Private wealth management (PWM) is the term generally used to describe highly customized and sophisticated investment management and financial planning services delivered to high net worth investors. Generally, this includes advice on the use of trusts and other estate planning, vehicles, business succession or stock option planning, and the use of hedging derivatives for large blocks of stock.
Traditionally, the wealthiest retail clients of investment firms demanded a greater level of service, product offering and sales personnel than were received by the average clients. With an increase in the number of affluent investors in recent years, there has been an increasing demand for sophisticated financial solutions and expertise throughout the world.
The CFA Institute curriculum on private wealth management indicates that there are two primary factors that distinguish the issues facing individual investors from those of institutions.
Time horizons are different. Individuals face a finite life as compared to the potentially infinite life of institutions. This fact requires strategies for transferring assets at the end of an individual’s life. These transfers are subject to laws and regulations that vary from locality to locality and therefore the strategies available to address this situation vary.
Individuals are more likely to face a variety of taxes on investment returns that vary from locality to locality. Portfolio management techniques that provide individuals with after tax returns that meet their objectives are necessarily going to be specific to these tax structures.
The term was first used by the elite retail (or "Private Client") divisions of firms such as Goldman Sachs or Morgan Stanley (before the Dean Witter Reynolds merger), to distinguish themselves from mass market offerings, but since has spread throughout the financial services industry. Certain larger firms (UBS, Morgan Stanley and Merrill Lynch) have "tiered" their platforms – with separate branch systems and advisor training programs, distinguishing Private Wealth Management from "Wealth Management", with the latter term used to describe the same type of services, but with a lower degree of customization and delivered to mass affluent clients. At Morgan Stanley, "Private Wealth Management" is the retail division focused on serving clients with greater than $20 million in investment assets, while "Global Wealth Management" focuses on accounts smaller than $10 million.
In the late 1980s private banks and brokerage firms began to offer seminars and client events designed to showcase the expertise and capabilities of the sponsoring firm. Within a few years a new business model emerged – Family Office Exchange in 1990, the Institute for Private Investors in 1991, and CCC Alliance in 1995. These new entities were devoted to educating the ultra wealthy investor and providing a network of peers for the ultra high net worth individual and their families. Their growth since the 1990s indicates a market eager to become more informed about private wealth management.
Wealth management education for private investors with substantial wealth is offered by several leading universities. The first such program was offered by the American Academy of Financial Management (now rebranded as the International Academy of Financial Management) who offers the CWM Chartered Wealth Manager Program and then the Wharton School of the University of Pennsylvania. Since 1999, over 5000 people from over 100 countries have completed the IAFM CWM Wealth Manager program. At Wharton, 520 investors from 29 countries have completed the course. The five-day program is offered twice a year and is a continuing partnership with the Institute for Private Investors. Both The University of Chicago and Stanford University also offer 5 day programs. In 2009, Columbia University offered a three day program on value investing designed for high net investors Wealth management can be provided by large corporate entities, independent financial advisers or multi-licensed portfolio managers whose services are designed to focus on high-net worth clients. Large banks and large brokerage houses create segmentation marketing-strategies to sell both proprietary and non-proprietary products and services to investors designated as potential high net-worth clients. Independent wealth managers use their experience in estate planning, risk management, and their affiliations with tax and legal specialists, to manage the diverse holdings of high net worth clients. Banks and brokerage firms use advisory talent pools to aggregate these same services.
The events of 2008 in the financial markets caused investors to address concerns within their portfolios. "The past 18 months have challenged traditional thinking about investing and asset allocation, diversification, and correlation. For individual investors, risk tolerances have been tested, investment assumptions have been overturned, and fundamental truisms have been questioned." For this reason wealth managers must be prepared to respond to a greater need by clients to understand, access, and communicate with advisers regarding their current relationship as well as the products and services that may satisfy future needs. Moreover, advisors must have sufficient information, from objective sources, regarding all products and services owned by their clients to answer enquiries regarding performance and degree of risk-at the client, portfolio and individual security levels. "This state of affairs poses a dilemma for wealth managers, who, for a generation, have adhered to the core principles of asset allocation and earned their keep by preaching the mantras of 'buy and hold', 'invest for the long term', and when things get tough, 'stay the course'.”
Today wealth management advisors must have access to an objective content repository. This repository must contain a current and readily available profile of the clients holdings.
