18May2024
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Balancing the Books: Understanding the Role of Balance Sheets in Wealth Management and Banking πŸ“ŠπŸ¦

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Wealth managers are often questioned about their balance sheets. However, this economic factor is predominantly significant for banks rather than wealth management firms.

A bank’s balance sheet is a crucial indicator of its financial stability, and clients naturally prefer to entrust their private wealth to a bank with solid financials. In contrast, wealth managers do not hold client money on their balance sheets. Their role involves assisting clients with account opening paperwork and due diligence for a carefully chosen custodian bank. This standard procedure results in a contractual agreement between the client and the bank, where the wealth manager is given limited power of attorney for managing, but not withdrawing, assets except for agreed portfolio management fees.

The banks recommended by wealth managers are chosen based on knowledge and belief. Regular exchanges with custodian banks and cooperation agreements between banks and independent wealth managers are standard practices, ensuring that banks also screen wealth managers before partnering.

This creates a triangular relationship between the client, bank, and wealth manager, bound by a mutual agreement to manage the client’s wealth carefully. Additionally, securities like shares and bonds legally belong to the client and are not part of a bank’s bankruptcy estate, making them off-balance sheet transactions of banks. For instance, purchasing shares in a technology company means acquiring a stake in that company, with ownership unaffected by a bank’s bankruptcy.

While a bank’s balance sheet is crucial, particularly for cash deposits, shares, or bonds issued by the financial institution, it plays a subordinate role in plain vanilla portfolio management. Consequently, the balance sheet of a wealth management firm is even less critical, with many wealth managers having professional indemnity insurance.

Source: Linkedin

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A detailed illustration showcasing the importance and nuances of balance sheets in the context of wealth management and banking, featuring imagery of financial documents, banking institutions, and wealth management firms.

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