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Financial planning versus wealth management


Sometimes even self-directed investors may prefer the security of having their money managed by a professional. Maybe they don't have enough time to do it themselves. Maybe they are looking for help from an expert who can monitor their finances over time.

Unsurprisingly, many companies are more than willing to step in and help you work towards your financial goals, but they come with a mind-boggling variety of generic names and a range of services.

Two areas that seem similar at first but have become increasingly disparate are financial advice and wealth management. What are the differences between these, and when might you use each one?

It's hard not to think of 'wealth manager' as an umbrella term. After all, isn't that what all these financial experts are doing? However, the term actually means something slightly more specific.

What's the difference?

According to the Financial Conduct Authority, a wealth manager is a firm or individual that manages a customer's money or investments on either a discretionary or an advisory basis.

Discretionary wealth management involves signing over total responsibility to the wealth manager. They will make portfolio decisions for you without having to consult you first.

An advisory wealth manager on the other hand will make recommendations based on your specific circumstances and goals, but refer to you before any change is implemented.

Either way, however, the firm is responsible for ensuring your investment portfolio is suitable for your objectives and risk appetite.

Wealth management may involve either bespoke portfolio construction - the pricier option for wealthier clients - or the use of a range of model portfolios with different risk ratings.

Financial advice has more to do with your overall financial life, including insurance, pensions, saving for children and other more personal goals. Under the adviser umbrella there is also a distinction between a financial planner and a financial adviser.

Generally speaking, an adviser will recommend products as solutions to a specific issue, while a financial planner will take a more holistic view of your needs, and make recommendations with a view to meeting those goals.

Your financial life

According to Alex Whitman, director of Kingston-upon-Thames firm Whitman Fry Wealth Management, the difference between financial advice and wealth management is a soft one, but generally has to do with where the client is in their financial life.

Whitman says advice is generally for people who are building their wealth, and can include other things such as mortgage or insurance recommendations. Wealth management, on the other hand, targets people who have already amassed their fortunes and need advice in more of a caretaking capacity.

But Jeremy Le Sueur, managing director of wealth management firm 4 Shire Asset Management and a wealth manager by trade, draws a slightly different distinction: a financial adviser will deal with the packaging of 'the money' while a wealth manager will deal with 'the money' itself.

So for example, a financial adviser might say to a client that they need a pension and an Isa, and recommend one of each. A wealth manager on the other hand will make sure that pension or Isa is invested in funds that match the client's risk profile, and that the funds don't drift away from the risk profile over time.

One word that gets thrown around a lot in financial services marketing material is 'bespoke'. It evokes an image of a tailor in a boutique carefully measuring you to hand-sew a suit that fits you perfectly and is exactly what you had in mind.

Model portfolios

Financial services firms are keen to make you feel the same way about their service, yet many offer only a veneer of true tailoring before shunting you into a pre-made model portfolio - analogous to going into the back room and grabbing the closest-fitting suit off a peg.

According to Jim Grant, chief executive officer of advisory and wealth management firm Fidelius, many financial advisers (and indeed wealth managers) say they offer a bespoke service, but behind the scenes are really operating something closer to a model portfolio - despite charging bespoke prices.

Don't be mistaken: there's nothing wrong with a model portfolio service if that's what you're willing to pay for. Such an offering will generally be less expensive than full-fat portfolio construction, and may well fit well enough for your needs. Many mid-range wealth managers work on a model portfolio basis.

However, if you decide on a fully bespoke model, do make sure you're getting what you pay for.

Grant says the manager should have a conversation with you to see what you do and don't want to invest in, and that you should try to get under the surface with your questioning. 'Have a conversation about how that

portfolio is going to be run, about what you will accept and what is or is not right for you,' he says.

If you want to invest ethically, for example, you should be given the option to perhaps exclude oil companies or include handpicked socially responsible stocks. If you are the employee of a large firm and already have share options with that company through your work, you might want to exclude that firm from your portfolio to avoid having too many eggs in one basket.

ASK QUESTIONS

Finally, don't be afraid to ask 'cheeky' questions. 'You'll get a printout of where the money is invested and you can ask, "how much of this will drop into model portfolios and will my charges reflect that? Do you charge for dealing?",' adds Grant.

If you are trying to decide between a financial adviser (or financial planner) and a wealth manager, think about what you need. If you want help putting together a plan to meet your financial goals - saving for children, setting up an Isa, retirement planning, insurance or will writing - then an adviser or financial planner will probably be the best bet.

If you feel confident with your financial plan and want someone to look after your money for you, that's when wealth managers come into their own.

However, be wary of going to one and expecting the other: some IFAs, for example, will also market themselves as investment managers but may not have the resources to give you a fully fleshed-out service, and indeed may themselves use external wealth managers to manage client portfolios.

PEELING THE COST ONION

It is surprisingly difficult to find a single figure showing exactly how much you are paying for wealth management - or how much of your money various professionals are shaving off. However, it is important that you have as clear a picture as possible of what you will be paying and what service you will be getting.

See below for a glimpse from Jeremy Le Sueur of just how many layers are in the cost onion, although these are simply estimates and actual prices may vary. Note that altogether, you could end up shedding as much as 10 per cent of your investable money just getting set up, although this would be an extreme case.

Initial adviser fees are generally around 3 per cent plus VAT.

If they give you an ongoing service, expect an ongoing annual adviser charge of 0.5 to 1 per cent;

If the adviser outsources to a discretionary fund manager (DFM), the DFM will take an ongoing fee of around 0.75 to 1 per cent a year.

The DFM might also be paid dealing commission of 0.5 to 1.5 per cent when it buys and sells funds. Keep in mind that it 'deals' your entire investment at set-up.

If the DFM invests in funds (rather than direct equities), each will have its own cost. An actively managed fund might cost 0.75 per cent a year for a clean share class unless the DFM is able to use its buying power to negotiate a better rate. Note that if it puts you in in-house products, it might scrap this fee.

The fund incurs other hidden costs you will never be told about, including transaction costs. You will have to pay stamp duty on trusts and stocks as well, at 0.5 per cent.

HOW MUCH DO I NEED?

One key question is portfolio size: how much will wealth managers expect you to place with them? Wealth management is not reserved solely for the very wealthy. For example, Chase de Vere charges 1 per cent and has a minimum investment requirement of £50,000, although this is negotiable for high-earning clients.

Killik, while continuing to offer its managed portfolio and discretionary broking services for £100,000-plus portfolios, now caters for smaller investors. It offers a fund-based multi-manager service with a choice of six investment approaches, a minimum investment of £7,000 and an annual management charge of 1.2 per cent.

To put this into context, according to data from research firm Compeer, the average portfolio size for those using a full service wealth manager was almost £190,000 in 2013, representing a 17.8 per cent increase on the previous year.

However, half of portfolios (51 per cent) were worth less than £50,000, and a third were between £50,000 and £250,000. Only 2.6 per cent were worth over £1 million.

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Category: Wealth management

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