Many UHNW individuals are and can be confused about the array of business models pitching for their business. This article - the first of a five-part series - explores the terrain.

As part a continuing series of analyses of ultra-high net worth client issues in North America and beyond, here is the first of a five-part overview by Jamie McLaughlin. He is chief executive of J H McLaughlin & Co, a member of FWR's editorial advisory board, and also a founder of the UHNW Institute, the not-for-profit organization. (FWR is the exclusive editorial partner of the Institute.) To view other UHNW Institute content, click on the button marked “UHNW Institute” under the “categories” section on this news service’s homepage. Readers can also find the Institute's website here.

Ultra-high net worth clients, including the most discerning families, are confused and challenged to understand the different wealth management models, their operating dimensions, service platforms, and capabilities.

The firms that serve them do not make it easy. One of the reasons potential clients hear the same thing from different firms is that the firms genuinely believe they are doing or delivering the same thing (or won’t admit that they don’t).  

This muddle about who does what in wealth management is made worse by the fact that the term itself is undefined almost universally. Imagine, if you will, an industry that has not developed a generally accepted definition of its primary product. Welcome to wealth management.

How did we arrive at this juncture?  A look at history offers some explanation. The industry that is wealth management today represents a loose amalgam of four different business models operating under four distinct regulatory regimes - all competing in the same space. They are:

-- Commercial banks;
-- Broker dealers;
-- Registered investment advisors; and
-- Trust companies.

Our intent here is to offer a five-part series (this being the first and introductory installment) that will unpack each of the four business models across several dimensions, including:

-- What are their ownership and capital structures?
-- What are their cultural norms?
-- What are their investment and non-investment processes, service platforms and resources?
-- How do they price their services?
-- What are the drivers of their business economics?
-- What are their conflicts of interest?
-- How do they comply with the “fiduciary standard”?
-- As putative “trusted advisors (1),” how do they manage their client relationships?

The accompanying article, A History of Wealth Management, is offered as a survey overview of the industry’s history and represents an essential element of our series. Our overall goal is to help investors better understand the various models and service platforms, and thereby to be able to better assess what they read and hear.

Defining the term
To start, we need to help clear the muddle by nailing down an important definition. We define wealth management as comprehensive, integrated financial planning and administrative services for people with a lot of money. Wealth management is not the same thing as money management. Money managers manage assets, whereas wealth managers manage their client families’ financial lives.

How much money is a lot? That could mean many different levels of wealth, but for a definition of ultra-high net worth we’ll proffer two tests or thresholds: enough so that meaningful assets will remain at the death of a surviving spouse, and thus wealth transfer planning in respect of the estate and gift tax regime is appropriate. In practice, when assets exceed the estate tax exemption. (2)

Enough so that there are excess or surplus funds available for investment management purposes beyond cash or household management requirements and asset-liability funding (i.e. education, retirement, longevity risk, etc.). Those assets could be “risk assets” invested for total return and/or require philanthropic planning for their tax-optimized disposition.  

Given the above tests, a working number might be $25 million or $30 million. (3)

Only a decade ago, it was common for some firms to offer investments and nothing else yet call themselves wealth managers. This was often misleading and certainly confusing to client families. Today, in a welcome turn, comprehensive planning is showing signs of reasserting its rightful place as the foundation of wealth management.

As wealth management evolved over the past three decades, firms’ service models have come to incorporate a host of integrated disciplines and techniques of comprehensive planning to serve the needs and expectations of wealthy clients. It now includes non-investment advisory services that address wealth transfer, asset protection, tax planning, risk management, and philanthropy among an array of other services to serve the administration of their households. More recently, for the super-wealthy, the dialogue now includes issues related to family systems, family sustainability, and the very purpose of the money.

Finally, with the rise of information technology and an emerging FinTech industry, client expectations have also come to include data transfer and data assimilation for household financial management and consolidated reporting with the emergence of a host of digital, tech-enabled solutions. The importance of quality assured, secure data cannot be overstated.  
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The economic framework
Contemporary wealth management can be seen as part of a broader asset management industry or complex. In fact, the industry exhibits many of the same common economic aspects as other industries whose supply chain economics include a continuum of manufacturers, distributors (i.e. sales) and consumers.  

Applied to wealth management, the asset management complex includes asset management companies who produce various investment products, their distribution agents and the clients who buy or consume these products. An additional role of advisor emerges sometimes as a distributor or salesman and sometimes in a role as agent for a consumer. The advisor advocates for the best terms and conditions for their clients, often with the intent of disintermediating the manufacturer and/or the distributor.

When we examine the four primary wealth management business models, firms can play various economic roles - manufacturer, distributor or advisor - each having its own set of standards and incentives.