Wealth Management Business Model

Under the wealth management business model, financial advisors provide expertise to mostly affluent clients who may be individuals, families, businesses, or organizations.

Understanding the wealth management business model

The wealth management business model requires licensed financial advisors to consult with various affluent clients, learn about their circumstances, and then improve or enhance their financial situation.

Wealth managers offer the full gamut of financial services and, at least in theory, can provide virtually any such service that exists.

However, most specialize in areas where they feel most qualified to provide advice such as investing, accounting, retirement, estate planning, and tax optimization.

Fundamental to the wealth management business model is consultation. Indeed, the most effective wealth managers are customer-focused and do not recommend products or services that are inappropriate.

Instead, their primary objective is to determine what is important to the client (and why) and then develop a tailored solution.

On a related note, it should be mentioned that wealth managers provide more than just financial advice.

Instead of a piecemeal approach where multiple products from various financial professionals are combined, wealth managers recognize that affluent individuals are better suited to an integrated approach.

The responsibility of the financial professional, in this case, is to coordinate the various products and create a plan that is sensitive to the client’s current and future needs.

Wealth management fee structure

Wealth managers collect advisor fees in a few different ways.

Fee-only advisors charge flat, hourly, or annual fees, while others are compensated via commissions they collect from the investments they sell.

Some managers utilize a hybrid approach, earning a mixture of investment commissions and fees.

The most common fee structure tends to be an annual fee that is charged as a percentage of the total funds under management.

In 2021, for example, advisors collected a 1.02% fee (equivalent to $10,200) for managing an investment amount of $1 million.

Fees work on a sliding scale such that the more money is invested, the lower the amount a wealth manager charges.

What’s more, active managers who buy, hold, and sell securities in a bid to outperform the market will also collect a more substantial fee than those who passively manage portfolios.

Wealth management business model credentials

The particular credentials of those operating under the wealth management business model will depend on the country of operation.

In the United States, the most desirable credentials include:

  • Certified Financial Planner (CFP) – requiring up to 1,000 hours of coursework and a minimum Bachelor’s level of education.
  • Chartered Financial Analyst (CFA) – more relevant to investment research and portfolio management and issued by the CFA Institute. CFA holders must also have four years of prior education or work experience.
  • Personal Financial Specialist (PFS) – PFS holders are credentialed by the well-regarded American Institute of Certified Public Accounts (AICPA). In essence, they are certified public accountants (CPAs) with further expertise in all aspects of financial management.

Key takeaways:

  • Under the wealth management business model, financial advisors provide expertise and guidance to affluent clients who may be individuals, families, businesses, or organizations.
  • Wealth managers collect flat, hourly, or annual fees and commissions from investments. While some choose one avenue over the other, many choose a hybrid approach and collect both.
  • The wealth manager business model is characterized by more than just financial advice. Wealth managers coordinate various financial products from different professions and create a plan that satisfies the current and future needs of the client.

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