Difference Between Investment Management and Wealth Management

Introduction

Investment and wealth management are two essential components of financial planning, each serving distinct purposes in helping individuals grow and manage their financial assets effectively.

Difference Between Investment Management and Wealth Management

So, let's explore more about Investment and Wealth Management, including the introduction, Importance, etc.

What is Investment Management?

In simple words, investment management focuses mainly on handling financial assets and other investments. It is not only about buying or selling them; it is about long-term Management, which involves planning how to buy and sell investments over time. It also covers things like banking, budgeting, and taxes.

Example: Let's say you have some money to invest. You can buy stocks in a company with the goal of selling them later at a higher price. That's part of investment management. Additionally, you might use a bank account to store your money, create a budget to track your spending and pay taxes on any profits you make from your investments. All of these activities fall under the umbrella of management.

It basically refers to maintaining an invested account, managing the holdings within an investment portfolio, like stocks and bonds, and trading them to reach a particular financial goal. You might also hear it called "money management," "portfolio management," or "wealth management."

You can consult an investment manager to help you grow your retirement savings. They'll analyze your financial goals, risk tolerance, and time horizon and then create a customized investment portfolio for you. They'll regularly monitor and adjust your investments to maximize returns while minimizing risk, all with the aim of helping you achieve your retirement goals. This process of managing your investments to meet specific financial objectives is an example of investment management.

Understanding Investment Management

The main aim of investment management is to meet the desired investment goals so that you can feel financially stable at a certain stage.

Professional investment managers will manage your funds and portfolios to improve your investments. They will diversify your capital into assets like stocks, mutual funds, ETFs, etc.

Clients who seek investment management services can be individual investors like you and me, or they can be big organizations like pension funds, retirement plans, government agencies, universities, and insurance companies. These institutions rely on investment managers to help grow and manage their large pools of money to meet their financial objectives.

Investment management provides a range of services. These include deciding how to divide your money among different types of investments (asset allocation), analyzing financial statements, picking the best short-and long-term stocks, monitoring your current investments, and planning how to manage your portfolio over time (portfolio strategy and implementation).

It also involves providing advice on your overall financial situation, not just your investments. This could mean coordinating your investment portfolio with other assets you have and it depends on your financial goals like buying a house or car, etc.

Professional experts deal mainly with a variety of different securities and high-capital financial assets like bonds, commodities, equities, bank securities, etc. Apart from them, Investment managers can also handle tangible assets like precious metals, commodities, and artwork as part of their portfolio management. They can assist in aligning investments with retirement and estate planning goals, ensuring that your assets are distributed according to your wishes.

An annual analysis conducted by research and advisory firm Willis Towers Watson indicates that the investment management sector is expanding. At the start of 2022, the combined assets under management of the world's top 500 investment managers amounted to over $131 trillion, an increase of more than 10% from the year before.

Investment management in corporate finance is responsible for managing a company's tangible (such as buildings and equipment) and intangible (such as patents and trademarks) assets. It involves ensuring that these resources are appropriately cared for, tracked, and employed to achieve the business's objectives.

How to Run an Investment Management Firm?

Running an investment management firm takes work. You will face many hurdles in the initial stage, but you don't need to worry. If you have the right knowledge and potential, you can easily manage the firm.

The first major step in running the firm is to hire well-known, highly qualified managers who deal with the market, make connections, and deal with clients. They also prepare and manage reports for clients. Internal audits and the study of specific assets, asset classes, and industry sectors are among the other responsibilities.

Apart from hiring marketers and training managers who oversee investment decisions, leaders of investment management firms must ensure compliance with legislative and regulatory rules. They also need to review internal systems and controls, manage cash flow, and accurately record transactions and fund valuations.

Typically, investment managers with at least $25 million in assets under management (AUM) or those advising mutual funds must register as investment advisors (RIAs).

They sign up with the Securities and Exchange Commission (SEC) or state securities administrators, promising always to prioritize their clients' best interests. If they don't, they can face legal trouble. Smaller firms, managing less than $25 million, typically register only in the states they work in.

Investment managers usually get paid a fee based on a percentage of how much money their clients have invested.. These fees range from 0.35% to 2% annually and often vary based on the client's assets-the more assets, the lower the fee. On average, management fees are around 1%.

What is Wealth Management?

Wealth management is a type of financial service that helps high-net-worth individuals manage their finances. Advisors gather information about the client's goals and situation and create a personalized plan using various financial products and services.

This approach often covers a wide range of services to meet the client's needs, including investment advice, estate planning, accounting, retirement planning, and tax services.

Understanding Wealth Management

In simple words, wealth management is not just about investing money into some stock's mutual funds. It is more than that, and it is not just as an investment advice to the clients. It covers all aspects of a person's financial life. Instead of getting advice and products from different professionals, wealthy individuals benefit more from an integrated approach. In this method, a wealth manager organizes and creates a plan for their present and future needs-like will and trust services or business succession plans.

While many wealth managers can help with any financial area, some specialize in certain areas, like cross-border wealth management. This specialization might be based on the wealth manager's expertise or the focus of the company they work for.

Sometimes, a wealth management advisor needs to bring in other financial experts, along with the client's service professionals like an attorney or accountant, to create the best strategy for the client. Additionally, some wealth managers offer banking services or advice on philanthropic activities.

