With the increasing number of HNIs in India, wealth management is fast emerging to be a niche segment that caters to all the financial needs of the elite class. However, just a couple of years back, the term wealth management was not as popular and investment banking had emerged as the go-to career option for many in the financial sector, some taking a plunge even without knowing its true meaning or scope. While both these segments cater to a specific clientele, it is important to know their true meaning and the basic difference between them for better understanding and application. So are you too confused between these terms? Read on to know more about their meaning and the core difference between the two.
What is the meaning of wealth management?
What started as exploring newer investment options for the wealthier class became a whole new segment of wealth management. Wealth management is the investment advisory service for High Net Worth (HNIs) with a focus on protecting and growing their capital and wealth. It includes many diverse functions like tax planning, estate planning, retirement planning, estate planning, and more. Wealth managers work closely with their clients to understand their specific needs and goals and provide suitable solutions to meet them. Wealth management involves keeping a close eye on the personal risk and return expectations of the clients, keeping track of investments, assessing their performance, and making recommendations to optimize the portfolio based on market conditions and the client’s goals.
What is the meaning of investment banking?
Investment banking has a broader scope than wealth management. While wealth management caters to specific individuals or their families, investment banking is centered on providing financial services to companies and governments. Investment banking helps the government and companies raise funds by issuing stocks or bonds to meet their specific goals. Investment bankers assess the financial health of the company, the prevailing market conditions, and the growth potential in order to determine the most optimum mode of raising capital and the expected returns by the public from the same. They are also instrumental in mergers and acquisitions in identifying potential targets, negotiations, as well as the restructuring of debt. Investment bankers also provide underwriting services when a company is focusing on coming out with an IPO and marketing the same to gain maximum subscription.
What are the differences between wealth management and investment banking?
Now that we have seen the meaning of wealth management and investment banking, let us now consider the core differences between the two.
|Category||Wealth Management||Investment Banking|
|Focus and Clients||The focus of wealth management is to primarily cater to individual HNIs and their families. Wealth managers manage their clients’ investment needs as well as meet their financial goals through effective asset management and financial planning and aim for wealth preservation and growth||Investment banking involves catering to corporations and governments as well as institutional clients and meeting their financial needs by providing strategic financial services.|
|Services offered||Wealth management aims at providing personalised financial services like estate planning, tax planning, insurance planning, retirement planning, risk management, investment management, philanthropy, and relationship management.||Investment banking focuses on providing services like raising capital in the form of stocks, bonds, and other instruments, advisory services in corporate restructuring, assisting in mergers and acquisitions, acting as agents to trade in securities on behalf of their clients, etc.|
|Skill set required||Wealth managers are required to have a sound knowledge of the dynamic investment products and investment strategies, prevailing tax laws of the country, and an understanding of the needs and nuances of estate planning.||Investment bankers are required to have proficiency in corporate finances, company restructuring, financial modeling, and strategic analysis of the markets.|
|Fees||Wealth managers typically charge a percentage of assets under management (AUM), or charge fees at a flat rate.||Investment bankers usually charge fees or commissions based on a transaction basis or on the basis of the services provided like underwriting services, advisory services, and other IPO-related services.|
|Time horizon||Wealth management focuses on building long-term relationships with clients and their families and wealth preservation. They are often in charge of meeting their financial planning needs for future generations of their clients as well.||Investment banking focuses on the short-term approach with its clients and usually engages in project-based relationships with its clients.|
|Regulation||Wealth management is part of financial advisory and is therefore regulated by SEBI in India.||Investment banking is subject to regulations from SEBI, RBI, and other government regulatory bodies to ensure fair market transparency in raising capital and meeting other needs of corporate clients and government bodies.|
Wealth management and investment banking both aim at providing tailored services to their clients based on their individual needs but differ drastically in their approach and functioning. However, both are considered to be a core part of the financial planning fabric of society and meet the specific needs of their customers.
Wealth managers charge fees based on the assets they are managing or at a flat rate.
The core functions included under investment banking include various roles in the financial industry, like underwriting new stock issues, facilitating mergers and acquisitions, and providing financial advisory services.
Investment banking is generally considered riskier than wealth management due to its broader perspective than focus on individuals and involvement in complex financial transactions and exposure to market volatility.
Some of the popular wealth management options for HNIs include Portfolio Management Services, Alternative Investment Funds (AIFs) market-linked debentures, and equity investment in domestic and international markets, REITs, INvITs, Sovereign Gold Bonds, etc.