There is a multitude of financial advisors in the marketplace. Employing the services of one can be extremely beneficial to an individual wanting to reach an investment goal or other financial objectives.
It is important to know which types of services are provided by the financial professional depending on your financial goals.
Portfolio versus planning
Although it is common to use the terms portfolio management and financial planning interchangeably, these staples of the financial services industry are not the same. Portfolio management is the act of creating and maintaining an investment account, while financial planning is the process of developing overall financial goals and creating a plan of action to achieve them.
In the industry, portfolio managers typically have more experience and are further advanced in their careers as they need to deal with the complexities of investing. Financial planners typically start out in more junior roles.
Both financial planners and portfolio managers may have the same designations, but a specific certification is not required. These designations will typically include Chartered Financial Analyst (CFA), Certified Financial Planner (CFP) or Chartered Financial Consultant (ChFC). Understanding the differences between the two types of advisors will help in selecting the most suitable financial professional for your needs.
Financial planning
Financial planning is a more thorough process than portfolio management. It is an assessment of an individual’s overall financial standing with the intention of developing long term financial goals. Financial planning covers many areas such as building an emergency fund, saving for a new home or reducing debt, accumulating retirement assets, saving for a child’s college fund, estate planning, or creating tax efficiency.
Before creating a comprehensive financial plan, one would need to take stock of their entire net worth. This would include a valuation of all assets, such as real estate, savings, retirement accounts, investment accounts, and any outstanding debt.
Portfolio management
Portfolio management is provided by financial professionals that create and recommend portfolios of stocks, bonds, mutual funds, exchange traded funds , or alternative investments to meet the investment objectives of a specific investor. Portfolio managers make day-to-day trading decisions on a portfolio of assets, whereas a financial planner makes recommendations on certain products based on the individual’s goals.
Professionals who perform portfolio management are focused on meeting the needs of investors through the rate of return achieved within a portfolio and they are often responsible for rebalancing the account to remain in line with the investor’s allocation preferences and risk tolerance.
One important difference between financial planners and portfolio managers is that portfolio managers are held to the concept of fiduciary duty. They are meant to manage the client’s investments in good faith and prioritize the client’s interests in any investment decision.
The bottom line
At the most basic level, financial planning is about managing and budgeting for your future financial needs, while portfolio management is investing your current capital to grow your wealth.
While they are integrated to some degree, the primary tool we use with clients is financial planning and this incorporates the use of professional portfolio managers when it comes to the implementation and management of a client’s investment assets. The proper and effective use of the appropriate tools and skills is part of Keeping Life Current.
