Wealth Management: What is it and Why You Cannot Do Without It

By Ivon T Hughes
wealth management

Optimize Your Financial Health

Financial prosperity doesn't happen on its own. Those who enjoy financial freedom, live a comfortable post-retirement life and transfer their wealth to future generations, may not necessarily be making six-figure incomes or be millionaire heirs. What they have done is grow their wealth, possibly with a professional wealth manager, developing a financial roadmap for the future with every aspect of their life taken into consideration.

You may now have an inkling about what wealth management could be, but let's delve a little deeper.

  • Wealth management offers an all-encompassing view into the preservation, growth and distribution of your material assets for the present and future.
  • Wealth management focuses on an overall optimization of wealth depending on your lifestyle and legacy goals.
  • Some keywords/phrases associated with wealth management are 'discipline', 'diversification', 'value', 'wealth protection', 'risk reduction' and 'long-term direction'.
  • Wealth management plans are targeted to the unique needs of the client. Wealth management and investment planning are not synonymous.

A wealth manager won't just invest your money in the stock market for you. Nor will he just recommend a few investment products and define your wealth in terms of the returns gained. Wealth management is not just a couple of transactions, but a process with the big picture in mind and tightly integrated with your life goals. In contrast, the emphasis of investment planning is to build more wealth from existing wealth by maximizing the gain of every investment you make. So, while one occurs in isolation, the other considers your entire life, family and future generations.

An integrated approach

Wealth management helps you understand how every financial decision you make has an impact on other areas of your financial life. For instance, when you increase contributions to your employer-sponsored retirement plan, your cash flow, paycheque and taxes are affected. But you know why exactly you've chosen to increase contributions and how it will impact your current lifestyle while addressing future financial risks.

Greater attention to detail

It is very difficult to keep track of all the details of your financial life without reliable assistance. Every business owner or professional, at some point, will delegate this task to a wealth manager. The idea behind wealth management is not to leave the planning of personal finances to managers. It is being guided by a financial expert so you can stay on top of things and seamlessly connect different financial details of your life. Wealth management tackles the nitty-gritty and does not leave any loose ends.

Wealth management is for everyone

Wealth management was formerly called financial planning. Some reserve the term for high net worth individuals with sizable family and business assets, and for whom wealth tax, tax laws and matrimonial disputes pose a threat to financial status and reputation. However, we believe wealth management to be a democratic term, and a critical, sustained process that individuals and families across all income groups must leverage to support their aspirations of leading financially secure, productive and happy lives.

Wealth management is financial care

Wealth management becomes necessary at some point in your life. You may feel the need to access financial planning services when there are too many financial issues, concerns and priorities to handle by yourself. However, the tipping point shouldn't be the time to opt for wealth management. The sooner you start, the better you're poised to achieve your life's goals. Let's now look at how exactly wealth management is advantageous for you.

The Importance of Wealth Management

What is the wealth for?

The most important starting point for wealth management is answering the question : what is my wealth for? Everyone has their own aspirations from wealth. Most, of course, want to grow their wealth but the motivation behind it is unique and personal. Wealth management comes into the picture once you've answered this question, and helps you refine your goals into appropriate financial solutions. Every investment and choice you make directly addresses these goals. Financial planning is tied into your lifestyle, factoring in personal and life goals – such as exercising and healthy habits, spending time with those you care about and enjoying the experiences that you've been putting off for later – to help you accomplish them.

Have I protected my wealth against threats?

Inflation, interest rates, income tax, inheritance tax, wealth tax, divorce, nursing home expenses, creditors, lawsuits, expensive business mistakes are some threats that can adversely impact your finances. Wealth management examines your current financial situation, age, occupation, health and other factors to formulate an asset protection plan. This can be anything from insurance and disability planning to wealth planning structures such as a trust, foundation or an international business company.

How can I support my current lifestyle better?

One of the key objectives of wealth management is to maintain your current lifestyle and secure your financial independence. Quite often, you may be confused about the perception of wealth and the reality of wealth. It can lead to poor financial decisions that affect liquidity and future finances. A wealth management plan addresses your lifestyle goals while ensuring adequate liquidity and long-term financial security.

How can I enjoy a secure post-retirement life?

The issue of retirement is central to any wealth management plan. An increase in the cost of living and simultaneously – debt - can make it challenging for employed individuals to subsist comfortably on their retirement income. By understanding your income needs and assessing options in retirement contributions and investment allocations early on, you can meet your retirement objectives.

How can I preserve and share my legacy for future generations?

You may want to help your heirs get established and lead comfortable lives. You may want to provide for their housing or medical needs, or prepare them for unforeseen financial emergencies. Estate planning must be done judiciously, as there are just as many non-financial goals as financial goals that you may want for your heirs. Transferring your family legacy is more than just leaving behind all your assets for family members most dear to you. It's about striking a balance between making them self supporting while also providing them a safety net to tide over financially challenging times.

