The summer months often see a handful of interns passing through Square Mile’s doors. Explaining to them the nuanced differences between wealth and asset management is not particularly straightforward and as my patter has developed I suspect that I have established some thoughts that may be of interest to the wider fund buyer community. This article shares some of these thoughts.
Broadly speaking asset managers focus on a specific role inside the securities market. They may be acting for institutions, individuals or intermediaries and often operate with a relatively narrow mandate. However, I guess this description could equally fit the role of many wealth managers.
Wealth managers sit inside the financial adviser community, albeit investment specialists inside the nebulous world of personal finance. Investors, such as myself and the majority of fund buyers, offer a centralised investment proposition while those focused more on individual private clients may additionally provide bespoke or tailored investment solutions for their clients.
I suspect a better way to differentiate asset managers from wealth managers is by what they aim to achieve for their clients. Asset management is, by and large, a competitive exercise. Professional investors apply their skill to generate excess returns that are ahead of the average. This seems a reasonable observation for active managers but at first sight would not be an appropriate description for managers utilising passive investment strategies.
However, even passive investment strategies have a competitive element underpinning their approach. Philosophically, passive funds look to outperform the average active fund through cost minimisation and passive fund management is a fiercely competitive arena. Passive managers are continually shaving off fees to present the cheapest products to their cost focused cliental. Asset managers generally have a high desire to win and the individuals in the industry often sport a record of winning both in their professional lives and personal endeavours. This is a trait that the Square Mile fund analysts certainly seek when assessing the merits of an investment manager.
I believe that a competitive mind-set is not a particularly relevant personality trait for wealth managers, and indeed it could be counter-productive. In the earlier years of my career, I remember feeling ashen by the lack of competitive drive displayed in the portfolio management of my mentors. Looking back, I recognise now that both these mentors were highly competitive individuals, excelling in their academic studies and achieving impressive sporting accomplishments in their youth.
Wealth management is not about achieving the highest possible returns; there is far more focus on capital preservation and achieving sensible results for clients that are more robust. Clients typically have spent a lifetime building their asset base and many can already be considered wealthy. They do not look to their wealth managers to become wealthier still, instead they seek to maintain the real spending value of their assets and to ensure a comfortable retirement. They are, in effect, looking for a four door saloon car that can survive hitting a few potholes in the road as opposed to the sexy Italian sports car that risks being left wrapped around a tree.
I have a strong competitive drive; I would be eager to have the shirt off your back in a game of poker and there is a world championship cup with my name on it (albeit in the admittedly tiny niche arena of miniature historical wargaming). My competitive drive is something that I have to dial down when running private client portfolios, even at the expense of the frustration I see in the eyes of my more ambitious junior analysts.
The wise heads at Fulcrum Asset Management have produced a succinct chart that neatly illustrates the key risk faced by private clients. The worst possible thing private clients can do is panic out at the foot of a bear market. The repercussions can be devastating for their financial well being. Having lived through previous bear markets, I have come across clients who are unable to cope with the mental pain suffered during a bear market, or else find themselves in such diminished affairs that they can no longer endure the risk of further losses and are forced to exit markets at the worst possible juncture. Retirement rarely involves a good Plan B. This is why suitability has such an important role in the financial planning process and why the responsibility resting on the shoulders wealth managers is so great.