If you're overwhelmed by the prospect of financial planning, you're not alone. This world of stocks, bonds, trusts, assets, risks, and returns can be daunting.
To start, many people don't understand the difference between wealth and investment management. Beyond that, the roles of brokers, advisors, and financial planners can be convoluted and mysterious.
The recent Regulation Best Interest, adopted by the U.S. Securities and Exchange Commission in June, complicates matters further. While it’s intended to require brokers to act in the best interest of their clients, it seems to have deepened confusion about the differences between brokers and advisors.
You can clear up much of the uncertainty about the kind of planner you should work with by understanding the difference between wealth management and investment management.
Choosing Your Path: Wealth Management vs. Investment Management
Investment management tends to focus only on investing assets; wealth management takes a broader approach. The former might be handled by a broker or an advisor focused solely on managing your portfolio. If you hire a wealth manager, however, he or she will typically look beyond assets to incorporate taxes, insurance, and the whole estate into the planning process.
If you feel you have a good handle on those other areas of your finances, you may only need to get an investment manager. In an investment management scenario, your advisor or broker may perform an assessment to determine your risk tolerance before choosing an appropriate portfolio.
If you don’t feel like you are seeing the full picture, though, you might consider whether you should get a wealth manager. These holistic planners will probe to discover all factors: income, expenses, assets and their projected annual growth, retirement goals, college savings goals, and more. The investments become a means of achieving specific goals. A wealth manager can help you weigh all these factors alongside your goals and timelines to form a comprehensive plan.
Let's say, for example, that you've retired and are trying to decide which accounts to use to cover your expenses. A wealth manager could examine your tax liability under different scenarios to determine if it might make sense for you to start taking money out of your IRA before you are required to — when required minimum distributions kick in six months after you turn 70.
Another factor to consider in determining whether to use a wealth manager or an investment manager is the status of your estate. If your estate is large enough — or if you're entering a season where change is likely — a holistic wealth manager will monitor everything regularly and make sure all is updated and properly titled.
Whichever type of advisor you choose, be sure that you have a clear picture of your financial goals and the factors at play in achieving them.
Question Before You Commit
Whether you ultimately choose a wealth manager or an investment manager, be prepared to ask plenty of critical questions before you commit to the partnership. Here are a few questions to get you started:
1. Are you a fiduciary?
A fiduciary is someone who has a legal duty to act in the best interest of clients, so this is a top concern for you as a personal investor. Not all financial advisors are legally bound to work on your behalf, so it’s essential to know whether your advisor is acting as a fiduciary.
Be exceptionally thorough if you're looking at a broker. They are known for churning through different stocks, buying and selling to produce the highest commission for themselves. The legal rules are a little different with them, so you'll want to perform due diligence to understand the difference.
2. How are you paid?
Fee structures often lack transparency. Don't be afraid to put your potential advisors under the microscope until you feel comfortable with how they're being paid.
To get to the heart of the matter, ask direct questions: “Do you or a related company receive any payments from money managers you recommend, consider, or otherwise mention? If so, what is the extent of these payments in relation to your other revenue?”
3. How often do you check in?
Ask potential advisors whether they meet with clients at least annually to assess progress. You'll also want to know if they review portfolio performance since inception.
In this regard, there really should be no difference between wealth management and investment management. Your financial future is an important part of your life, and your financial advisor should be willing to check in regularly about it.
4. What's your ethical track record?
Needless to say, you don't want your money tangled up in legal troubles. Steer clear of any firm or advisor that's been in hot water ethically or legally.
Pose questions like: “Have you or your firm ever been subject to regulatory discipline by a body that governs unlawful or unethical actions?"
Financial planning can be intimidating, but a good partner will make it simple — even exciting. When you know the difference between wealth and investment management, and you're equipped with good questions, you'll find the right partner in no time.