The Basic Functions of Private Wealth Management Companies

by Derek Loosvelt | March 10, 2009

The private wealth management industry integrates the varied and complex business of managing wealth by accounting for income needs, taxes, estate preservation and asset protection for the wealthy. Typically, private wealth management is a smaller division of a much larger investment firm or bank. The private wealth manager leverages the expertise of the various departments inside the firm (such as the trust department) to present clients with solutions to wealth management issues. Though not required to be experts in one particular area of wealth management, private wealth managers must know enough about each area to expertly represent their clients' best interests and, where appropriate, offer advice.

Creating income

It is the first job of private wealth managers to help create, from among various investment strategies, income or growth sufficient for the everyday needs of their clients. In addition, they must provide enough excess growth to account for inflation in order that their clients' purchasing power does not become eroded over time. In addition, hopefully the wealth manager will continue to grow the clients' assets so that they become richer.Because the wealthy often need to live solely off of their investments, today private wealth managers must use a variety of investment techniques to help clients create enough income to live off of every year. Sounds easy enough right? Not really. When you consider that someone who invests $1 million in a conservative corporate bond returning 5 percent creates a modest $50,000 a year in income, it becomes obvious that having $1 million dollars or so just isn't as big of a deal as it used to be. Sure, $50,000 is a lot of money for doing nothing, but living on champagne and caviar is out of the question. With wages in the U.S. averaging a little over $35,000 per year as of 2004, according to the Social Security Administration, the average typical family with two income-earners can make more than someone with $1 million in the bank who lives off of his or her investments. Indeed, because of inflation, the portfolio with $1 million must return in excess of 7.5 percent just to keep up with the two-worker household that can possibly expect to get raises every year. With rates of return in the stock market sometimes as high as 20 percent or more, 7.5 percent may not seem a very high return, but when you consider that the S&P 500 in the six years since 2000 has returned less than 1 percent annually, you'll see that the job of private wealth managers in creating income for their clients isn't always easy.

Paying taxes

Another problem wealthy clients often encounter is taxes. None of us likes paying taxes. For most of us, however, we would willingly pay additional taxes if it meant that we were making additional income. For the wealthy it isn't quite so simple. When managing large pools of assets, small differences in tax rates can translate into big changes in after-tax returns. Various types of investments used are treated and taxed differently by the IRS. For example, income derived from the interest rates of bonds is taxed differently than long-term capital gains derived from selling stock. It is the private wealth manager's job to balance assorted types of investments to create the most tax efficient combination for the client.

Wealthy people are also subject to inheritance taxes. Accordingly, private wealth managers must help their clients select from a number of products or legal entities, such as trusts or insurance, to preserve their estates after their death. Though the private wealth manager does not offer legal strategy (it is against the law for anyone other than a lawyer to offer legal advice), the manager must be well versed on the various laws regarding trusts and estates. Additionally, private wealth managers often have insight and experience in managing charitable investment entities, such as endowments and foundations.

Asset protection

In today's society, people with money are sometimes targeted with lawsuits just because they happen to have money. So, an increasingly popular area of practice for private wealth managers is called "asset protection," which helps the wealthy guard against losing money in civil lawsuits. There are several techniques used to protect assets, including U.S. trusts laws and foreign, off-shore banks. Advocates of asset protection methods contend that making their clients impervious to lawsuits doesn't just protect assets, but also prevents lawsuits from even happening.

Though the above are some of the main areas in which a private wealth manager will work, they are certainly not the only ones. In general, clients will often rely on advice from their private wealth managers for a variety of decisions outside of investments. Decisions ranging from what type of car to buy to which is the best kidnap insurance policy to use are often made by clients only after first consulting their private wealth managers.

Filed Under: Finance


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