What is Private Wealth Management?

Two weeks ago, I began my first finance-related internship in the Private Wealth Management (PWM) division at a Swiss bank called UBS. It sounds fancy but it’s essentially the management of wealthy individuals’ stock portfolios. These individuals are called ultra-high net worth (UHNW) clients and must have at least $25 million to manage. With so much money at hand for investment, it is critical to keep client information confidential while keeping their accounts risk-averse and tailored for long-term growth. So what does all this mean for the Private Wealth Managers and interns? Allow me to explain.

At the forefront of PWM strategy is asset and wealth protection. This strategy ensures that each and every security in the client’s portfolio has historically encountered limited volatility and will continue doing so. The model portfolio is full of diversified, steady, and long-term positions that preserve one’s wealth. There are tactics like tax-reducing investment, such as choosing ETF’s over Mutual Funds, or holding on to positions for longer than a year to receive the long-term tax benefit instead of the higher, short-term one. The more diversified the client’s portfolio, the less risk it will take on, which is the goal. Traditionally, bonds are some of the safest investments because of their nature of credit–government, municipal, corporate, or state debt owed to the bondholders. I have learned so much about bonds during these first two weeks, because we are trying to maintain a limited-volatility portfolio to preserve the client’s wealth. (Here is a simple definition of bonds from the extremely useful site, Investopedia). The past month and a half saw a very roller-coaster-like market with high volatility, so bonds were suggested to clients. But for the most part, US equities (in simple terms, stocks) have been climbing so they have also been emphasized for client recommendations.

The portfolio must resemble the upside of a bull market while limiting or avoiding the downside of a bear market. This can be done by hedging certain index funds or ETF’s tracking entire markets or industries. When I say hedging, I am describing the process of taking a certain position (stock purchase or sale) that is the opposite of another position in the portfolio. Hedging is done to minimize the effect of any losses incurred from that opposite position–it is a risk aversion strategy. Let’s examine an example of a hedge. (We’re going a little of the beaten path here, but hedging is an important investment strategy and one that should be explained for those of you interested in a career in finance).

You buy an investment vehicle for your portfolio, let’s say a US corn ETF that tracks the price of American corn. (By the way, this ETF is part of your commodities asset class within your portfolio. There are several types of asset classes, and I will do a piece explaining the various classes later on). You buy that ETF at $20 in June thinking that the price of American corn will shoot up in the next couple of months or years because of America’s beautiful weather…shout out to California. Since you think corn will be in higher demand around the world, you should think of the price of your US corn as well as another country’s corn–let’s pick on the Aussies. Since you believe the price of corn will increase around the world, you want to be sure US corn is the corn with the most upside. With this in mind, a private wealth manager will advise you to short sell the Australian corn ETF, given that the US corn ETF has greater value after analysis and research. This means that you will bet against the future price of the Australian corn ETF by borrowing the shares of this ETF to sell at the current price and re-purchase at a lower future price (hopefully). There is a lender who believes the price of Australian corn will fall less or even rise, so he or she lends you shares for a fee in hopes of making money off of your bet. If you are right and the share price does indeed decrease, then you buy the same amount of those ETF shares for a lower price. The difference between your sell price and purchase price is the profit that you will earn on the short sale. This is an example of hedging your long position, or position that you have faith in and are holding, with a short sale–the position that you believe will drop in share price.

Since you cannot predict the future, sorry, you are not 100% sure that the prices of US or Australian corn will rise or fall. So with this long-short strategy, you are hedging out the risk of losing money if corn prices drop by profiting from the short sale because of the commodity’s dip, mitigating the hit you take from your purchase of a now-weaker US corn ETF. The risk is minimized because you are essentially “cutting your losses.” The downside of hedging is that you generally cut your gains in an across-the-board bull market where, in this case, every country’s corn ETF’s are rising in share price.

Sorry to explain a single strategy that takes place in the minds of PWM teams, but I felt it was necessary to cover. Next time around, I’ll describe my day-to-day tasks and the lifestyle of a PWM intern. I’ll leave you with this…

The five best things about PWM in my opinion:

  1. Great opportunity to learn everything possible about fixed income, equity and cash alternative markets
  2. Great opportunity to network your way to the finance division of your interest
  3. Makes you an early bird, making you WAY more productive with your day
  4. No access to Facebook from computers, once again, making you WAY more productive with your day
  5. Beautiful view from the office, at least in San Francisco

Feel free to comment or message me on FB/LinkedIn if you have any questions about this internship.

#Yeezus

Comments

  1. Abigail:

    Hi,

    I really like what you are writing about. Could you give me a starting point as to where I should start reading on things so I can get more insight into PWM and hopefully have something to talk about in interviews.

    Kind regards,

    Abigail

    Reply

    • Salmaan Javed:

      Hi there Abigail!

      First off, thank you…I appreciate it. If you are interested in PWM, definitely learn as much as you possibly can about the capital markets, specifically the fixed income space (bonds). But equities and alternative investments are important. I strongly suggest to check out investopedia.com, and then do independent wikipedia searches on words that you commonly see but do not understand. That’s how I learned.

      Hope that helped. ­čÖé

      -Salmaan

      Reply

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