There's no doubt that financial terminology can be confusing at times.
Wealth management and asset management are occasionally interchangeable terms around the same topic: growing and preserving wealth.
But don't be misled into thinking that they're the same thing as their execution is different concepts in different contexts.
With the addition of investment management and private banking, things get even more complex, and you may ask what service do I need as a wealth owner?
Difference between wealth and asset management
And what is the difference between wealth and asset management? Well, it depends on what the service provider intended when offering it.
Unbelievably, there are no unified definitions across the industry to reduce complexity.
While we don't claim to provide the exact definitions, we hope that this post will outline the main aspects of the difference between asset management and wealth management for private wealth and make the waters less muddy.
From a Swiss perspective, it's merely our perception that both services play an essential role in the financial services landscape.
The starting point is the literal meaning of managing assets.
Asset management has a focus on growing and preserving financial assets and investments on behalf of others.
These can be traditional investments such as equity, fixed income, mutual funds, and alternative investments such as private equity, commodities, real estate, and crypto financial instruments.
What is asset management about?
It's about implementing an investment strategy with various financial tools to grow financial assets and preserve them simultaneously with diversification.
The approach is technically focused and return-driven, i.e., to achieve a tangible and peer comparable result under specific risk parameters.
Asset management at a portfolio level
You may know this service as discretionary portfolio management or investment management. More terms to throw into the mix!
A financial services provider performs investment decisions on behalf of its clients based on their objectives, financial situation, knowledge, and experience.
The clients delegate the investment process entirely to the asset manager that will invest in suitable and appropriate financial instruments.
In many cases, asset managers rely on so-called model portfolios that already consider suitability requirements and are tailored to achieve specific objectives considering their clients' risk classification.
If an algorithm does the job, the service is called robo-advice.
Asset management at an instrument level
Rather than managing individual portfolios, asset managers also offer collective investment schemes to get exposure to a mix of financial instruments while aligning asset allocation with suitability and risk parameters.
The service and systematic approach are comparable to asset management at a portfolio level, just under a different structure of a collective investment scheme to grow and preserve wealth.
Asset management fees
Asset managers are usually remunerated on a percentage basis of the assets under management. The higher the assets under management, the higher the level of individualization and sophistication.
Fees will decrease with higher assets under management. If your strategy is to diversify between asset managers, you should focus on the costs as you may miss out on scaling opportunities.
However, with investment funds you may not leverage fees based on higher investment volumes since such investment fund costs are usually fixed irrespective of the invested amount.
Excursus: external asset management in Switzerland
Asset management does not need to be performed necessarily by the custodian of the assets. In other words, the custodian bank and the asset manager can be different service providers.
The importance of external asset management
Switzerland is home to more than 2000 external asset managers with over CHF 500 billion assets under management. That's an impressive number compared to other global financial centers.
According to the Asian Private Banker and Julius Bär 2018 IAM Report: Asia-Pacific Ready for Take-Off?, Hong Kong and Singapore had a total of 160 independent asset management firms and collectively managed USD 91.5 billion in private wealth.
However, numbers should have increased significantly in the meantime since the Asian sector is rapidly expanding.
The external asset management business model
Most external asset managers focus on asset management and investment advice, while custody of assets remains with a banking institution.
These are independent of custody banks and thus a viable alternative to the traditional banking asset management offering.
And with recent Swiss regulations, they are obliged to increased transparency, governance, and customer protection and are subject to enhanced regulatory supervision.
Although custody is becoming a low-cost commodity, access to sophisticated products, lending, and exclusive services is still an excellent reason to work with an independent asset manager and a sophisticated custodian bank.
The popularity of external asset management
The report mentioned highlights the reasons for the rising popularity of the external asset management model:
The fragile trust of wealth owners after the 2008 financial crisis, the interest in buying asset management services instead of setting up a single family office, and the preference to delegate and centralize the asset management process.
Wealth owners expect to enjoy a long-term relationship with relationship managers who can offer independent services to fewer clients.
Independent of any bank, external asset management firms can offer a more creative and expansive set of investment ideas by sourcing the best products tailored to the clients' risk profiles.
Furthermore, clients are interested in consolidating their assets without jeopardizing the diversification of their portfolios.
To this end, they want to oversee their investments in various banks.
By having a single service provider handle their investments activities, they can see all their assets and liabilities in a consolidated balance sheet, which allows clients to receive asset mangement services on a holistic basis across all portfolios.
How is the asset management industry developing?
The main drivers for change are digitalization and customer expectations for personalization, purpose, and transparency.
