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What is the Difference Between Portfolio Management and Comprehensive Financial Planning?

What is the Difference Between Portfolio Management and Comprehensive Financial Planning?

24 Jun 2021

Many people may not understand the difference between portfolio managers and financial planners.  The confusion between financial planning and portfolio management is understandable as there is a bit of overlap between the two.  If you are looking for a financial advisor in Canton, OH your unique financial situation and goals will play a large part in determining whether you can benefit more from the assistance of a financial planner or a portfolio manager.

The bottom line is you need and deserve a financial strategy and overarching plan that will be tailored to your specific situation and nuanced goals.  Furthermore, you deserve transparent communication in which the financial professional you select makes the complex simple, explaining concepts and strategies in plain English you can understand with ease.

 

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Above all, the financial expert you select should help you make decisions or make them on your behalf in accordance with the dynamics of the market, removing emotion from the decision-making process.  The industry’s best fiduciaries rely on reason and actual facts as opposed to speculation, ensuring decisions are rooted in logic rather than guesswork.

The Subtle Yet Important Differences Between Financial Planning and Portfolio Management

Plenty of people use the words “financial planning” and “portfolio management” in place of one another, assuming they are similar enough to carry the same meaning.  However, these terms are not completely the same.  Financial planning is a process used to create overarching financial goals.

Financial planning also encompasses a plan of action that helps clients achieve those goals.  Alternatively, portfolio management is centered on actually managing your investment portfolio.  Financial planners may or may not offer portfolio management services.

A Closer Look at Portfolio Management

Portfolio management is centered on creating investment portfolios and managing those portfolios on behalf of clients.  Such portfolios typically consist of a wide variety of investments ranging from mutual funds to stocks, exchange-traded funds (ETFs), bonds, CDs, money market accounts, and alternative investments.  The nuanced details of the specific investments in a portfolio such as individual stocks, diversification, and weight distribution are primarily shaped by the client’s idiosyncratic financial goals.

Portfolio managers make trades on behalf of clients on a daily basis if necessary.  However, most portfolio managers are not actively day trading with clients’ money.  Rather, extensive research and analysis are performed before pulling the trigger on the trade of a stock, mutual fund, ETF, etc.

The overarching aim of portfolio management is to meet investor needs by achieving a specific rate of return.  Portfolio managers are also tasked with rebalancing an account based on the client’s specific risk tolerance and preference for investment allocation.  These professionals have a fiduciary duty, meaning they are required to manage investments on behalf of clients in good faith, prioritizing the interests of clients when making decisions.

Financial Planning

Financial planners may make investment recommendations on specific stocks, mutual funds, ETFs, and other investment vehicles based on a client’s specific goals.  It is best to think of financial planning as more process-oriented than portfolio management.  Such planning is centered on an assessment of the client’s financial standing with the overarching aim of helping clients meet their long-term financial goals.  Financial planning encompasses much more than investing in equities.

Truly comprehensive financial planning includes:

  • Establishing an emergency financial fund
  • Minimizing debt
  • Saving for specific goals
  • Building a retirement nest egg
  • Tax mitigation
  • Estate planning

Financial planners conduct a valuation analysis of a client’s net worth in terms of assets, real estate, outstanding debt, investment/retirement accounts, and cash savings before developing a custom-tailored financial plan.  In short, financial planning is centered on budgeting and managing financial needs across posterity. Including goal creation and execution.  This is a stark contrast to portfolio management in which the focus is on investing existing capital to increase wealth, typically with the goal of expanding a client’s nest egg for a comfortable retirement.

The Overlap Between Financial Planning and Portfolio Management

Every aspect of portfolio management is included in full-scale financial planning.  However, truly comprehensive financial planning expands the scope all the more.  As an example, a financial planner will perform an in-depth analysis of a client’s taxes, especially in the context of investment tax mitigation to set the stage for an enjoyable retirement without any worry pertaining to whether investments were properly structured to minimize the tax burden.  Financial planners may also lend invaluable advice in regard to investment structuring in the context of the taxation of retirement income.

In short, there may be some overlap between financial planning and portfolio management yet there are distinct differences between the two.  Take some time to think about the type of assistance you need and determine whether you will be better served by a portfolio manager or a financial planner.

As an example, if you own a business, have several children, or own a diverse array of assets, you may greatly benefit from the insight, guidance, and analysis provided by a financial planner.  A financial planner will help you in the context of estate planning.

The same may not necessarily be said of portfolio managers who are laser-focused on managing client portfolios with the purchase and sale of diverse investments.   Such a professional zeroes in on the micro-level of a client’s finances while financial planners have more of a macro view.

Meet with a financial planner and this professional will help you perfect the idiosyncrasies of a comprehensive estate plan.  Though these subtleties might not seem that important while you are fairly young and healthy, they are of the utmost importance.

A financial planner’s guidance in estate planning sets the stage for your loved ones, charities, and others to receive the most money possible after you depart this plane of existence.  Your financial planner will break down the complexities of estate planning in layman’s terms, explain the importance of investing in the context of estate planning, and modify your unique plan as time progresses and your life changes.

By working with a fiduciary like McGervey Wealth Management, you can be assured you’re getting investment advice from a firm that has the obligation to disclose conflicts of interest and put your interests ahead of its own.

We get to know you on a personal level and keep things simple, using common language everyone can understand. To learn more about McGervey Wealth, contact us today or get your wealth score to see how you stack up for retirement.

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More About the Author: E. Michael McGervey, CFP®, CRPC®

Mike is passionate and skilled at helping clients solve complex financial challenges. He’s known for his thoughtful communication, educational approach, and exceptional customized service. Mike has been a sought-after source for financial television, magazines, and newspapers looking for insightful analysis. His expertise has been featured by CNBC, FOX Business and...