Wealth managers follow a number of steps at the start of a relationship to ensure things are prepared for both sides and no rules are being broken.
Wealth managers are set up to serve affluent individuals who are likely to have more complex requirements than the average person and so need a package covering various services and investment offerings. Wealth managers are also subject to a plethora of rules and regulations intended to protect investors and prevent financial crimes like money laundering and tax evasion. There are therefore several elements to being taken on as a wealth management client (or “onboarded”, as it is sometimes called).
How it works
There is a big regulatory aspect to the process of becoming a wealth management client and there are a range of checks and assessments which need to be carried out and documented at the start of a relationship.
Regulators require wealth managers to carry out a range of checks so that they can document that their clients’ money is legitimate and ensure that their assets will be appropriately taxed. As you would expect, you will therefore have to provide various pieces of documentation to establish your identity:
- Your address
- Your nationality and domicile for tax purposes
- You will also have to prove that the source of your wealth is above board, but this is usually pretty simple once the wealth manager has documented what you do for a living;
- any directorships or significant shareholdings you may have; and how your own business is held if you have one.
In addition to the information requested from you, wealth managers will run their own checks (usually via third-party systems) to verify your identity, that you are neither “a politically-exposed person” (PEP) nor that you deemed to carry reputational risk. Simple internet searches will also form a part of these checks so your online presence will be noted by the wealth manager.
The rules around the prevention of financial crimes like money laundering and bribery are very strict. Although it might feel that you are being asked a lot of questions, you can rest assured that every client has to go through the same process. You would only want to deal with a wealth manager which takes its regulatory responsibilities seriously in any case.
Tax authorities are ever-hungry for revenues, and this has only increased since the financial crisis. HMRC, like tax authorities around the world, is taking a tougher stance on tax evasion. Therefore there is also a fair amount of documentation which may apply, depending on whether you are a resident domiciled UK client or whether you are domiciled elsewhere for tax purposes, and if you will be dealing with an offshore entity for whole or part of your wealth management relationship. For example, under legislation which came into force on 1 July 2014, wealth managers everywhere in the world are obliged to report on the assets of any clients who are US citizens or Green Card holders to the IRS. The added complexity caused by the new tax reporting requirements has led some wealth managers to stop working with US clients, but for others it has become a special area of expertise and we have several of these firms on the findaWEALTHMANAGER.com panel.
As with the Anti-Money Laundering (AML) and “Know Your Client” (KYC) parts of the onboarding process, remember that your wealth manager is only asking as many questions about your tax affairs as they have to under the rules. It is also the case that these conversations often uncover a need or gap in your wealth management strategy right away, so they can actually be very useful.
Suitability and risk-profiling
Suitability simply refers to the process of making sure that the financial advice the wealth manager gives is appropriate for your needs. The investment strategies and products the firm recommends must suit your investment time horizon, but more importantly they must represent a risk/return payoff which is suitable for you in both practical and psychological terms. Some clients aren’t fazed by volatility and want to chase growth fairly aggressively, whereas some are more comfortable with less risk and more modest investment growth, for example.
Accurately risk-profiling clients and then matching them to suitable investments for their needs is carried out in a variety of ways today. Some wealth managers take a very high-tech approach, whereby clients take a sophisticated psychometric risk-profiling test. Other wealth managers prefer a more qualitative approach, which is based predominantly on detailed discussions, or a combination of the two.
Contracts and investment proposals
The risk-profile and suitability assessments carried out by the wealth manager will be the foundation for the overall investment strategy they devise. Once your objectives and situation has been fully discussed (alongside any questionnaire-type tests you may have taken), an investment proposal will be generated. This will effectively “play back” your investment profile and what you are asking your wealth manager to achieve. Your contracts and letters of engagement will also include details of all the relevant fee schedules. The institution must make clear what you will be paying and why. If you are in any way unsure, just ask.
Account opening and investing
Once everything has been approved and documented on both sides your account will be opened and can then be funded. Once the money hits your account, the wealth manager will start to invest according to the parameters that have been agreed in the case of a “discretionary” investment relationship, or they will contact you with investment ideas in the case of an “advisory” investment relationship. You will now be looked after by your dedicated adviser, who will stay with you as your primary point of contact in most cases. They will probably be in contact quite often in the early days to make sure you are happy with how things are progressing.
The process of becoming a wealth management client covers a wide range of elements. While some are about rules and regulations, signing up with an institution really centres on your adviser understanding you as an individual and forming an accurate picture of your circumstances and goals. Most clients therefore find the on-boarding process very useful in terms of getting clarity around what they would like to achieve for themselves and their family (indeed, a lot of firms also offer some kind of educational events and programmes for clients who would like to better their understanding of financial planning and investing).
Your needs and requirements will be reviewed regularly as your relationship with your wealth manager progresses. The process of becoming a client is really just the start of what should be a very productive dialogue over time.
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