As with many other services, asset management clients expect outstanding digital engagement and immediate information from their service provider.
FinTech and robo-advice are now established and pressure incumbents with engaging, convenient, and cost-efficient services.
Beyond returns, clients care about the purpose of their investments and require tangible information on their investments' impact, such as the carbon footprint of an investment portfolio.
Finally, they expect transparency on value creation and costs and an alignment between them. Thus, remuneration based on assets under management is transforming into performance-based compensation.
Private wealth management takes a much broader approach and is somehow asset management's big sibling since it may also include it.
Thus, asset management and investment management are usually part of both offerings.
Wealth management definition
Wealth management and asset management can also overlap in investment advice, which in a narrow sense includes recommendations to buy, hold or sell financial instruments.
Since there is no unified wealth management definition, we believe comparing services should provide clarity.
While asset management is a more technical approach to grow and preserve investments in financial instruments, wealth management takes a holistic view of its clients' entire wealth to enable growth, preservation, protection and transfer of private wealth.
Sometimes the service is called private banking, and compared to assessment management and investment advice, it considers further dimensions and non-financial assets to ensure asset protection and generational transfers of wealth.
Wealth management in Switzerland
Switzerland is the most powerful global cross-border wealth management center with CHF 2.3 trillion of foreign private assets under management.
This is approximately 25% of the global cross-border wealth, and wealth management is one of Switzerland's biggest import industries.
With an additional CHF 1.4 trillion of domestic private assets, Swiss wealth managers manage a total of CHF 3.7 trillion of private wealth.
However, their competitors in Hong Kong and Singapore have seen impressive wealth management growth for the past years, and international competition should ultimately benefit wealth owners due to innovation and enhanced services.
Wealth management services
The Swiss Bankers Association in its Banking Barometer 2020 refers to wealth management as holistic asset planning that includes among other things
• Investment strategy / asset allocation
• Access to financial markets / products / exclusive investment (e.g., IPOs, hedge funds, etc.)
• Financing (Lombard loans, aircraft/ yacht finance, etc.)
• Suitability and appropriateness testing for investment products
• Pension planning, tax and inheritance consulting
• Succession solutions
• Custody solutions
• Philanthropy services
The relationship with your wealth manager
Usually, you don't need to develop a deeper relationship with your asset manager since expectations and services should be clear right from the outset.
You'll review periodic reports, and if performance is satisfactory, there is not much to discuss.
This doesn't mean that your asset manager will not act in your best interest and assist you with issues outside of its service range.
As we will outline below, asset managers may be less exposed to conflicts of interest and have less incentive for cross-selling than wealth managers.
With your wealth manager, the situation is different since you will share much more than your financial situation, such as your story, values, the purpose of wealth, and the vision of your legacy.
It's in the best interest of both parties to develop a deep relationship to prepare for all kinds of life events.
Additional wealth management services
Let's explore some of private wealth management's additional services to illustrate why you sometimes discuss the most intimate topics with your wealth manager.
Wealth planning is the sum of arrangements to grow, preserve, protect, and transfer wealth. It comes with legal, financial, and tax planning.
It's the baseline for implementing asset and wealth management in a broader context.
You may think that the tools for wealth planning are the most critical part, but it's much more than that.
The human element, needs, objectives, and correlated risks are equally essential in an ongoing wealth planning process that adapts to changes in your and your family's life.
Wealth managers often have in-house wealth planners to assess your situation and assist in wealth planning, but in most cases, they don't provide tax and legal advice and will refer you to an external lawyer for that.
Estate planning is all-around one scenario that will become a reality for everyone: the death of a wealth owner.
While not the most appealing topic, wealth managers assist in fostering the discussion, which is already a great starting point, and developing estate planning strategies including inheritance tax planning.
Again, they usually don't provide legal and tax advice and will refer you to an external lawyer.
Wealth managers further assist in holding assets with trusts, foundations, companies, partnerships, and life insurance policies.
Wealth structuring is the combination of those tools to enable you to protect and control your wealth's destiny.
Sometimes, wealth managers have in-house trust and life insurance companies catering only to their clients.
Wealth structuring aims to achieve diversification, tax efficiency, wealth protection and preservation, and consolidation of activities.
Rather than just focusing on financial instruments, this includes non-bankable assets such as real estate, private equity, art, other collectibles, and digital assets in an international legal and tax environment.
With all the above in place, you'll need to ensure tax compliance and adherence to reporting obligations.
You'll also want to know what your tax exposure will be.
