As with any profession, wealth management has its own jargon for clients to get a handle on. Understanding these key terms will help to empower investors, wherever they are on their wealth journey.
A desire to maximise investment returns is of course one of the prime reasons High Net Worth Individuals use a professional wealth manager. Here is an indicator of what the industry has been achieving for clients to help you in your search.
Users of findaWEALTHMANAGER.com ask us very frequently what level of investment returns they can expect. Those who have been managing their own assets through a DIY platform want to know how much better their gains are likely be with a professional investment manager, while individuals who are contemplating changing provider need to know how their existing one compares to peers.
The question of what your investment returns “should” be is slightly more complex than it might seem because each client is different and their wealth will be managed in line with those unique circumstances and objectives. This tailoring is in large part the whole point of professional wealth management, and the reason it is a premium service. There are, however, some “ballpark” figures you should bear in mind.
Before thinking about the returns you might achieve, you must first consider your risk-profile and the kind of investment mandate your wealth manager will be working to
Obviously, risk and reward represent a trade-off: the greater returns you seek, the more risk that must be taken on. Therefore, before thinking about the returns you might achieve, you must first consider your risk-profile and the kind of investment mandate your wealth manager will be working to.
Our guide to risk-profiling explains things in more depth, but in essence it encapsulates:
Wealth managers ensure that the investments selected for clients are suitable for them in different ways, with varying degrees of tailoring, but you will often find that portfolios are designated as “cautious” or “conservative”, “balanced” and “growth”, representing a spectrum progressing from risk-averse to aggressive.
Your asset allocation – the proportions of the asset classes and instruments comprising your portfolio – dictates where it sits on the risk spectrum. In simple terms, a “cautious” portfolio might be split 75% to 25% global bonds versus global equities, with a growth-orientated one the other way around and a balanced one divided 50/50.
Although your eventual portfolio may be fine-tuned so it doesn’t fit these broad categories exactly, it can be helpful to think about investment performance in terms of them. This is also how the industry compares performance among peers.
For instance, the Private Client Indices produced by Asset Risk Consultants are well-known benchmarks which assess the investment performance achieved across a broad sample of wealth managers. Firms will commonly cite these to show potential clients how they compare to the industry average, but there are other benchmarks which may be used too. See our Guide to ten key points on performance benchmarks to learn more.
Alongside industry averages, you may also like to consider what the very best performing wealth managers have been able to achieve. The Citywire Wealth Manager/ARC Performance Awards for 2018, which were announced in October, tell us the following:
The best-performing cautious portfolio from its entries had returned 3.88% over one year and 18.79% over three, against returns of 1.4% and 9.4%, respectively, for the ARC Sterling Cautious PCI.
The winner of its balanced portfolio award achieved 5.82% over one year and 24.78% over three, compared to growth of 3% and 15.7%, respectively, for the ARC Sterling Balanced Asset PCI.
In the growth portfolio category, the standout firm garnered 7.73% over one year and 38.40% over three, against 4.9% and 23%, respectively, for the ARC Sterling Steady Growth PCI.
Then, at the most aggressive portfolio end of the spectrum, the award went to a firm which had delivered 9.62% over one year and 45.34% over three, versus 6.4% and 28.2%, respectively, for the ARC Sterling Equity Risk PCI.
You will often find that portfolios are designated as “cautious” or “conservative”, “balanced” and “growth”, representing a spectrum progressing from risk-averse to aggressive
As these performance figures illustrate, there can be wide variation in the returns wealth managers achieve and the best performing firms can outstrip the average by a significant degree (although do bear in mind that consistent outperformance should be what you are looking for). If you have been disappointed by your provider’s performance then it may be time to look at alternatives.
What these figures also tell us is that even the most cautious portfolios wealth managers are running for clients are generally generating returns far in excess of cash savings rates.
October 2018 research from Savings Champion shows the average interest rate on existing savings accounts actually fell from 0.9% at the end of July to 0.89% at the end of August. Despite the Bank of England raising rates, many banks are failing to pass this onto savers, and some instant access ISAs are paying as little as 0.25%. As we explain in our Guide to safe havens beyond cash, being cash-heavy in such an environment can seriously erode your wealth over time due to inflation.
Investment performance needs to be looked at in combination with volatility and risk management, since protecting your wealth is as important a pillar of wealth management as growth. It is also naturally net gains, once all fees and costs are deducted, that should be your focus.
A good wealth management relationship should deliver robust investment performance, value for money and quality client service. If you feel your provider is falling short in any of these aspects, why not put our smart matching tool to work and see what other wealth managers could offer.
The investment performance figures contained in this piece are for informational purposes only and are not intended in any way as financial or investment advice.
We always advise consultation with a professional before making any investment decisions. Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.