A wealth management plan can help you finalize a structure that provides your heirs with suitable assets, brings your family closer, makes room for community contributions, and addresses non-financial goals.

Financial planning for women

On an average, a woman who retires at the age of 65 can expect to live another 19 years. That's three years longer than a man retiring at the same age. Working women often face career interruptions to start a family or take care of family members. They're more likely to be part of the workforce for fewer years and contribute less towards retirement, leading to lower lifetime savings. There is also a greater likelihood of women working part-time jobs that do not qualify for a retirement plan. Women who're the sole breadwinners of their family and those who're caregivers, additionally, must make appropriate arrangements for those they provide for and those in their care. All these factors make wealth management especially critical for women. Financial planning provides women a roadmap to achieve their financial goals, which can range from financial security, life-changing events and retirement to divorce, birth, health needs and death.

Wealth management helps you meet today's funding needs while enabling you to afford tomorrow's goals. Just like how you plan your personal and professional life, you must also take stock of your income and assets, and put them to good work.

Estate Planning

What is an Estate Plan?

Make sure you have an up-to-date Legal Will; 6 people out of 10 die without one. At the very basic level, when planning your estate, you designate who will inherit your assets; who will be in charge of your assets; and who will be in charge of your affairs, such as a property power of attorney or healthcare power of attorney. An estate plan is a set of written instructions specifying such individuals and responsibilities. Typically, an estate plan includes (a) your will or trust indicating how you want your assets to be managed and distributed (b) paperwork determining the guardianship of minor children (c) the power of attorney to designate who can make medical and financial decisions on your behalf, and (d) a healthcare directive expressing preferred medical interventions in various scenarios.

What is a Good Structure to Provide Your Heirs with Suitable Assets?

There are five broad categories that help you plan how to leave your assets to your heirs.

Distributing your assets entirely to beneficiaries

This structure automatically makes your heirs the legal owners of your assets upon your death. It is quite reliable for mature, adult heirs but not so much for younger beneficiaries with little or no experience managing assets. For minor beneficiaries, this structure will require a guardianship of the estate, with full ownership granted when they turn 18.

Holding assets in a trust and distributing at a specific age or after a certain event

Retaining assets in a trust until the beneficiary has attained a certain age, or after the occurrence of a certain event, is quite common. The purpose of this structure is to limit the control of beneficiaries over assets until such time as they're more capable of taking over stewardship of the assets. This structure is also helpful when an adult beneficiary has trouble managing assets or personal issues to settle, such as a divorce. Holding assets in a trust and allowing beneficiaries to withdraw at a specific age or after a certain event

Here, the beneficiary is afforded the right to withdraw assets at a certain age or following an event.

If the beneficiary is unable to fulfill his/her stewardship duties due to an incapacity, the trust will continue for him/her past the particular age or event, without requiring a guardianship of the estate.

Holding assets in a trust, and phasing out the withdrawal or distribution

Under this structure, beneficiaries can access trust funds in a staggered manner, such as half at age 30 and the rest at 40. The purpose is to allow beneficiaries the experience of managing an estate and learning from their experience, which they can apply the second time around. However, it also poses the risk that beneficiaries will simply use the second half of the inheritance to fix the mistakes made with the first.

Continuing trusts

You also have the option to retain the structure over the beneficiaries' lifetime. Here, beneficiaries can access trust funds on a needs-basis, but the assets are never entirely or at-once transferred to them. Historically, this structure aimed to bail out heirs when they faced debt problems, but over the years, it has become popular for other reasons as well. These include : (a) estate protection in the event of a divorce and asset partitioning thereof (b) estate protection in the event of remarriage, where upon the death of the heir, his/her spouse inherits the property and allocates it to stepchildren from a remarriage or a previous relationship (c) tax savings from a lifetime trust.

Estate Planning for Business Owners

As a business owner, transferring the value of your business to heirs upon your demise can be quite challenging. You must consider the interest of your business and everyone with a stake in it. There is also the issue of equitable division of business assets among your children and keeping the business in the family. There are various strategies that you can explore to provide for survivors, distribute assets fairly among children, minimize taxes, ensure sufficient liquidity and preserve the value of the business. Two life insurance strategies you can consider are:

  • Bequeathing control of your business to active children, and providing an equivalent value to passive children via life insurance proceeds.
  • Using life insurance to hire advisers to assist less experienced children in running your business or supervising critical projects through to successful completion.
Ivon T Hughes

About the Author

Ivon T. Hughes

Ivon T Hughes is a leading expert in life annuities in Canada. His website LifeAnnuities.com is a recognized authority on annuities. He's also an established insurance and investment broker, through The Hughes Trustco Group since 1972. Recently, he's been redefining how annuities are sold in Canada.

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