It can be confusing to hear various financial planning terms and know what best suits your needs. They might sound the same, but investment and wealth management are quite different. Knowing the difference can help you align your financial goals with what is available when choosing an advisor.
Essentially, investment management vs. wealth management comes down to the overall scope, with wealth management being a more holistic approach. In contrast, investment management is limited to an individual’s investment portfolio.
When you ask yourself, “Do I need a financial advisor?” weigh the differences between managers based on your comfort level with managing your estate and other financial needs.
Investment Management Definition
Investment management is primarily the management of a portfolio. More than buying and selling stocks, investment management includes both a short and long-term strategy for your portfolio holdings. It focuses on a variety of elements within your investment portfolio, and investment managers will consider when and how investments should be rebalanced, generally with the simple goal to maximize value.
Your broker or advisor will help you set investment goals and determine a risk tolerance based on a client assessment to start with an appropriately balanced portfolio. Understand that even within the world of investment management, not all managers are equal. To ensure you're working with someone who prioritizes, be sure to ask about their fiduciary standard and whether they are dually registered.
If you feel you have a good handle on other areas of your estate, you might only need an investment manager.
Wealth Management Definition
So, what is wealth management?
Investment management is a component of wealth management, but a wealth manager takes a more holistic view of your financial picture and estate to build a full plan. Along with growing and managing your portfolio, your financial planner considers all factors, including:
- Insurance needs
- Retirement goals
- Estate planning
- College savings goals
- Tax strategies
A wealth manager takes a comprehensive approach that is especially beneficial for large and complex estate needs. They monitor your accounts regularly to ensure your plan adapts to your life changes or economic conditions. This proactive and holistic approach really set wealth management apart from investment management or basic financial advising. Don't miss the examples of wealth management in action below.
Process for Investment and Wealth Management
Given the different scopes of investment and wealth managers, each process has a considerably different approach regarding management depth.
An investment manager solely focuses on your investment portfolio and considers your financial goals and risk tolerance. In planning your financial future, an investment manager will rebalance a portfolio as needed and adjust for lower risk tolerance the closer you get to retirement age.
Your investment manager should regularly consult with you on life changes and portfolio adjustment needs.
Investment manager compensation is typically through commissions on financial products they sell you. It is vital to ensure they act as fiduciaries rather than in their financial best interest.
As a holistic approach, wealth managers have a more substantial process that considers all aspects of your financial health and estate needs. The wealth management process is a fully customized solution designed to achieve your financial goals and reduce stress.
Before all else, wealth management involves fully understanding every aspect of your financial goals. As your life changes, so does this holistic understanding.
Considering all of the elements of wealth management previously listed, your wealth manager dedicates their time to monitoring and reviewing your plan, tapping the appropriate subject matter experts, and discussing life changes with you. Wealth management requires solid and dedicated relationships with clients, and it might also include using experts outside the scope of general investment management, such as lawyers and tax accountants.
Whereas an investment manager will often follow traditional industry practices for managing a portfolio, a wealth manager may consider unique or bespoke strategies to achieve a client’s betterment and financial well-being. An investment manager is retained to manage a portfolio; a wealth manager is there to eliminate financial stress and help you realize your dreams.
Wealth managers are typically paid on a flat-fee structure tied to your portfolio size.
Examples for Investment and Wealth Management
Here are a few examples to give you an idea of the difference between these services and when it might make sense to meet with a wealth manager.
Example of Investment Management
John and Mary want to start investing for their retirement and approach an investment manager to start and manage a portfolio. Their manager considers their age, risk tolerance, and investment goals before recommending investment funds and how to best diversify their new investment portfolio.
There are annual meetings to recommend new products and update John and Mary on portfolio performance.
Example of Wealth Management
Joan is close to retirement. Her wealth manager runs through different scenarios to plot the appropriate course that makes the best financial sense. The manager analyzes her financial needs for using financial assets for retirement and tax liabilities under different strategies. Retirement income and expenses are reviewed to ensure life continues free of financial stress.
Additionally, an estate review by Joan’s advisor ensures:
- Updated preparations are made for the asset base in the event of death or incapacitation
- Insurance needs for retirement are discussed
- Investment assets are adjusted to reflect the coming life change
- Future philanthropy goals are discussed.
So Which Type of Management Do I Need?
The management type that best fits you will come down to the level of assistance and expertise you're looking for. If you’re comfortable managing your estate needs, like family planning, tax strategies, and insurance needs on your own, an investment manager might be your best fit.
Wealth management is your best route if you wish to avoid the financial and personal stress of comprehensive planning or have the complex financial needs associated with larger estates.
Plancorp is a wealth management firm providing its clients with a full range of services. Our Investing by Age series explains how your needs and investment strategies change as you move through the phases of your life, and our full resource library covers many of the other factors we incorporate into planning such as estate planning, tax minimization, and equity compensation.