THE DIFFERENCE BETWEEN INVESTMENT MANAGEMENT & FINANCIAL PLANNING
As the Royal Commission unfolds, some institutions will move away from advice and more towards investment management.
New offers will emerge and it will be very easy to confuse them. In fact, only last week when dealing with a new client I was asked to explain what differentiates financial advice from investment management. Both are important but confuse them, and the price paid may be more than money.
Investment management makes money the focus. Financial advice makes life the focus.
Investment management is about security selection, asset allocation, expected returns, risk and time horizons. Financial advice is about how you use all your financial and other resources to live the life you want to live. It involves making choices about the use of human capital (how long and how hard you want to work), debt, savings plans, tax efficiency, catastrophe planning, asset ownership, insurance, estate planning, and philanthropy.
Differences between investment management & financial advice:
- Investment management is about managing money. Financial advice is about managing people with money. It has a large component of dealing with the “interior” of money — an investors frame of reference, and the common errors made by investors based on emotional decisions.
- Investment management is about measuring portfolio performance by comparing returns to benchmarks. Financial advice is about delivering outcomes regardless of performance.
- Investment management is about taking as much risk as you can tolerate. Financial advice is about only taking the risk you need to take to live the life you want to live.
- Investment management is about maximising. Financial advice is about optimising.
- Investment management is about creating a process that changes the portfolio based on different market conditions.
- Financial advice is about implementing and then renewing a plan to adapt to changing life, economic, regulatory or cash flow requirements.
- Investment management is about finding investments to withstand market challenges. Financial advice is about creating a financial plan that can withstand life’s challengesInvestment management deals with financial capital. Financial advice deals with financial and human capital.
- Investment management is about growing and/or preserving your assets value. Financial advice is about understanding what role money will play in your life and how much is needed.
- Investment management helps you how much income your investments will produce. Financial advice helps you understand how much income your investments need to produce, how much you need to save and how much you can spend.
- Investment management provides cash when needed and if it’s available. Financial advice is about planning so that you can spend consciously and worry-free.
- Investment management is about allocating and tracking capital. Financial advice is about creating processes to allocate time and money in line with your life plans.
- Investment management outcomes can be compared to others. Financial advice outcomes are compared to self.
- Investment management is an important component of financial advice. It needs to be done well but alone is insufficient to deliver a worry-free financial life.
- An investment manager only needs limited information whereas a quality financial adviser needs comprehensive personal information.
- An investment manager will ask obvious questions; a quality financial adviser will ask surprising questions.
- Investment managers will be judged on returns. Financial advisers will be judged on returns and intangible value.
Financial advisers are at a low point right now and will have to work very hard to take their rightful place amongst professionals. As the institutions move towards investment management, quality financial advisers will move more towards their clients. It’s a tremendously exciting time for those of us who love serving and being part of our client’s lives.