Example: Let's say a wealthy individual wants to set up a charitable foundation to support education in their community. Their wealth management advisor would coordinate with the client's lawyer to establish the foundation's legal structure and ensure compliance with tax laws. They might also work with an accountant to manage the foundation's financial aspects.

In this example, the wealth management advisor acts as the central point of contact, bringing together legal, financial, and philanthropic expertise to help the client achieve their goals.

Wealth Management Example

A wealth management office has a team of experts available to provide advice on various financial matters. For example, let's consider a client with $2 million to invest and a trust set up for their grandchildren whose partner has recently passed away. The wealth management office would not only invest these funds but also provide services for tax minimization and estate planning, including will and trust services.

Wealth management advisors employed directly by an investment firm might specialize in investment strategy. At the same time, those working for a large bank might focus on managing trusts, estate planning, or insurance options. Each firm may have different areas of expertise, so it's important to find one that meets your specific needs.

Business Structure of Wealth Management

Wealth managers can work for small businesses or larger finance firms. Clients might work with one designated wealth manager or have access to a team of wealth management experts.

Charges of Wealth Managers

Wealth managers can charge for their services in different ways. Some only charge a fee, which could be yearly, hourly, or a flat rate. Others work on commission and get paid through the investments they sell. Fee-based advisors earn a mix of fees and commissions.

A recent survey found that the median advisory fee for assets under $1 million is about 1%. However, some advisors charge more, especially for smaller account balances. People with more money to invest often pay less, with the median fee decreasing as assets increase.

Credentials of Wealth Manager

When choosing a wealth manager, it's important to look at their credentials to find the right fit for your needs. The top three professional advisor credentials to consider are Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), and Personal Financial Specialist (PFS). Many certifying organizations have websites where you can check if a member is in good standing or has any complaints or disciplinary actions against them.

The (FINRA) provides a tool to understand professional designations and whether the issuing organization requires continuing education or handles complaints. These organizations also allow you to verify who holds the credentials.

Strategies of Wealth Managers

Wealth managers' strategies totally depend on their skills and knowledge. Every manager has different strategies and goals, but the basic thing that every wealth manager follows is to build a great plan for their client so that their client's wealth will maintain and increase. The planning will be done according to the client's financial situation, goals, and any risks that they might take.

It's crucial to coordinate every aspect of a client's financial situation, including tax planning and estate planning, to safeguard their wealth. This aligns with financial projections and retirement planning goals.

Once the initial plan is created, the manager regularly meets with clients to adjust goals, review the financial portfolio, and rebalance investments. They also assess if additional services are necessary, all with the aim of serving the client's needs throughout their lifetime.

Major Difference Between Investment Management and Wealth Management

AspectInvestment ManagementWealth Management
DefinitionManagement of financial assets and investments for long-term goals. Includes planning for buying, selling, banking, budgeting, and taxes.Comprehensive financial service catering to high-net-worth individuals. Includes investment advice, estate planning, accounting, retirement planning, and tax services.
ExampleBuying stocks, creating budgets, managing bank accounts.Setting up a charitable foundation, managing trust funds, estate planning.
Client BaseIndividuals, institutional investors such as pension funds, retirement plans, governments, educational institutions, and insurance companies.High-net-worth individuals, including affluent clients with substantial assets.
Services ProvidedAsset allocation, financial Statement analysis, stock selection, portfolio monitoring, financial planning, advising, and estate planning.Investment advice, estate planning, accounting, retirement planning, tax services, banking, philanthropic advice.
Assets ManagedStocks, bonds, commodities, equities, mutual funds, ETFs, tangible assets like precious metals, and artwork.Investment portfolios, trust funds, estates, philanthropic foundations.
Industry SizeThe global industry managed over $131 trillion in assets under management in 2022.The global industry managed over $112 trillion in assets in 2020 and is expected to grow to $145.4 trillion by 2025.
Compensation ModelManagement fee based on portfolio value, typically ranging from 0.35% to 2% annually.Fee-based on the client's assets under management (AUM) may include commissions on investments sold.
Regulatory RequirementsRegistered investment advisors (RIAs) managing at least $25 million in assets or advising mutual funds must register with SEC or state securities administrators.Similar to investment management, it requires adherence to regulatory standards and a fiduciary duty to act in clients' best interests.
Business structureSmall-scale businesses or larger firms operating as financial consultants or advisors.Similar to investment management, operating within small businesses or large financial institutions.

How Much do Wealth Managers Earn?

According to Indeed data, wealth managers in the United States earned an average salary of $79,395 in 2022.

Wealth Manager vs. Financial Planner: Key Differences

While some professionals may serve as both wealth managers and financial planners, there's a notable distinction between the two roles. Wealth managers primarily focus on assets and investments, whereas financial planners consider a broader range of financial aspects, including household finances, insurance needs, and more.

The Scope of the Wealth Management Industry

The wealth management industry oversees a massive amount of money. In 2020, it looked after around $112 trillion in assets worldwide. According to financial experts, their analysis suggests that by the year 2025, the number will grow even more, possibly reaching $145.4 trillion. This shows that the industry is expanding significantly.






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