide for future generations. The private wealth management segment is usually comprised of a variety of specialists who can offer advice on diverse types of investments such as hedge funds, money markets, private equity, and other types of investments. Independent wealth managers leverage their expertise in risk management, tax, and estate planning to manage the wealth of their HNWI clients.

A high percentage of private wealth managers charge their clients a proportion of the assets under management. A fee-based payment scale, as opposed to a commission-based payment scale, offers less conflict of interest and better performance potential. A commission-based payment may motivate the private managers to recommend investment products and services that will earn them high commissions but that offer less potential to grow the client’s wealth. However, a fee-based payment allows the wealth managers to choose a combination of portfolios with high profitability that will grow the client’s wealth.

High-net-worth individuals may also consider opening a family office to provide a more personalized approach to their investments. Family offices may be either single-family offices or multi-family offices. A single-family office provides support to one wealthy family, while a multi-family office can serve multiple HNW individuals and families. Multi-family offices are more common than single-family offices because they allow for cost-sharing of investments and consulting expenses.

Other Resources

Thank you for reading CFI’s guide to private wealth management. To learn more, see the following resources and enroll in our free Introduction to Financial Planning and Wealth Management course.

• Investing: A Beginner’s Guide
• Bank Corporate Divisions
• Monetary Assets
• Equity vs Fixed Income
• See all career resources