wealth-management-business-model

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.

Connected Business Concepts

Balance Sheet

balance-sheet
The purpose of the balance sheet is to report how the resources to run the operations of the business were acquired. The Balance Sheet helps to assess the financial risk of a business and the simplest way to describe it is given by the accounting equation (assets = liability + equity).

Income Statement

income-statement
The income statement, together with the balance sheet and the cash flow statement is among the key financial statements to understand how companies perform at a fundamental level. The income statement shows the revenues and costs for a period and whether the company runs at profit or loss (also called P&L statement).

Cash Flows

cash-flow-statement
The cash flow statement is the third main financial statement, together with an income statement and the balance sheet. It helps to assess the liquidity of an organization by showing the cash balances coming from operations, investing and financing. The cash flow statement can be prepared with two separate methods: direct or indirect.

Financial Structure Modeling

financial-structure
In corporate finance, the financial structure is how corporations finance their assets (usually either through debt or equity). For the sake of reverse engineering businesses, we want to look at three critical elements to determine the model used to sustain its assets: cost structure, profitability, and cash flow generation.

Tech Modeling

business-model-template
A tech business model is made of four main components: value model (value propositions, missionvision), technological model (R&D management), distribution model (sales and marketing organizational structure), and financial model (revenue modeling, cost structure, profitability and cash generation/management). Those elements coming together can serve as the basis to build a solid tech business model.

Revenue Modeling

revenue-model-patterns
Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall business model.

Pricing Strategies

pricing-strategies
A pricing strategy or model helps companies find the pricing formula in fit with their business models. Thus aligning the customer needs with the product type while trying to enable profitability for the company. A good pricing strategy aligns the customer with the company’s long term financial sustainability to build a solid business model.

Dynamic Pricing

static-vs-dynamic-pricing

Price Sensitivity

price-sensitivity
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.

Price Ceiling

price-ceiling
A price ceiling is a price control or limit on how high a price can be charged for a product, service, or commodity. Price ceilings are limits imposed on the price of a product, service, or commodity to protect consumers from prohibitively expensive items. These limits are usually imposed by the government but can also be set in the resale price maintenance (RPM) agreement between a product manufacturer and its distributors. 

Price Elasticity

price-elasticity
Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It can be described as elastic, where consumers are responsive to price changes, or inelastic, where consumers are less responsive to price changes. Price elasticity, therefore, is a measure of how consumers react to the price of products and services.

Economies of Scale

economies-of-scale
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

diseconomies-of-scale
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Network Effects

network-effects
network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

Negative Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

Read Next: Income StatementBalance SheetCash Flow

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