What is the Difference Between Portfolio Management and Financial Planning?

Managing your finances is crucial for everyone, be it an individual or a firm, as it paves the way for financial freedom through the attainment of your financial goals and objectives. Planning your finances can sometimes get overwhelming because of the number of moving components – you need to consider your risk profile, your end goal, the type of investment that may be suitable to you, the taxes that you may have to pay, and also create a back-up plan or have a contingency fund to counter any unforeseen events.

There are a host of financial services and financial advisors to help you out. However, what kind of service does your money require? Do you need portfolio management or financial planning? While these terms are often interchangeably used, they are not the same. Financial planning refers to setting goals and chalking out a path to reach them. Portfolio management primarily involves creating and managing your investment account.

This article delves into these two kinds of financial management to help you assess what type of service you require to grow your corpus and whom you may contact to help you with a comprehensive plan.

What is financial planning and what is the role of a financial planner?

Financial planning involves the assessment of your current financial status, setting up realistic financial goals, and finding ways to achieve them within specified timelines. It includes several things like saving for education, estate planning, and creating an emergency fund. It encompasses managing your debt and planning for your retirement as well.

Financial planners are qualified professionals who help individuals and companies to meet their long-term financial goals. They consult with their clients to understand their financial standing, long-term objectives, and risk-taking capacity. Based on this information, they create a comprehensive plan to help them reach their goal. A financial planner may further specialize in tax planning, estate planning, insurance planning, or risk management, among others.

Financial planning does not focus on any one aspect of managing your finances; it is a broad concept that involves different services. To set financial goals and help you reach them, financial planners will take your entire financial situation into account. They will look at your salary, savings, income from other sources, evaluate the assets you own, and assess your debts and liabilities. Once your investible amount and financial goals are identified, your financial planner will also perform risk profile analysis and may then help you pick out suitable investments to achieve your financial goals.

What are the qualifications of a financial planner?

A financial planner must possess a bachelor’s degree in a field related to finance. Apart from that, there are some specialized certifications. For instance, CFP (Certified Financial Planner) is the most common certification that is a distinction in the industry. The Certified Financial Planner Board of Standards conducts the CFP test. It assesses the candidates on their ability and aptitude to have a holistic approach to financial planning. The CFP has strict codes of ethics.

[See: What is a Certified Financial Planner (CFP)?]

What are the different types of financial planning?

Financial planning covers several services. Some financial planners specialize in particular areas and some financial planners offer a comprehensive service.

Here are some of the services that financial planners offer:

  • Estate planning: Estate planning involves setting up tasks to manage your real estate and assets in case of incapacitation or death. It ensures a smooth passage of your assets to your heirs. Estate planning might involve making a will for you or establishing a trust, as the case may be.
  • Tax planning: Tax planning will help you minimize your tax liabilities and maximize returns. Every penny earned is counted towards taxable income. However, there are measures one can take to save some tax up to certain levels, and also some accounts such as the traditional IRA that allow for tax-deferred growth of your money. Financial planning is the best way to achieve tax efficiency.
  • Education planning: Financial planning can help you meet the rising cost of education for yourself or your children, or contribute to the college funds of your grandchildren, with ease.
  • Retirement planning: Retirement planning lets you save enough so that you can live your retired life the way you imagined it, without having to worry about how to meet expenses when there is no regular stream of income such as a salary.
  • Insurance planning: Insurance planning can help you decide on your insurance needs to secure your future and prepare for unforeseen expenditures towards damage to life or property.

What is portfolio management and what is the role of a portfolio manager?

Portfolio management involves the management of your investment account. Its main aim is to create a suitable profile of assets and investments that will provide the investor capital appreciation as well as preserve wealth through minimizing risks and plugging tax outgo. The portfolio thus created would also require constant monitoring and rebalancing to capture maximum potential returns from the opportunities present in the market.

In simpler terms, portfolio management involves the day-to-day handling of all your investments, including stocks, bonds, mutual funds, real estate investments, investment in business(es), and alternative investments too. It involves decisions like how much to invest while keeping in mind your risk tolerance and investment strategy.

A portfolio manager controls the day-to-day activities of investment and redemption, research, review, and rebalancing of asset mix for high net worth individuals or institutional clients. They make investment strategies and invest the client’s capital assets to get returns. Portfolio managers generally work for wealth management firms, pension funds, foundations, insurance companies, banks, hedge funds, and other organizations in the securities industry.

They are financial professionals with excellent research skills and innovate the approach to investing so that the gains are maximized while keeping costs, such as cost of investment and taxes, under control. Both active and passive managers need to possess these two skills. They need to be thorough with their market knowledge, have a keen sense to identify opportunities in the market, and also notice red flags before it is too late.  Portfolio managers have considerable experience, expertise, and qualifications in conducting trading and investment activities. Most portfolio managers have proven track records of high success rates in investing, and most are willing to share their credentials before engaging.

Portfolio management is associated with fiduciary duty. Thus, the portfolio manager acts on behalf of the client, prioritizing their interests above everything else. While making any investment decision, their goal is to ensure that it is in the best interest of the client and that there are no conflicts of interest involved.

What are the qualifications needed by a portfolio manager?

A bachelor’s degree in the relevant field is the minimum educational requirement to become a portfolio manager. One can choose any subject ranging from Accounting to Economics. Mathematics and Physics are also acceptable since they develop the quantitative and analytical skills of a person.

