Bauer Wealth Blog

Strategies & Types of Investments in Wealth Management

Dec 13, 2019 2:04:00 PM / by Stephen Heitzmann

What Kind of Products can a Wealth Management Client Invest In?

Wealth management balances risk and reward and not all wealth management products are meant for every investor. Investors must choose between low or high-risk investments, low rewards vs. high rewards, and highly concentrated vs. highly diversified investments.

Wealth management clients have a number of options for products they can invest in that other types of investors may not have. Some of the main products that wealth management services work with include but are not limited to:

  • Bonds and other forms of debt

For the more conservative wealth management client, Bonds tend to be a safer choice because they typically have at least a minimum return of the original investment amount. Bonds also appeal to investors who prefer to have a form of predictable income as these securities pay consistent interest.

  • Equities

Equities, or shares in a company, are common investments. In fact, almost every investor will handle stocks working through the public exchange. Equities have proven to have the highest rate of return on average than other common asset classes. An investor can strategize by learning about the potential role and weighing the options of how much money to invest. There are several different types of stock such as value stocks, growth stocks, industry focused stocks, and various others. An equity investor should be familiar with all the different types of stock investing or at least have complete trust with the manager they work with.

  • Mutual Funds

A common type of investment that involves pooling money into a fund where the manager collectively invests the money into securities such as stocks, bonds, or a combination of the two. Mutual Funds have many differences so it is important for an investor to understand the objectives of the specific funds they invest with and can obtain this information through the prospectus. While some mutual funds can be very conventional, others can be aggressive in nature.

  • Private Equity Funds

Generally riskier than the previously listed investments, Private Equity Funds are a group of funds from different investors that are not listed on the public exchange. The return can be much higher through Private Equity as these deals often happen in niche markets and are exclusive to a select group of investors. Private equity firms are well-known for commonly investing in start-up businesses or real estate. Private equity investments often last about 7 years, so it is important that an investor will not need the money during that time period. 

  • Money Market Funds

Often referred to as MMA’s, Money Market Accounts are comprised of highly liquid, short term investments that generally come with higher interest rates than other types of savings accounts. MMA’s also may come with more restrictions such as steeper fees and higher account minimums. This type of investment is more conservative as it is foreseeable income. Most investors do not make MMA’s the star component of their portfolio, but they do help to diversify one and provide a higher rate of interest than a general checking or savings account.

  • Hedge Funds

With similar qualities to Private Equity Funds, Hedge Funds are alternative investments that involve a limited partnership of investors that jointly invest in securities to achieve high returns. The investments are generally higher risk, as investors sometimes use borrowed money to make their investments. The length of the investment can be short or long-term. Hedge funds are limited to very high net-worth investors who can afford the high fees that accompany them.

  • Certificates of Deposits

Another lower-risk investment option for conservative investors. Certificates of Deposits, or CD’s, are a type of federally insured savings account with a fixed interest rate. They typically do not have monthly fees, but CD’s can last years. The funds are intended to stay in for the duration of the investment, so it is critical that an investor is certain they will not need the money in that time period or be faced with paying a penalty or commision for selling out early.

  • Exchange Traded Funds

Exchange Traded Funds are pooled investment vehicles (similar to a mutual fund) that invest in a variety of securities like stocks, bonds, money market instruments, etc.... They have a wide range of wealth-building strategies and risk-level factors. This type of investment derives value from the underlying investments they currently own and trade intraday on public exchanges just like individual stocks. EFTs allow investors to easily access broad stock/bond market exposure, gain leverage, short markets, and mitigate short-term capital gains taxes.


Important Questions to Ask When Choosing a Wealth Manager

There is much more that goes into choosing a wealth manager than comparing management fees. Of utmost importance is whether the firm adheres to a fiduciary standard. Wealth management firms are designed to service their clients for extended periods of time. It is important to think long-term and ask questions regarding the preservation of assets and the family’s financial future. Some crucial questions to ask a wealth manager before deciding to work with them include:

Does the firm adhere to a fiduciary standard?

The fiduciary standard simply means that the advisor is legally required to put the interest of the client before their own. For example, if an annuity does not meet a client’s needs and a fiduciary advisor sells it anyway, they can be taken to court. In general, it is best to bring a copy of the fiduciary oath to any advisers you meet with. Any adviser not willing to agree to this oath should be reconsidered.

