In financial planning, wealth management plays a crucial part, as it entails a comprehensive approach to managing finances to attain long-term stability and growth.
Wealth management essentially includes all financial activities and considerations to help individuals meet their financial objectives.
The main aim of wealth management is to protect and grow corpus while reducing the risks associated with investments.
Wealth management firms primarily understand and assess the client’s financial situation, including income and expenses.
By getting a comprehensive picture of their financial standing, wealth managers guide individuals to make strategic investments to meet their financial goals and ensure long-term financial stability.
Role of wealth management in personal finance
Personal finance broadly involves money management, saving, and investing. Thus, it includes budgeting, investing, saving, and planning for the future.
For example, budgeting involves earmarking a certain amount to a high-value purchase, such as a home appliance from an online marketplace. It also considers various financial risks and future events, enabling you to make informed financial decisions.
Let us look at the role of wealth management in personal finance:
1. Financial planning
Wealth management firms consider various financial elements, including taxes, insurance coverage, and cash flow, instead of focusing on a single aspect.
This allows them to draft a comprehensive financial plan, which also accounts for sudden changes in your life, such as having a child or getting a new job.
2. Investment management
Another crucial facet of wealth management is creating and managing an investment portfolio that aligns with your objectives, risk tolerance, and investment horizon.
A wealth management firm or manager often employs diversified strategies, including mutual funds, bonds, stocks, and alternative investments.
For example, a part of your corpus will be earmarked to open a fixed deposit with a bank or NBFC that guarantees moderate but assured returns.
3. Risk management and insurance
Risk management and insurance are also part of wealth management. Wealth managers identify financial risks and create strategies to mitigate them.
On the other hand, insurance solutions, ranging from health and life insurance to property and liability insurance, are assessed and optimised based on the client’s exposure.
4. Tax optimisation
A key aspect of building and preserving wealth is minimising the tax burden. Wealth management firms work with tax professionals to use strategies that reduce tax liabilities and maximise net returns.
This can include tax-saving investment instruments (such as PPF or 5-year tax-saver FDs) and planning for capital gains.
An example is tax-loss harvesting, which involves selling underperforming securities at a loss to offset gains from other investments, thus reducing the overall tax liability.
5. Retirement planning
A crucial part of wealth management is creating a roadmap to ensure a comfortable life post-retirement.
For this purpose, wealth managers assess your current lifestyle and calculate the income needed per month post-retirement (taking inflation into account). Wealth managers also explore optimal withdrawal strategies and adjust plans according to changes in market conditions.
6. Estate planning
Once you have accumulated wealth, as a discerning parent and individual, you must think about how to distribute your assets before passing.
In India, assets are distributed among the legal heirs according to applicable personal laws if someone passes away without drafting a will.
However, it is essential that you plan ahead to ensure the assets are distributed properly. You can also donate a part of your assets to charity, and all of this comes under wealth management.
7. Ongoing financial advice
Neither personal finance nor wealth management is static. They change according to changes in your personal life.
For example, career changes, marriage, or the birth of a child warrant certain adjustments to your portfolio.
Similarly, changes in the market conditions require the wealth manager to come up with new strategies and make specific adjustments to your asset allocation.
Conclusion
Wealth management combines all facets of personal finance, with the wealth manager creating a robust and comprehensive plan to protect and grow your corpus.
These strategies are tailored according to individual goals, risk appetite, and changes in your personal life.
By providing continuous guidance and assistance, wealth managers ensure the plan drafted remains aligned with changing market conditions and life changes.
