Executive Summary
In the nebulous space where financial services firms decide what to call themselves and how to hold themselves out to the public, there's not necessarily a very clear distinction between a "financial planning" firm and a "private wealth management" advisor. Often, the difference is little more than the perceived marketing distinction of the labels to certain target clients.
Nonetheless, there is some evidence to suggest that the services delivered to very high net worth clients can be quite different than those provided to the average American, and accordingly may require a different set of knowledge and skills to deliver effectively.
As a result, there is an effort underway to try to study the real differences between what it takes to be a successful financial planner versus a private wealth management advisor, in order to develop certification that is unique and appropriate to the distinct specialization.
Financial Planning Versus Private Wealth Management
The inspiration for today's blog post comes from time I spent through the end of last week working with IMCA on a volunteer committee analyzing the job tasks a private wealth manager really does, and the necessarily knowledge and skills one must have to deliver private wealth management, as a part of the ongoing development of their Certified Private Wealth Advisor (CPWA) program (a "post-CFP" certification program). Yet when I mentioned earlier in the week to some financial planning colleagues that I would be a part of the project, the consistent response I received was "Ugh, is this just another designation to confuse the public?"
To the contrary, as we went through the process, I was increasingly convinced that private wealth management - when reasonably and appropriately defined as specifically serving (very) high net worth clients - does deserve a standalone certification, because it really does build upon a different set of knowledge and skills.
For example, let's look at the different kinds of skills a practitioner might need when working with a $20 million net worth client, versus a $1 million client:
- Numerous "advanced" estate planning strategies, from CRTs to GRATs to sales to IDGTs (at least until/unless they're shut down!), may be highly relevant and used with some frequency with $20 million clients, but simply are not relevant in all but the most exceptional cases for a $1 million client.
- The impact of estate taxation itself is materially different, as a $1 million client may not even need to worry about Bypass trusts anymore, while a $20 million client faces a multi-million dollar estate tax liability even with effective A-B trust planning, necessitating further planning techniques. Furthermore, to the extent there is exposure to estate tax, the $1 million client's primary exposure is to state taxation (depending on the state), while the $20 million client's exposure is primarily to Federal estate tax.
- Income tax planning issues are very different between these clients. The $1 million client faces a much lower tax rate, may have limited exposure to AMT, and needs to plan for taking advantage of the limited taxation of Social Security benefits or 0% capital gains rates. The $20 million client, on the other hand, is likely perpetually exposed to the top tax bracket, or the AMT; issues like the maximum taxation of Social Security benefits may just be a given.
- While Social Security benefits may be a significant pillar for the retirement income and cash flow of the $1 million client, effective Social Security benefits planning and the value of delaying is generally not material for the $20 million client. In fact, the $20 million client may already have more than needed for retirement, and/or only wishes to use a portion of his/her funds for retirement, with the remainder held for future generations, and must make an effective decision about what portion of net worth should be held aside for retirement in the first place!
- Although any family regardless of wealth can have its dynamics and issues, the multi-generational family dynamics involved are quite different when children may inherit enough money that they would never need to work in their lives (paired with a parental concern to not make them into "trust fund babies").
- The types of investment options held out to clients with a $20 million net worth are dramatically different, and may include much more exposure to investment opportunities like private equity, various limited partnerships, etc., that simply may not be available to a $1 million client, due both to accredited investor limitations, minimum investment requirements, and the feasible level of diversification (or lack thereof) a $1 million client could achieve.
- Clients with $20 million of net worth - especially if it is first generation money - are likely to be attached to extensive executive compensation or closely held business planning issues, that resulted in such a material accumulation of wealth.
Of course, many of the planning issues noted for a $20 million high net worth client may have parallels with a $1 million (or less affluent) client, but the fact remains that the level of technical depth and complexity, the multi-professional involvement, and the concerns that are and are not issues do vary between these clients (and would vary even more significantly between a $20 million and $200,000 client). Strategies that might be used once a year, or once a lifetime, for the less affluent client may be used regularly in the high net worth scenario. Similarly, other issues may pertain only to the less affluent client (e.g., debt counseling and certain types of budgeting issues), but not the higher net worth.
I'll grant that in our world these days, the line between financial planning and private wealth management has blurred. More and more firms these days are eschewing the financial planning label and using the term private wealth management instead, as the latter implicitly sounds more advanced, sophisticated, and "high end" - regardless of whether it's really just "personal wealth management" where they're actually doing anything different for their clients.
Nonetheless, when you get far enough up the wealth scale, it appears that the necessary knowledge and skills, and the associated tasks one performs in their daily job, really do begin to change, and private wealth management begins to represent a distinct body of knowledge from financial planning. Or at the least, representing a distinct specialization of the field, not unlike how an orthopedic surgeon represents a significant depth of knowledge and skills, with different job tasks, than the general practitioner physician. And in turn, the delivery of these private wealth management tasks, skills, and knowledge lends itself to different business models, as well; private wealth management includes family office and multi-family office firms that serve a relatively limited number of very high net worth clients with unique services as a business model that simply couldn't be done economically and feasibly in a financial planning firm with hundreds of clients.
Where you draw the line between being a financial advisor versus a private wealth management advisor is still a little fuzzy. Some suggest the line is at $1 million of net worth, which many organizations define as "high net worth", but I don't think that's it. When I look at what a "financial planner" does and what a "private wealth manager" does, when I really try to separate the job tasks and body of knowledge, the dividing line (at least in terms of net worth) is somewhere higher. I suspect it belongs somewhere in the $5 million to $10 million range. One outcome of the work I was doing with IMCA is a survey that will ultimately go out to private wealth managers (or at least those who identify as such), to try to determine where to put a stake in the ground to show the distinction of what private wealth managers uniquely know and do.
So what do you think? Does private wealth management constitute a unique job from financial planning, requiring different skills and knowledge (regardless of whether some firms are really doing anything different now)? Has the line between financial planning and private wealth management been blurred? Where should the line be drawn? Does private wealth management need a new or different name to describe it?
