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Wealth management is a high-level professional service that consists of financial and investment advice, and sometimes includes accounting and tax services. Depending on the company approached it may incorporate retirement services and legal assistance. As a customer you may work with a single wealth manager who collects information from financial experts and can include advice from accounts or legal representation of the customer. It all depends how sophisticated the requirements are. There are wealth managers offering even banking services or other tax deduction areas, i.e. philanthropic activities.
The wealth manager typically serves as your financial compass covering all your financial aspects and objectives. The term one-stop shop may say it all since the wealth manager advises on the management of financial issues coordinating all the services needed to have the client manage their money and planning their own family’s current and future needs. In a nutshell the position is considered consultative in nature as the primary focus is providing needed guidance to those using the wealth management service. Fees are paid for the services requested.
Islamic banks have ventured into wealth management services over the last few years – of course, differentiating their services as being in line with the Sharia rules. Investment vehicles are required to comply with the Sharia law in which the vehicle must avoid any investment that involves gambling, interest earning or if the purpose of the said investment vehicles is unclear.
Conventional as well as Islamic financial institutions work within the framework of their created vehicles, which are usually, separated entities. These entities create product and services either for their retail and/ or wholesale banking divisions, but the management of it within their own entity. Customers are charged a management fee and/or performance fees depending on the agreement between the institution and customer.
Islamic wealth management has been growing exponentially during the last decade, and products offered have become more sophisticated. As with their conventional counterpart, derivatives structures have formed the basis of some contracts – the distinction being the underlying commodity or mechanism must be Sharia approved to ensure there are no conflicts. The legal framework of Islamic product and services are placed before the Sharia Board for approval, which is to protect the Islamic financial institution and its customers to have a truly Islamic environment. The Board of Directors of Islamic financial institutions would then provide their approval for the newly created product and service offering as a note.
An example of wealth management products offered to customers are Islamic bonds (Sukuks) portfolios, which have underlying assets like real estate or equities for example. This is viewed as creating more safety for investors vis-a-vis conventional bond portfolios which may not necessarily have underlying assets attached to the bond.
The legal framework of the conventional counterpart product and services focuses with the commercial aspects on the other hand, marking a sharp distinction from the Sharia compliance which takes precedence in Islamic finance.
The advantages or disadvantages of using Islamic wealth management products and services can be very debatable. The past may share a light on what the advantages have been during the “The Global Financial Crisis” and following the Eurozone crisis demonstrated the vulnerability of the wealth management industry to changing fortunes. If one had been placing funds in offshore centers, which some conventional counterparts offer as a wealth management service, due to the perceived advantages of lightly regulated environments or tax havens, and comparing the Gulf investors who sought Sharia compliant wealth management services, they have lost much lesser than those Russian oligarchs placing funds in jurisdictions such as Cyprus, whereby countries may have banking systems that are much larger than the capacity of their regulators. The financial crisis earlier, also highlighted that Sharia compliant investments were much safer then those investing in the conventional space.
The disadvantage is more likely the limited offerings to customers. This has become the area of focus within Islamic financial institutions, which are striving to expand product and services offerings. The importance of the same gets underlined by the customers becoming more aware of the market and better educated on the various products and services offered.
For both wealth management concepts, the local regulatory bodies regulate their respective businesses. On a parting note, the lessons of the past may well act as guidelines to create improved regulations and supervision, hopefully avoiding further financial debacles.
Peter, MBA, Independent International Treasurer/Senior Consultant Asia/GCC runs an active facebook page, @moneychats centered around finances, investments and business