As more people value the benefit of tapping into the education, expertise and experience of finance professionals instead of handling their finances themselves (DIY), the demand for their services has increased.
However, individuals, businesses and other organisations seeking financial advice can become confused when they jump into the pool of finance professionals. Company A said they are financial advisors, B said they are financial planners and C said they are wealth managers. Is this just a disagreement about names or are there significant differences between them? And, more importantly, which one do you require?
In my opinion, financial planning and financial advisory are mostly synonymous and will be used synonymously here. Financial planners are a type of financial advisor, but not all financial advisors are financial planners.
Financial planning is different, however, from wealth management. Understand the differences between the two and discover the factors you need to consider before choosing one or the other.
When choosing the right financial professional to help you and your family, it is important to consider what you need most and where you are in your financial journey. The less established you are, the more likely you will only need some light guidance and advice from a single financial advisor. However, if you are older, wealthy or have significant complexity in your finances, you may need a broader team of advisors working in conjunction to help you properly.
What Is the Role of a Wealth Manager?
Put simply, wealth managers are finance professionals that help high-net-worth individuals (HNWIs) manage their wealth.
Since they serve a very specific clientele, they tend to provide a comprehensive or broad range of services for them, including:
- Investment management
- Charitable planning
- Tax planning and preparation
- Portfolio management
- Estate planning
- Business succession planning
Wealth managers also tend to work closely with the legal advisors and other professionals of their clients to provide comprehensive and quality service.
Because they typically manage client portfolios, wealth managers are often very skilled in asset management, capital budgeting and investment management.
While there are independent wealth managers, many of them are subsidiaries of more popular banks. So, it is common that the same bank that provides general banking services to a HNWI also manages their wealth.
What Does a Financial Planner Do?
Put simply, a financial planner creates a plan that will help an individual or organization achieve its financial goals.
Since all classes of people have financial goals and require a financial plan to achieve them, financial planners tend to work with a varying and broad pool of clients.
Also, because not all of these clients have already built significant wealth, financial planners tend to also provide more basic personal finance management services. These services can include:
- Debt management
- Setting up an emergency fund
- Investment management
- Retirement planning
- Estate planning
Financial planners or advisors tend to be Certified Financial Planners (CFP®) and they are regulated and licensed by the Financial Industry Regulatory Authority (FINRA), U.S. Securities and Exchange Commission (SEC) or individual states, depending on their registration.
Though financial planners are often general-purpose financial professionals that work for everyone, some of them also have specialties such as estate planning (Certified Estate Planners), tax planning (Certified Public Accountants) and insurance (Certified Insurance Counselors). These specialists often work with the more general-purpose advisors when a client requires some special services.
Robo-advisors are a subset of financial advisors that use various financial technologies to provide customized investment portfolios to clients based on a popular investment theory (such as the Modern Portfolio Theory). There are also digital advisors that combine robo-advisory with general personal financial management services delivered digitally.
Comparing Wealth Managers and Financial Planners
Wealth managers and financial planners differ in approach to asset management, client net worth and cost of services. Understand these differences when searching for someone to help with your finances.
As said above, wealth managers provide more comprehensive and active asset management services to their clients. In fact, they charge their clients based on the amount of assets they are managing for them. Thus, they tend to be more skilled in capital budgeting, risk management and advanced portfolio management. Also, they directly manage assets in tandem with long-term estate planning, tax planning and business succession planning, among others.
In contrast, many financial planners are not directly involved in asset management itself. Some only recommend various investment products — annuities, mutual funds, ETFs, index funds — to clients; some outsource the entire asset management to other companies, and others, like robo-advisors, provide customized passive ETFs or index funds that require little to no management (except portfolio rebalancing, which is also automated).
In summary, wealth managers tend to be active asset managers while financial planners are not.
Client Net Worth
Also, wealth managers often deal with HNWIs. HNWIs are typically those with a liquid net worth of $1 million to $5 million. There are three levels of this classification. Very-high-net-worth individuals follow HNWIs with a liquid net worth of $5 million to $30 million, then ultra-high-net-worth individuals with a liquid net worth of over $30 million.
These individuals have unique needs, special opportunities to explore and special risks to navigate. Wealth managers have the expertise and experience to meet those needs.
On the other hand, financial planners draw from a larger pool. They work with everyone who needs to create a financial plan to achieve their financial goals. This includes those who need help with cash flow management and those with more stable finances in need of investment advice on how to achieve their goals. While their clientele can include some HNWIs, it is not limited to such people.
In summary, while wealth managers focus on meeting the unique needs of HNWIs, financial planners help a wider range of people achieve their financial goals.
Cost of Services
Wealth managers charge their clients based on the assets under management (AUM). For example, wealth manager A can charge 2% of AUM while wealth manager B can charge 3% of AUM as annual fees. Some can also charge an hourly rate and, in some cases, where they have to carry out some specific projects, they can charge a flat project fee.
Financial advisors — especially robo-advisors — can also charge a fee based on AUM even if they are not actively engaged in asset management as wealth managers. Also, their fees tend to be cheaper when compared to wealth managers.
However, many financial advisors also work on a commission basis, where they receive a commission from the products they recommend to their clients. Though they have something to gain from the products they recommend, they are still legally under a fiduciary relationship with their clients, as per FINRA regulations.
Also, financial advisors at times charge a one-time fee to prepare a comprehensive financial plan for clients.
Things To Consider When Deciding
Some factors you need to consider before deciding between a financial planner or wealth manager include your current financial condition, AUM and your personal needs.
- Current financial condition
- If your finances are currently disorganized — bad debt, no budget, overspending — you are better off with a financial planner.
Also, if you are just starting out your investment journey and you don’t know what to do considering stocks, bonds, mutual funds or ETFs, a financial advisor is a better option.
In these two situations, a financial planner will provide more general personal finance management and provide a good foundation upon which you can build wealth.
- If you are a HNWI, you need the services of people who understand your specific condition and can meet your specific needs in a comprehensive way. A wealth manager could be more beneficial in this situation.
The only way to know if you qualify for the services of a wealth manager is to check out their minimum asset requirements. If you meet that minimum, then you might qualify for such services even if you are not, strictly speaking, a HNWI.
However, if you don’t have significant assets and are more focused on retiring with enough money to last until death, a financial advisor may be a better and cheaper option.
- As said above, wealth managers often provide comprehensive services that meet the needs of HNWIs such as multigenerational estate planning, tax planning or preparation and advanced portfolio management. Financial planners often provide general personal finance management in addition to investment planning, retirement planning and some little estate planning.
Which of these services do you really need based on your current financial situation? Since wealth managers tend to be more expensive, it is imperative that you don’t spend more money on wealth management when that is not what you actually need. On the other hand, you should not “manage” financial advisory when what you actually need is wealth management.