Wealth management versus financial planning

Although the terms “wealth management” and “financial planning” refer to different aspects of financial advisory, they are mutually complementary. Such services are offered to individual customers e.g. by banks. What is wealth management and financial planning?

What is wealth management?

Wealth management means primarily multiplication (safe investing) and protection of the wealth accumulated by an individual customer. A wealth management component is financial planning.

Wealth management software and services are offered by quite a lot of entities. The number of companies specialising in financial advisor has grown recently. The most frequent divisions identify:

• Financial institutions — often of international reach thanks to which they serve customers from different parts of the world,
• independent advisors — operating alone or in larger groups, those are often advisors who gained experience in banks,
• banks — advisory services are offered by dedicated bank departments.

Banks have not limited their activity solely to holding deposits or offering loans and credits for a long time — they recognise the potential of offering customised services to individual customers. Wealth management is such a service.

Wealth management service is not old as the first companies offering it in its contemporary form were founded only in early 1990s in the United States. This service was initiated to attempt at retaining wealthy customers using private banking by the banks.

Although wealth management is a relatively new bank service, it enjoys a growing interest of individual customers. There are several reasons: the number of wealthy people is increasing year by year, wealthy customers want to multiply their funds even more efficiently and, last but not least, contracting specialists to manage wealth enables to achieve optimum results.

Whom is wealth management service addressed to?

Wealth management is a service which can be used both by individual and institutional customers. However, banks dedicate it usually to the customers using private banking. The target group is affluent people, with the banks and institutions offering wealth management identifying three groups of customers. A factor considered for this division is the value of customer’s wealth covered by the service. Thus, the following are distinguished:

• wealthy people (HNWI – High Net Worth Individuals) — their wealth entrusted for management is 1 to 5 million dollars,
• very wealthy people (very HNWI) — they entrust 5 to 30 million dollars to the institution offering the wealth management service,
• the so-called ultra wealthy people (ultra HNWI) — they hold at least 30 million dollars covered by the wealth management service.

There are various sectors, but the wealth management service is addressed to each of them differently.

The above value-based differentiation is not rigorous and the classification is conditional on the bank or the financial company offering the wealth management service. Banks usually focus on creating the most flexible offering so they serve also less wealthy customers. They include:

• affluent customers — their wealth is below 500 thousand dollars,
• wealthy customers — their wealth is estimated to be below 1 million dollars.

Banks do not limit themselves solely to the comprehensive wealth management offering and they frequently offer occasional advisory services for investment products selected by the customer or wealth management planning. Simplified advisory services are particularly popular among customers holding relatively small funds.

What is financial planning?

Simply speaking, financial planning consists in identifying, reviewing and setting financial objectives which may be achieved by a given person, taking specific steps in the financial area. Financial planning may refer e.g. to retirement saving. Saving a certain amount every month and then opening and renewing bank deposits, the bank customer may save funds to use once they retire.

Financial planning enables to set realistic financial objectives and a path to achieve them. Thanks to financial planning, the customer may dispose of their own funds advisedly. At the same time, they are less vulnerable to manipulations and less often use high-risk financial instruments which, when used incompetently, may result in losing the gathered capital.

What is the financial planning process? It covers several activities which enable to create and perform the financial plan:

• setting objectives — if there are more objectives, they should be divided into the short-, medium- and long-term ones,
• summing up assets and liabilities — in this way it is possible to check the current financial standing and reduce expenses if required,
• developing a plan — it should have a tangible form to make it possible to return to it systematically,
• performing the plan — plan performance by the customer may be monitored by the advisor on an ongoing basis to check if the customer saves money on the saving account or opens deposits,
• monitoring the plan and introducing changes — the financial standing is not constant, it may change over time and this is why the plan should be adjusted whenever required.

Wealth management planning — what do those services consist in?

The customer may expect comprehensive assistance under the wealth management service. This service comprises not only financial planning, but also e.g. investment management. Specialists agree the way to invest and multiply the funds with the customer. Wealth managers will also help to earn on the non-financial assets held. This category includes e.g. real property (including commercial ones) which may bring monthly profits to the customer.

If the customer and their wealth is considered to be a business entity, wealth management and financial planning comprises also tax optimisation. It is particularly important for sole traders or those investing in real property in different countries. Tax optimisation may have different dimensions, including but not limited to using the so-called tax havens by the customer contracting wealth management.

Financial planning is an integral part of the wealth management service, so it is difficult to speak of any “wealth management versus financial planning” dichotomy. In this context, it also refers to inheritance planning which consists in planning and implementing activities aimed at protecting and retaining the wealth accumulated by the customer in the family should the customer die. What helps here is e.g. the appropriate asset allocation, using tax exemptions and planning annuities for the heirs.

Wealth management versus financial planning — solutions for banks

According to the report called “How do You Build Value When Clients Want More than Wealth?” prepared by Ernst & Young, one third of customers will change their wealth management advisors in three years to come (this refers in particular to UHNW customers). This is connected with e.g. demographic changes, a growing number of affluent and wealthy people and the digital service development.

What advisors’ services are the customers using the wealth management going to resign from and whom are they going to employ? According to the above-mentioned report, this tendency refers to all entities, though to a differing degree:

• commercial banks – 54% (now) and 48% (in 3 years),
• alternative investment companies (e.g. real property) – 51% (now) and 52% (in 3 years),
• universal banks (UBS, Citibank) – 42% (now) and 45% (in 3 years),
• independent financial advisors – 40% (now) and 47% (in 3 years),
• FinTech companies (including robo-advisors) – 38% (now) and 45% (in 3 years).

According to the above summary, it can be inferred the banks are entities which may face customers’ outflow. This is an explicit signal for banks offering advisory services. They must implement cutting-edge wealth management systems today.

One of such systems available on the market today is Comarch Wealth Management. It enables to implement the risk management service both on demand and comprehensively for customers in different sectors. Comarch Wealth Management offers the financial planning application, multi-channel frontend for the customers and solutions facilitating portfolio management. Customers may also perform their investments themselves thanks to the available robo-advisory channels.

More about Comarch Wealth Management