Choosing the right wealth manager for your goals and understanding your objectives can be a difficult proposition, so it pays to consider some steps in making the decision.

Summary

There are many reasons why you could be looking for a wealth manager. Perhaps you have just come into an inheritance and are looking for a reliable wealth manager. Perhaps you don't want to keep your assets in a current account any more, and need help. Most people do not have the faintest idea on how to go about this properly. In fact, most investors put more effort into finding their favourite restaurant than they do to identify the best wealth manager -a mistake that often costs millions.

This guide gives you a set of practical, easy to implement instructions on how to choose the right wealth manager. The following important points should be borne in mind here:

Do things systematically, and proceed step-by-step.

Avoid emotional decisions: it is not about finding the most likeable wealth manager, but about finding the best.

Start with an analysis of your case: your needs and prior knowledge would be decisive.

It is worthwhile to put in some effort and objectively compare various providers.

Never put all your eggs in one basket.

Take your time.

Self-analysis: the first step towards the right bank.

Only those who know their investor personality properly can hope to find the right bank or right wealth manager. That is why the first thing the wealthy private customer needs to do is to perform an honest self-analysis. In the following we provide you with a framework to determine your investor profile. This is done in a qualitative way. However, in a separate brief we also provide a comprehensive self-analysis questionnaire.

Determine your goals

First you have to be very clear on your overall goals for your investments. Goals have to be determined with respect to the importance of capital protection, your expected rate of return and required income/cash flow from your assets. This involves questions like:

How important is it for you to preserve your capital? Which rate of return do you require? How much income should your capital generate? Do you require significant cash flow at specific points in time? Do you save towards a specific goal like buying property or to have funds for retirement?

The return is clearly dependent on the risk. Anyone who expects above average returns should also have a higher inclination for risks. Which leads us to the next point.

Analyse your risk tolerance

Risk is the central to every investment. Only those who can assess their risk tolerance correctly can arrive at the right decisions concerning their bank.

Definition: Financial risk is the probability that an investment's actual return will be lower than expected. This includes the possibility of losing some or all of the original investment.

Risk has a very important time component: Conclusive data shows that in the long run risk is decreasing, especially for stocks. So your time horizon becomes very important. The second important component of your risk tolerance is your dependence on those invested assets. If you are dependent on the cash flow from a certain asset, especially in a shorter time frame (here we come back to the time horizon), your risk tolerance tends to be low.

Typically, the appetite for risk is high when the stocks are doing well (because it is hard to imagine the markets crashing, or one is hardly willing to do so), whereas in times of recession there is a high aversion to risks. But the investor must define his risk independently of the current market condition. Several questions may help you to assess how much risk you are prepared to take:

Which potential maximum loss are you prepared to accept? How large a probability for such a loss are you willing to accept? How long is your investment horizon? Do you depend on cash flow from your investments? Understand how you cope with uncertainty.

This concept relates to how you feel about, react to and cope with uncertainty. It is somewhat different from your risk tolerance since you may feel very stressed and frustrated just by strongly fluctuating asset values without even taking a loss. The longer the period over which this tolerance to frustration can be stretched, the better that investor can cope with uncertainty.

The following questions may help you understand how you deal with uncertainty: Do you feel emotional stress when your portfolio goes up and down a lot?

Do you anxiously and frequently check financial quotes on the internet? Do you strive for assets which have a very stable and predictable value development? Determine your level of knowledge.

The required knowledge involves financial strategies, the evaluation of investments and technical issues such as the processing of stock exchange orders. Most investors overestimate their knowledge. However, investment decisions based on half‑baked knowledge are often the most dangerous, since one ends up taking decisions without the ability to foresee their consequences.

Do you have a professional business background? Have you had exposure to several cycles of the stock market or other asset markets? Do you understand what drives the value and the price of a security like a stock, bond or real estate?

Do you know independent experts who are willing to give you unbiased advice? Other factors to consider are time and effort: investing money is a time consuming task. One has to reckon with a substantial number of hours per month if one does not want to leave the decisions entirely to the bank or wealth manager.

Your international experience matters: Today, investment decisions are almost always made in a global context. No investor can get away with excluding foreign instruments today, because the inclusion of foreign investments enables better diversification. Knowledge of the English language is indispensable here. This should be accompanied by a certain knowledge of the countries in which one is to invest.

Personal factors: This includes the tax situation of the investor, as well as a whole set of other personal factors such as domicile, family situation, age, professional situation, etc.

Conclusion

In conclusion you must ask yourself: Are you an investor with challenging goals, high-risk inclination, long-term horizon, sound knowledge, readiness to invest your time and an international background? In that case you will not need a wealth manager. A deposit with an online bank will be fully adequate.

If, like the majority of us, you do not belong to this group, then you will need more or less intensive support. Here, the basic differentiation can be made between a wealth management mandate and an advisory mandate.

So you have basically a few major options to chose from:

In a wealth management mandate, you will be entrusting the concrete investment decisions to the bank. You will enter into agreement with the wealth manager on the risk approach only in the beginning, eg “conservative”, “balanced” or “aggressive”.

In the case of an advisory mandate all the investment decisions will be taken in consultation with the client. You will get suggestions, research and analysis from your advisor. But ultimately you have to take responsibility for all investment decisions.