It is not compulsory to have a Master’s degree, however, it has become a trend in recent times to additionally have an MBA in finance. Most employers require portfolio managers to hold financial analyst certifications. The CFA designation given by the CFA institute is the most coveted of the certifications in the industry. Many employers also name the Certified Financial Planner (CFP) designation, awarded by the CFP Board, as an optional qualification. Working in portfolio management requires licensing by FINRA and registration with the SEC that comes with rigorous studies and passing of examinations.

Portfolio managers usually start as junior financial analysts working with research firms, generally on stocks and bonds. Senior financial analysts undertake market research and analysis to make recommendations to the management or clients. After years of experience and a proven track record, they become portfolio managers.

What are the different types of portfolio management services?

You can opt for different types of portfolio management services depending on your needs:

  • Active Portfolio Management 

In this type of portfolio management, the portfolio manager tries to beat the market indices to maximize the rate of returns. There is much risk involved in it. Therefore, the investor as well as the manager have to conduct rigorous research before making any investment decisions, and also constantly monitor the portfolio performance to conduct rebalancing activity once in a while, in line with the overall trend in the market.

  • Passive Portfolio Management  

In this type, the manager mimics the performance of a market index of choice and invests in the same proportion and composition. Here, the task becomes to achieve returns in line with the market and not attempt to beat it. Thus, it involves a comparatively lower risk.

  • Discretionary Portfolio Management

In this type of portfolio management, the client entrusts the portfolio manager to represent them and make investment decisions on behalf of the client. This kind of engagement gives the portfolio manager more leeway and independence to structure the portfolio elements in a way that the investment bucket captures potential opportunities from the market, without interference from the rightful owner. The client also is relaxed that their money is in good hands and they are free to take care of other things that matter to them such as family and business rather than having to micromanage finances. The risk involved is, obviously, higher in this type of portfolio management. However, the aim remains to achieve higher returns to grow the corpus of the client.

  • Non-discretionary Portfolio Management

Here, the portfolio manager acts in an advisory capacity only. They will advise you about the appropriate investment options for you. However, you will have to make the final decision and the execution may be charged separately if you need the portfolio manager to handle it end-to-end.

Do I need financial planning or portfolio management?

Financial planning is for everyone. Professional financial planners are skilled to help you define financial goals and assist in achieving them. They can make a comprehensive plan to reign in your expenses and minimize your outgo and create a systematic roadmap to financial freedom.

Whether you are an individual or firm, you can avail of financial planning services if:

1. You want to come out of debt – Financing your goals through loans are easy options available in the market. However, debts are a never-ending trap. A financial plan will help you break this cycle of debt and help manage your cash flows better.

2. You want a better understanding of how your money is spent – Engaging in unplanned and impulsive buying/expenditure can mess up your finances. That is why it is crucial to have a budget. A financial planner can help you streamline your inflow and outflow, and set up a strategy so that you can meet your living expenses even as you save towards a growing corpus for a comfortable retirement.

3. You have long-term financial goals – You might want to save your child’s education or expand your business. In any case, financial planning services will make it easier for you to reach your goal within the time horizon.

On the other hand, people with high net worth can opt for portfolio management services. It will help them systematically grow their wealth. That is because portfolio managers come with the experience and expertise to make informed decisions about investments, can assess the tax implications and market-related risks, and have the tools for reading into the performance of the investments. Portfolio management services may be more expensive than other kinds of financial advisories, however, the individual attention provided is generally worth the cost. That said, financial advice must always be considered as an investment rather than as an expense.

The Bottom Line

Whether you choose financial planning or portfolio management will depend on your goals and current financial status.  Everyone requires financial planning services and everyone can benefit from the expertise of the financial planners to streamline and put our money on track for growth. Having a proper financial plan will make one disciplined with money, especially with trimming costs and investing so that money can beget money. Tax planning and retirement planning are two areas that financial planners can contribute tremendously to help clients make the best of available resources to try and save for the rainy days. Financial planners will help you reach your goals smoothly and seamlessly.

However, if you are a high net worth individual and own large assets, you might consider taking portfolio management services. A portfolio manager will be exclusively assigned to you who will take the responsibility to safeguard your wealth and grow your corpus while you may turn your attention to other pressing matters. Portfolio managers are more suitable when your investible corpus is large and you have a risk appetite to explore the larger universe of financial investments through unique and innovative approaches and strategies to investing.

There are a few Investment Advisors that specialize in both Portfolio Management and Financial Planning. This would be the best scenario as these go hand in hand when planning for the future. I recommend asking advisors for both their GIPS Verified Performance History and get a Complimentary Plan done by them. This will help you determine their skill level at both of these services. Managing your finances well is the key to a happy and stress-free life. Reach out to a professional financial advisor for help who can help you manage your finances and save money for a secure financial future.

Find highly qualified and vetted financial advisors by answering a few questions about yourself on the Paladin Registry platform. Our free match service matches you with 1-3 fiduciary financial advisors that are suited to meet your financial requirements.

For additional questions on the most suitable financial advisors for your financial needs and goals, visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been covered in major business publications such as Barron’s, The Wall Street Journal, and The New York Times as a leader in the investment industry with a track record of creating value for his firm’s clients.

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