Financial planning and investment management services may overlap at times, but they’re not the same. Here’s what investors need to know.
At some point on your financial journey, you may seek professional guidance. That may happen when your situation becomes too complex to handle on your own. Or perhaps the decision is spurred by a significant life event or transition, like the birth of a child, a big promotion, or approaching your retirement date.
No matter the case, it’s critical to understand which financial services you need, so you can find the right financial professional for you. Indeed, not all financial professionals offer the same services. Some focus strictly on financial planning, others on investment management, and some on a combination of the two.
But first, it’s important to clarify the difference between financial planning and investment management. Though many people use these terms interchangeably, they address very different needs.
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What Is Financial Planning?
Financial planning involves understanding your entire financial picture and identifying key changes and strategies to get you from where you are now to where you want to be. Financial planning services typically include:
- Tax Planning: Identifying and implementing tax strategies to minimize your annual tax bill.
- Estate Planning: Ensuring that your wishes are carried out and your loved ones are taken care of in the event of your death or incapacitation.
- Income Planning: Also referred to as cash flow planning. This involves a detailed analysis of your income and expenses, as well as how to allocate your income to achieve your financial goals.
- Insurance Planning: Manage your risk by evaluating and recommending adequate insurance coverage. May include life, disability, health, long-term care, umbrella, home & auto, and more.
- Education Planning: Calculating future college costs and current savings needed to meet your education goals.
- Retirement Planning: This involves imagining your ideal retirement, ensuring you have the income to achieve it, and optimizing your retirement income streams like Social Security.
- Investment Planning: The process of understanding your risk tolerance and creating an investment portfolio that will allow you to reach your financial goals within your unique risk parameters.
In addition to working through every aspect of your financial situation, during the financial planning process, you can expect to understand how each facet relates to the next.
For example, when implementing your investment plan, it’s essential to understand the tax implications of your investment decisions. And as you plan for the future, it’s important to understand the potential tradeoffs between saving and investing for retirement versus other goals like funding your child’s education.
Ultimately, a solid financial plan should outline what you need to do to reach your financial goals while maintaining your ideal lifestyle.
What Is Investment Management?
Investment management involves designing, implementing, and managing your investment portfolio. It’s typically one aspect of a comprehensive financial planning process.
Many financial advisors focus on investment management because that’s how they charge for their services. In other words, their fee may be a percentage of a client’s total assets under management. Thus, their compensation depends on preserving and growing clients’ wealth.
Investment management typically includes the following steps:
- Assess your risk tolerance. Investment management begins with a risk tolerance assessment. This is a tool financial advisors use to understand how comfortable you are with risk. They can then design your portfolio accordingly.
- Understand your investment objectives. Next, it’s critical to understand your investment objectives. In other words, what’s the money for? This will help your financial advisor create and adjust your portfolio to match your goals. Generally, the further you are from each goal, the more aggressive your portfolio will need to be while accounting for your risk tolerance score.
- Design and implement your portfolio. Once your advisor knows your risk score and investment objectives, they’re ready to design and implement your portfolio. Since many advisors have a unique investment methodology, results can vary significantly. However, generally this step includes determining an appropriate asset allocation—in other words, the overall mix of investments you own—and selecting investments for your portfolio.
- Monitor and rebalance as needed. Once the implement your investment strategy, your financial advisor should monitor and rebalance your portfolio as necessary. As market action causes your portfolio to drift from its target asset allocation, a diligent investment manager will periodically trade your portfolio back to its original targets to maintain an appropriate risk profile.
- Update along the way. Lastly, your circumstances, financial goals, and stage of life will change over time. Thus, your financial advisor or investment manager should update your investment strategy accordingly. The most common example is reducing investment risk as you approach your objectives. For many, this means selling stocks and buying bonds as you approach retirement.
What Services Do You Need?
The services you need will likely depend on your current circumstances, financial acumen, and desire to be involved in the process.
For many people, financial planning can add significant value to their lives. That’s because it touches on every aspect of your financial life and results in a comprehensive plan to reach your goals. It also allows you to delegate important decisions to a trusted advisor, which, for many, is an important intangible benefit.
Alternatively, investment management involves just one aspect of your financial plan. And while it’s critical to your financial success, in isolation, it may not yield the results you seek. In other words, you’re still responsible for quarterbacking the rest of your financial life.
For many, a combination of financial planning and investment management will be the best fit. That way one person or firm is overseeing your entire financial picture.
However, some investors may choose to hire a professional to help them create a financial plan while either managing their investments on their own or hiring a separate investment manager. This may also be a good fit, provided your financial planner has the information they need to help you make smart financial decisions.
Finding the Right Financial Advisor
Whether you’re hiring a financial planner, an investment manager, or a financial advisor who does both, three questions can help you narrow your options:
- How are they paid? Look for advisors whose fees are transparent and align their interests with yours. For example, fee-only financial advisors only receive compensation from their clients. Meanwhile, commission- or fee-based advisors may receive compensation from financial institutions for selling certain products. This is an important distinction that can significantly impact the quality or service they provide.
- Are they credentialed? Certain credentials demonstrate a financial advisor’s commitment to developing and maintaining their expertise in a given area. For example, CFP® professionals must meet rigorous education, training, and ethical standards to earn the CERTIFIED FINANCIAL PLANNER™ certification. Or if a financial advisor specializes in a certain area like estate planning or divorce, they may be credentialed in those areas.
- What’s their specialty? Ideally, your advisor works with clients similar to you. That way, they can anticipate your needs and help you uncover your blind spots. For example, Milestone Asset Management Group focuses on financial planning for career-professionals and executives. By specializing in this area, we’ve become intimately familiar with the unique financial planning needs of our clients.
If you work with other advisors—for example, a CPA or estate planning attorney—asking for a recommendation may be a good place to start. Otherwise, here are a few places to find financial advisors who likely meet the above criteria:
Our Team Can Help Meet Your Financial Planning & Investment Management Needs
At Milestone Asset Management Group, we’re prepared to meet you where you are and provide the services you need. We offer financial planning and investment management services. However, we understand that some clients prefer to manage their own investments. If that’s the case, we’re happy to provide ongoing financial planning.
We specialize in helping our clients plan for a healthy and secure retirement while handling all of their tax planning, preparation, and estate planning needs in-house. To speak with a member of our team about how we may be able to help you achieve your financial goals, please schedule a call.