Wealth management, what’s in a name?

Our name, phwealth, refers to wealth management and I have been asked to explain the difference between financial planning and wealth management. Is it one and the same? Or is it just a marketing gimmick, trying to sound more important than we really are?

To begin to answer that question we start with a look at financial planning and what that is, as wealth management is a specialised form of financial planning for the relatively wealthy.

Financial planning

Our phwealth financial advisers (four at last count, three more waiting in the wings) initially trained as financial advisers and then went on to train as financial planners. We did the basic training of a financial adviser, required by law, and then studied for another four years under supervision for the Certified Financial Planner (CFP) designation. It was a strenuous exercise, coming as it did after a range of other degrees and diplomas, and it was, by general agreement, well worth the bottle. It is arguably the top designation for financial planners in the world.

The CFP is an international designation originating in the United States. There are approximately 240 CFPs in New Zealand, 3,000 in Holland, over 5,000 in Australia, 24,000 in China, nearly 90,000 in the United States, and about 192,000 worldwide.

There are harder qualifications to obtain than the CFP, such as the Chartered Financial Analyst (CFA), which is the top qualification for investment management professionals. But this is not aimed at client advisers, rather at investment management.

What is at the core of financial planning?

Financial planning is all about getting to know the whole person, or the whole family, with the underlying concept of, "The cure of a part should not be attempted without the treatment of the whole" – Plato (the Plato Principle).

The elements of financial planning are concerned with the full range of financial issues a typical client may have:

  • family budgeting
  • managing cash at the bank
  • debt and mortgages
  • funding for emergencies
  • savings for short-, medium-, and long-term needs
  • risk management and insurances
  • retirement planning
  • cross-border financial issues
  • investment risk profiling
  • lump sum investment strategies
  • diversified investment: implementation, monitoring and review
  • basic tax issues
  • wills and enduring powers of attorney

... all wrapped up with a broad financial education about what is important in financial terms, and what is not important and therefore what you can ignore.

Clients need help with how to avoid the “noise” in the media, sometimes referred to as “financial pornography” (the constant barrage of self-interested and mostly meaningless commentary masquerading as ‘expert opinion’). And they need help to not anxiously check their investment balances all the time, other than for entertainment.

Hopefully, financial planning also means help with avoiding the unconscious behavioural biases that we are all subject to, such as the Fear of Missing Out, or FOMO. There are more than 150 of these behavioural biases that have been documented and studied at the academic level and none of us are fully immune.

In a nutshell, financial planning is about providing financial leadership for clients.

It is not about “order-taking”, as some clients think. Some clients already know what they want, and they just want someone to “take the order”. A real financial planner cannot do that. They must diagnose before they prescribe a solution and this will always take time to develop, and the prescription may not initially be appreciated by their clients. They may have to be led.

Real financial planning is also not about the sale of financial products. Notice that there was no mention of a financial product in the list above in our elements of financial planning.

When you consider that the vast majority of financial services in New Zealand are delivered by either big banks or big share brokering houses where the focus is on product sales, rather than independent financial planning, where the Plato Principle is not the norm, financial planning is a rare beast, but one worth searching out.

If you come across a CFP in a bank or share brokering house then you should get the real deal, but the culture and the values of the big houses are working against them.

To be fair, many financial advisers do not hold themselves out as financial planners. They may only be offering investment services or share brokering services. In that case, you are unlikely to see the Plato Principle being applied.

It is not only most financial advisers and their bosses that do not understand financial planning; the law in New Zealand is almost wholly concerned with product sales. Take the current definition of financial advice from the Financial Markets Conduct Act 2013 amended by the Financial Services Legislation Amendment Act 2019 as of 15 March 2021: financial advice is when a person “makes a recommendation or gives an opinion about acquiring or disposing of (or not acquiring or disposing of) a financial advice product”.

Two more clauses were added to the definition of financial advice in the recent law changes, but it still begs the fundamental question. They were:

  • designing a personalised investment plan in certain circumstances and;
  • providing financial planning of a kind prescribed by the regulations (there are no regulations yet).

No mention of anything like the Plato Principle in the law, I am afraid. This reflects, in my view, the dominating position of the big commercial banks and share brokering houses in New Zealand who pay most of the fees to the Financial Markets Authority and do most of the lobbying.

Financial planning is a useful service for everyone, from those just starting out on their independent financial lives to retirees living their dream. It is just a matter of being prepared to see the value in it, and pay for it, like any service.

In summary, quoting my colleague Jared Campbell CFPCM, “Everyone needs a financial plan”.

Wealth management

All of the above, as well as some more specialised and in-depth services, but designed for clients with significant existing wealth, perhaps $5 million and above, and usually with a number of inter-locking entities such as family trusts, companies and partnerships.

Wealth management is a sub-set of financial planning. Both are akin to the General Medical Practitioner, taking an over-view, but wealth management has a lot more medical specialists involved. Wealth management deals with more complexity.

In wealth management the depth of services becomes more apparent.

What might a typical wealth management client with $10 million of investments and perhaps another $5 million of lifestyle assets need by way of wealth management services?

It is the same process as for financial planning – an in-depth diagnosis of the whole person and their family (and businesses), a good deal of interaction with all the client’s professional advisers, before providing a written prescription. Typically carried out over several years as the clients’ situation develops and carried on for a lifetime.

In addition to the services covered under financial planning above, the more specialised services typically delivered under wealth management may include:

... an integrated approach to all the client’s needs with the wealth manager coordinating a wide range of specialists -

  • advice with the full range of direct investments including residential, commercial, retail, and industrial property within an overarching strategy including any diversified investments
  • protecting wealth
  • managing emotions and unconscious biases around investment
  • growing wealth in a prudent manner for future generations
  • family trusts, monitoring, management, and review
  • trustees’ investment duties at law
  • accounting services
  • legal services
  • simplification of the myriad legal entities accumulated over a lifetime of business risk management
  • business risk management including trustee and director liabilities
  • business advice
  • business debt
  • business coaching
  • business succession-planning
  • estate planning and planning for matrimonial disputes in the next generation
  • taxation advice across multiple entities
  • buy/sell insurance agreements and key person cover
  • family financial coaching and financial planning involving open and honest communication with the next generation – helping the next generation get ready to manage the family wealth that will eventually come their way
  • family loans and debt
  • philanthropy planning and legacies
  • immigration services
  • cross-border tax planning
  • cross-border investment planning
  • lifestyle issues including health, community connections and purpose
  • managing the expectations of family, friends, and the community on wealth disbursement
  • foundations and charitable institutions strategic investment advice

Some of these services will already be provided by our clients’ other professional advisers such as their accountant and lawyer but the outcome will almost always be improved by the intervention of a wealth manager, even if it is to get things moving along. Professional advisers get very busy, and the coordination role can be very useful.

A key role for the wealth manager is to make sure there are regular meetings to review progress with the key stakeholders and professional advisers. It is easy to start something off; it is quite another thing to manage it every year and deliver it into the future.

So, there we are. Good question, whoever it was who asked me to explain the difference between financial planning and wealth management. I trust that helps.

Keep asking great questions...