  • What is the firm’s business model? Are they compensated by a broker-dealer based on commission? Or are they independant and work for an RIA? Do they specialize in any particular investment vehicles? There are exclusive wealth management firms, but many firms offer wealth management as a service when their main business is in banking or lending. Fees included in their services should be covered as well. It may also be helpful to ask about the firm’s history and if any reputable third-party organizations can vouch for them.
  • Does the firm specialize in investment management or wealth management? Investment management focuses on the return of the investment. Success is measured by the performance of each investment. Wealth management is a more comprehensive approach to managing finances that covers investment management as well as advice and longer-term wealth preservation. Choosing between the two has a lot to do with how long services are needed and how close to retirement the client is.
  • What is the firm’s investment strategy? What types of investments are offered (low cost, high cost, passive, active, etc…)? Can they provide access to exclusive Private Equity deals or other alternative assets? What is the history of the firm’s investment performance? It is important for a client to understand the types of investments that are offered and how much each costs.
  • How does the client track their accounts? It is critical for a client to know how often their account performances are reviewed and the method the firm uses that allows clients to track their reports. Clients should make sure they are able to see the information they are looking for and they understand how to read the reports.

A Question to Ask Yourself: Are your Philosophies Aligned?

When choosing a wealth management firm, it is imperative to find a business that is the best cultural fit for the client and their family. The client should feel as though the firm understands their current portfolio and the partnership overall will have cohesive visions. The relationship between a wealth manager and a client can last decades, so the pair should have similar philosophies and perhaps even have similar interests. In an interview with a firm, a potential client should take their time to fully understand the wealth manager’s business as well as personal aspirations for themselves.


Some concerns of using a traditional broker-dealer firm…

You probably recognize the big name broker firms like Edward Jones or Charles Schwab. These broker-dealer firms may have big brand names, but it is important to consider how exactly they operate and what potential risks may be involved. It is very easy to discover and get pulled into these firms because they spend millions on marketing and advertising with the goal of capturing as many assets as possible. So here are a few important things to consider before working with a traditional broker-dealer.

Subjective products, advisers/salesmen, and commissions/fees

Traditional investment advisory firms who also act as their own broker-dealer do not always operate under a Fiduciary Agreement. A Fiduciary agreement requires the advisor to put the interests of the client before their own. Unfortunately these firms are allowed to utilize financial advisers to encourage investments into their own products and funds. At some point, you’ll have to address the ambiguous line between your “Adviser” and their firm’s “Salesman.”  

These firms may provide incentives in the form of commission or bonuses for steering clients and investors towards certain products. At a traditional broker-dealer firm, it is perfectly legal (and normal) for advisers to operate in their own best interest.

Referral system partners & commission

In some cases, an investment requires the firm/adviser to be operating as a true Fiduciary. Some of the traditional broker-deal firms skirt around this requirement without losing business by operating within a private network of partners. If an investment requires a true fiduciary, they refer the client to a seemingly unaffiliated third-party. And in return for the referrals, Advisers are rewarded commission - sometimes up to 50%. Just be mindful that even if you are referred to a third-party, the broker-dealer adviser may have their own interests in mind.


The benefits of using an Independent RIA over a broker-dealer firm

Of course, there are probably advisers at traditional broker-dealer firms that truly put their clients first… 

But wouldn’t it be better if that was a legal guarantee?

That’s what you get working with an independent RIA (Registered Investment Adviser). And it’s probably why it is one of the fastest growing sectors in finance.

An RIA is required to operate as a genuine fiduciary under oath. Your adviser has a legal duty to be loyal and to act in your best interest. This helps ensure you can make the best wealth management decisions that align with your own goals - not your adviser’s. 

A professional and competent RIA can offer many of the same wealth management options as a traditional broker-dealer, but without a subjective interest or bias. If you have the ability to select your wealth management firm, it is highly recommended to choose an independent RIA.


How to get started with Wealth Management from an Independent RIA

You’ll find it is much easier to craft a wealth management strategy that aligns with your personal goals when working with an Independent RIA. Every decision about every dollar is carefully considered for your best interest. When you eliminate improper incentives and commissions, your adviser will be far more effective at their job of managing, growing, or protecting your wealth.

An independent RIA at Bauer Wealth Management can help you build the perfect portfolio for your circumstances. We’ll help you find an ideal risk tolerance threshold and maximize chances of hitting your financial goals. No bias. No BS. Just helpful, professional wealth management.

Set up a free call/meeting to learn how professional wealth management can integrate with your life goals.

Topics: Wealth Management

Stephen Heitzmann

Written by Stephen Heitzmann

Stephen Heitzmann is the CEO of Bauer Wealth Management, a Wealth Management Firm, based in Colorado Springs, CO. Bauer Wealth Management is a Registered Investment Advisor (CRD#: 152977/SEC#: 801-71090) with the Securities and Exchange Commission. This article does not represent an investment recommendation or endorsement of any kind. Please consult with your advisor regarding your specific situation. Investing in securities does involve risk of loss that clients should be prepared to bear. The risks can range from failing to keep pace with inflation to losing some or all of the money you invest.