Although the use of labels may appear to simplify life, it can also become a major problem. A label can take on a life of its own, evolving away from what it was that it initially described. Alternatively, a label can hide the need for additional research as its meaning becomes more and more corrupted with the passage of time. Our industry is not immune to this challenge. The perceived interchangeability of the terms “asset management” and “wealth management” is only one of the latest examples. In this short essay, we shall attempt to clarify what these two concepts have in common and what can make them radically different.

Private Asset Management
Private asset management is the simpler of the two concepts. Whether you are looking at substantial wealth or at modest asset levels, it is solely concerned with the management of assets. Most often, it involves little more than the management of financial assets, although there are good reasons why it should at times expand to incorporate other assets, principally human capital.

Holistically, private asset management is only marginally different from the much broader asset management discipline. Differences primarily fall into three categories: strategic asset allocation, tax efficiency, and asset location.

• Strategic asset allocation is often different because individuals find it quite difficult to think in a framework purely driven by asset/liability considerations. Although individuals should at times precisely focus on asset/liability issues because their asset level may or may not be sufficient to meet some of their future liabilities, their financial sophistication may be too limited to allow them to take that road. Life-cycle investing can be viewed as a possible solution, effectively involving a variant on the traditional finance theme. Others revolve around the general principles offered by behavioral finance.
• Tax efficiency is an important differentiating element, although a purist would observe that taxes do play some role in the institutional asset management world, with insurance portfolios, for instance. Yet, the major new element that taxes introduce into the investment process is particularly challenging in the world of individual investors, although, again, another purist might object that quite a bit of individual “wealth” is owned through tax-exempt or tax-deferred structures. A lot has been written on the topic, but thankfully, our industry has evolved quite a bit from the days when tax efficiency was viewed as a fad, was thought only to involve looking at capital gain or loss realization in the last two months of the year, or was derided as the foolish attempt to let the “tax tail wag the whole dog.”
• Asset location can be viewed as the point where strategic asset allocation and tax efficiency begin to interact. Strategic asset allocation deals with the answer to the question: What asset mix will meet investment goals? Asset location focuses on an equally important question: Given certain investment pockets with different tax treatments, which asset should be held in what pocket? Individuals indeed have at least two and at times as many as four generic investment pockets: (1) personal assets that they own and that they pay taxes on, (2) personal assets that they own but that enjoy a tax-exempt or tax-deferred status, (3) assets that they have bequeathed to their heirs and that they or their heirs pay taxes on, and (4) assets that they have bequeathed to charitable interests and that most often are tax exempt. The way in which various assets are allocated between the first two pockets, in particular, has a serious impact on long-term investment success.

The introduction of new ideas to deal with the more vexing asset allocation problems has naturally extended to the notion that human capital is an important element of the whole equation. Interestingly, the very same concept also has important, but somewhat different parallels, in the world of private wealth management. Within the private asset management world, though, it is simply focused on the notion that individuals typically start life with minimal financial capital and plentiful human capital. Over time, the two lines cross as human capital — often understood as the present value of one’s future earnings — declines, whereas financial capital rises as some of those earnings are saved and those savings grow with savvy investments.

Private Wealth Management
Private wealth management must be viewed as a discipline that is quite different from private asset management. Private asset management often deals with just a few of the multiple relationships that can be viewed as surrounding an individual: assets, cash flows, and taxes. The wealth manager must integrate a much larger number of factors and, therefore, an exponentially larger number of possible interactions. Consider a possible list of the issues facing a wealthy family: financial assets, taxes, cash flows, estate planning and execution, philanthropic planning and execution, family roles and governance, family education, family risk management, family values, and many others.

One might, in fact, deem the term private wealth management to be suboptimal and replace it with another that more accurately describes the issues at hand: integrated wealth management. The latter is more accurate because it immediately conjures up the image that should come to mind: The challenge is about the management of multiple misunderstood, or simply ignored, complex relationships or interactions. Let us review a few of the most important questions that you should consider and that you should find an answer to. You will quickly note the much wider nature of the challenges within the private wealth management world than in the private asset management world.

• How do the roles that each member of the family should, or wants to, play affect the governance of the family?
• How does the governance of a family affect the nature and importance of the integration of family values into the family’s integrated wealth management process?
• Is there, or should there be, an integration of family values in the broader asset management process?
• In practice, how do family education, the management of each member’s human capital, broad family value considerations, and the desirable optimization of family investment planning come together and work?
• How do financial planning issues — evaluated at the level of each member — come together when considering the whole of the family’s strategic asset allocation?
• How do individual financial goals come together when designing a family’s investment policy?
• How does a family’s estate plan affect its asset management issues and how do the finite lives of certain investment pockets interact with overall asset allocation?  
• Does a family’s estate plan introduce certain regulatory hurdles that need to be evaluated? How about issues of trading in public legacy stock holdings?
• What are the key interactions between administrative complexity, financial and regulatory compliance, and the broadest possible investment access for the broadest possible cross-section of family members?
• To what extent does the management of each family’s multiple sources of risk interact and, potentially, affect strategic and tactical decisions made with respect to investment, financial, philanthropic, or estate planning?
• Although certain philanthropic assets may already be segregated, how does the family’s planning and execution of its philanthropic activities interact with other disciplines, such as investment execution and ongoing contribution management?
• How can one optimize a family’s overall tax plan through strategic and tactical philanthropic actions?
• What are the interactions between a family’s liquid asset management and the management of family-owned businesses, be they privately or publicly held, or other illiquid assets?
• To what extent does the size of a family and its wealth interact with the possibly wide dispersion of individual asset levels? What does that say about issues of complexity, customization potential, and regulatory oversight, among others?
• For families with some wealth concentration in a private business, are there general markers that can be used to help with diversification and management issues?
• And many others.

In short, it should by now be painfully apparent that integrated wealth management is a considerably more complex proposition than its simpler sibling, private asset management. The fact that the latter is simpler does not make it less important. Indeed, although there may be more wealth within the aggregated world of integrated wealth management, there are also many more individuals requiring help within the sphere of private asset management. For many of these individuals, quite a few of the more esoteric questions that an integrated wealth manager needs to consider will appear irrelevant. The current gift and transfer tax environment in several countries indeed provides for significant thresholds within which quite a bit of wealth can be transferred to future generations in a tax-free manner, or at least with minimal tax consequences. Similarly, a number of individuals in the affluent category cannot afford too much suboptimality in their financial asset management endeavors for they could quickly drop into the nonaffluent category!

The complexity of the integrated wealth management world, however, should neither be ignored nor mistakenly aggregated with private asset management considerations. Indeed, CFA charterholders are faced with a deceptively simple choice: Do they want to be the major drivers of progress and innovation in this important segment of their target market, or do they wish to give that role to others? Although, in theory and with some necessary humility, one should not assume that control by CFA charterholders of the process will, ipso facto, result in a better outcome, the professional group that is most in control should expect to derive some higher financial profitability: The market should provide a return to innovation and leadership.

Where does that leave a CFA charterholder in practice? Charterholders should strive to understand all these complex interactions better. Indeed, many, if not most, of these interactions have some investment management dimension. Thus, an effort to understand whether (and, if so, how) traditional asset management practices must be altered to cope with and enhance the efficiency of all other related disciplines ought eventually to pay handsome dividends.