Wealth management is a crucial component in investing. It is a process that entails steps that organize the fundamental features of building a portfolio. An investor can deal with the uncertainty of financial markets; the uncertainty that markets were volatile last year, that they are volatile now, and that they will be volatile tomorrow, by regularly managing wealth. The wealth management process provides a strategic approach to managing and building wealth and will help an investor turn his client”s goals into reality.
In managing the investment process investors must determine their objectives, the resources for achieving them, and the process to go through to get there. Most importantly, it is essential for clients to be exposed to any new investment procedure or opportunity in the context of their individualized investment policy. The first step in the wealth management process is to establish objectives.
This step includes analyzing the current situation, where all factors that may have a bearing on the decisions should be identified, analyzed, and integrated into the process (Brown, Underwood 248). Before making any financial recommendations an investor must build a detailed financial profile so that he can understand the client”s personal balance sheet, his current asset allocation, and help the client develop his investment parameters. The result of this process is attaining the assessment of the investor”s goals.
With this, it is critical for the client to express five key factors: his total financial picture, his financial goals and objectives, his feelings and tolerance for risk, his time horizon associated with each of his goals, and if the client is building his wealth, preserving it, or passing it on to others (Brown, Underwood 247). Proper objectives will be established by these factors through the individualized analysis of the client”s current situation. The second important step in the wealth management process is to set a strategy. This is attained subsequent to the client assessing his goals.
In setting a strategy an investor will compare fundamental investment principles to a client”s goals. The client may consider five key fundamental principles when developing his portfolio strategy: Asset allocation, diversification, planning, discipline, and patience (Groppelli, Nikbakht 401). This step also helps the client to select appropriate asset classes and distributions. A portfolio”s asset mix or asset allocation refers to the percentages that are invested in various asset classes, such as domestic stocks, domestic bonds, cash, real estate, international stocks, international bonds, and so on.
A selection of well-diversified assets within these classes is perhaps the most effective way to manage volatility and portfolio risk in today”s markets. The investor should work with his client to identify the investor profile that fits his objectives and tolerance for risk. The second step of wealth management also includes determining the time horizon of investment objectives. One must consider the timing of the possible unexpected as well as expected requirements for use of the portfolio”s assets. Market timing can be an unreliable and hazardous practice.
Missing only a fraction of time can have a profound impact on value (Groppelli, Nikbakht 392). An investor can also help a client determine a financial plan to address his goals. In order for a client to make informed decisions and ultimately reach his goals, the investor should help translate the client”s goals and objectives into a personalized financial plan. This will help the client to organize his finances, where it will provide a clear picture of his financial situation, and help the client to understand how his financial puzzle fits together.
He will have the accessibility to evaluate his short and long-range goals and see how each piece of his financial puzzle can influence the other interlocking pieces. With this personalized plan, a client may also find solutions by putting his strategies into action by providing access to specialists in various financial disciplines, such as trust, credit, asset management, business planning, and insurance. Lastly, this step will help the client to uncover opportunities, where he can identify opportunities that could influence his overall financial well-being.
The third step in the wealth management process is to implement solutions. An investor can help the client select and implement financial solutions according to his financial plan and asset allocation strategy. The essential ways an investor can achieve this is by helping the client identify financial strategies and solutions, allocate his funds, select investment products, and managers, and develop a rebalancing strategy (Conley, O”Barr 42-44). To meet a client”s goals the investor can explore and help a client execute appropriate investment borrowing.
Depending on the client”s needs, an investor can explore various strategies. These strategies include investing from retirement, wealth transfer and estate-planning strategies, tax-minimization strategies, company stock option planning, managing concentrated stock positions, alternative investments, and other personalized solutions. An investor should also allocate the assets based upon the client”s specific goals and risk tolerance, and he should select a money manager by using specialists. This construction would result in a customized plan and solution for the client and his long-term objectives.
The final step in the wealth management process is to review the progress. An investor must continue to monitor the client”s situation in order to remain current with his goals in relation to the movement in the market. This ongoing service would include monitoring portfolio performance and results to evaluate progress, reviewing objectives and strategies periodically, and altering and adjusting the client”s wealth management strategies based on changing goals, circumstances, or conditions (Conley, O”Barr 45).
In addition, it consists of monitoring the resulting performance of selected money managers. An effective monitoring program should provide the investor with sufficient information to evaluate the program”s strengths and weaknesses, and to keep the program on track in achieving the portfolio”s objectives. The truly effective investor realizes that a crucial element of the decision-making process is establishing appropriate performance measurement standards.
The standards for provide an ongoing monitoring service for clients includes facilitating good investor-money manager communications and confirming the mutually agreed-upon goals of the investment policy. Also, an investor must show whether the assets are being managed as directed by that policy with respect to the portfolio”s risk tolerance and expected return. Another measurement is to support the qualitative judgments about the continued confidence, or lack of it, in the money manager”s abilities.
The last measurement standard is to support the periodic consideration of the continuing appropriateness of the investment policy. In the monitoring process, there are issues that should be addressed at specific times. Monthly, investors should analyze their custodian”s appraisal report containing the current market value of holdings and the previous month”s transactions and expenses. Particular attention should be paid to transactions initiated by hired money managers and compared against the manager”s stated investment strategy.
Quarterly, the investor should compare the asset allocation of the portfolio and the performance of hired money managers to benchmarks, and at least annually, there should be a formal review to determine whether investment objectives have been attained or have changed. The investor should be particularly sensitive of the need to determine whether the investment strategy still holds the highest probability of meeting short-term liquidity needs and long-term objectives.
The role of the investor is to maximize the benefits to be gained from the wealth management process. The degree of commitment to the necessary tasks outlined in the process will ultimately determine investment success. It will be the actions of the investor that will have the greatest impact on the value of the portfolio and mastering the wealth management process will assist the investor in creating the greatest outcome for his clients and their futures.
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