Most think them the same, but they’re definitely not. Let’s delve into the details. What makes a good investment manager? And a wealth manager?
While often used interchangeably, the terms investment management and wealth management do not mean the same concept. Investment management is like how it sounds—the focused management of investments engaging in one or more of a variety of possible strategies. Performance is the goal. Wealth management is dedicated to the wealth of high-net-worth clients. Their wellbeing is the goal. In this article, we will delve into what makes each form of management truly what it is, and their finer similarities.
Mandates tend to govern the goings-on of funds made within the scope of investment management. Investment mandates are sets of instructions dictating how the pools of capital within investment funds (generally: mutual funds, exchange-traded funds, or hedge funds) should be managed. The professionals running these funds are legally held against these instructions, which spell out amongst other considerations:
- Time horizon
- Acceptable risk levels
- Categories of investments to take or avoid
- Permissible amounts of buying, selling, or even shorting
Investors review these mandates and the quality of the managers as part of their decision-making process. Mandates are the first part of that puzzle. For example, the investment management could be centered towards small-capitalization stocks, global investments, bonds only, low-turnover, long-term growth or income only. The possibilities are endless.
The SPDR S&P 500 ETF and the Lord Abbett Growth Leaders Fund are two very well-known examples of investment management held to a mandate. The former has a passive mandate following the S&P 500 index, with no directive for any other active decision-making. Therefore they can advertise a gross expense ratio of less than 0.1%. The latter has an active mandate following its own strategy of buying into high-growth, innovative companies based in the United States, such as Apple or Tesla. But for this active investment management, there is a fund expense ratio of 0.93%, considerably higher.
The human investment managers themselves are often trained with skillsets reflecting proficiencies in financial statement analysis, multi-asset allocation, alternative asset management (i.e., hedge funds, real estate), single investment selection, portfolio strategy, and technical analysis. The designation CFA, for Chartered Financial Analyst, is a common marker of achievement for these investment managers.
Whereas the designation CFP, for Certified Financial Planner, is more common with wealth management. This field starts and ends, most often, with private clients holding investable assets of at least one million U.S. dollars. Investment advice is a fundamental part of wealth management but just that, one part. The rest includes: financial and estate planning, individual tax management, insurance selection, and retirement preparation.
See the difference? It encompasses all parts of a person’s financial wellbeing, especially one who has diverse personal or professional interests, and is a quote-unquote citizen of the world. Practically this also means a need for top-tier concierge services assisting with travel or selecting third-party vendors (like additional attorneys or accountants).
Not only do these professionals tend to have two degrees plus the above CFP designation, they are also culturally experienced with those cultures defining their clients. In investment management, the professionals are akin to data scientists or proven veterans of applied mathematics. In wealth management, the professionals are well-versed in people. Languages are highly valued. If a wealth management firm wishes to serve Brazilian clients, for example, Brazilian Portuguese and some time spent in Sao Paolo are both necessary.
Bringing It All Together
The major investment management firms of the world, like BlackRock or The Vanguard Group, do share one major component in common with even boutique and full-service wealth management firms, like Deltec—fiduciary responsibility. Coming from the Latin word fidere, or “to trust,” it demands that investment managers or client advisors always act in the best interests of their investors or clients.
Engaging in overly risky behavior or placing too much responsibility on unqualified staff are definitely out of the question. Leading firms know this, and that the investment arena—either for impersonal-sounding mandates or for clients themselves—is highly competitive. As the saying goes, take care of your employees, and they will take better care of your clients.