Wealth management services will assist you in getting the whole picture of your tax situation and develop a tax planning strategy.
Again, you will not receive tax and legal advice but an understanding of which tax elements to consider.
Since your wealth manager already knows that much about you, they can also advise on your plans for a hopefully long retirement.
Do you have to pay for all these services?
In one way or the other, yes. Often additional consulting and advisory services are offered to wealth management customers for free.
But there is a cost. Ask for the internal remuneration of such services to find out the hidden price or cross-selling incentive.
And be careful if you are directed to third parties for specific services. Also, here you want to know if there is any remuneration or incentive within the network.
Preferred provider lists often work on a quid pro quo basis, and external providers may thus not provide the advertised independent advice.
Ask if there are introducer agreements in place and how the remuneration within the network works.
What are the downsides of fully integrated wealth management services?
We see the following issues in one-stop-shop wealth management: lack of diversification, conflicts of interest, and product and service quality.
Lack of diversification
With all wealth management services offered by one provider, you quickly become dependent.
Just imagine the scenario where your assets are held under a trust administered by the wealth manager, and you're not happy with the asset management service.
If you want to change asset management and custody, the wealth manager will no longer want to be your trustee since the main incentive to manage your assets is gone.
If you're going to leave altogether, you'll also have to change the trustee, something that is even more cumbersome.
Next to this, you'll run a concentration risk.
Critical events such as data leaks, reputational incidents, or regulatory issues will affect your trustee, asset manager, and custodian since they are all part of the same wealth management group.
Conflict of interest
Let's stick to the example to illustrate a typical conflict of interest.
A trustee usually has to supervise the asset manager of the trust fund. That should be no problem as long as the trustee and asset manager are not affiliated.
If the trustee is not happy with the asset manager's performance, it can simply change it. We doubt this ever happens if both belong to the same wealth management service provider.
Product and service quality
Finally, let's look at product and service quality.
Wealth managers are experts in their overall business but not always entirely specialized in everything they offer.
The above services require boutique specialization to achieve the best results for your wealth.
To a certain extent, the industrial and necessarily standardized wealth management approach may not be tailored to your needs but rather tailor them to the offered services.
This means that you will inevitably have to compromise on the ideal outcome for individual wealth management requirements, not to mention that you don't get tax and legal advice.
Therefore, it's essential to remain critical of quality, conflict of interests, and dependencies.
How is the wealth management industry developing?
The above services have been available for decades without too much transformation.
Wealth owners' expectations
Meanwhile, wealth owners appreciate the importance of human-centricity, shared values, the meaning, and purpose of wealth, impact on the community, financial wellbeing, and peace of mind.
Younger generations expect an outstanding digital experience, clarity on costs, services, product quality, and ecosystems that cater to their individual needs.
The current state of the wealth management industry
However, the wealth management industry is somewhat behind the curve but catching up.
It will need to transform to deliver the expected transparency, value creation, personalization, and effectiveness in a digital setting.
It will also need to open to external services and solutions in a collaborative environment for a holistic wealth management approach.
Conclusion on asset management vs. wealth management
The lines between asset management and wealth management are blurred and may include investment advice rather than managing assets on your behalf.
Which service is ideal for you? This requires a thorough assessment of all circumstances and needs.
Difference between wealth and asset management
While asset management focuses on growing and preserving financial assets and investments on your behalf, wealth management takes a holistic view of your entire wealth.
It considers life events and scenarios potentially impacting it.
You don't need to choose between the two necessarily but can create your ecosystem of services.
Technology enables oversight and consolidation of services and data and can bring the best of specialized wealth and asset management providers together in a collaborative setting for individualized results.
The importance of a wealth planning strategy
In our view, a wealth planning strategy that considers your and your family's objectives, needs, the purpose of wealth, and shared values is the baseline for the implementation of asset management and wealth management services.
It would help if you developed such a strategy prior to the selection process.
You'll have your holistic view and obtain clarity on which services you need to achieve your objectives, and implementation will follow accordingly.
We don't recommend compromising on product and service quality and potential conflicts of interest for the convenience of one asset management and wealth management service provider.
A comprehensive ecosystem
When it comes to wealth management vs. asset management, each service component should be best in class, cost-efficient, avoid conflicts of interest, address your individual needs in a personalized setting and coherently fit into your strategy and services ecosystem.
Finally, it would be best if you avoided dependencies and concentration risks.
With that, you'll make the most out of asset and wealth management to grow, preserve, protect, and transfer wealth.