Financial Planning vs. Investment Management: a Brief Guide

Differences Between Financial Planning and Investment Management

What is meant by the term “financial planning”?

At Team Hewins, we use the term “financial planning” to refer to a process that involves holistically evaluating your current financial picture, identifying your personal goals, and crafting a strategy to achieve them. Below, we discuss 3 key steps for financial planning:

1. Evaluating Finances

The first step of successful financial planning involves sharing information and documents with your financial planner. With these data points, they’ll have a better idea of where you stand financially. Some of the areas they look at include your:

• Income: Your earnings across all categories. This includes both active income (e.g. wages, bonuses, and commissions) and passive income (e.g. property rental income, interest, distributions)
• Expenses: What you spend across all categories. This includes both essential fixed expenses (e.g. mortgage, insurance premiums, utilities) and optional discretionary expenses (e.g. vacations, clothing, entertainment)
• Insurance: The policies you hold and the degree of coverage you have across categories such as life, home, and health insurance.
• Benefits: The non-cash compensation you receive from your job, such as 401(k) matches, stock, parental leave, and home office stipends
• Taxes: The various forms and reports you’ve filed and tax payments you’ve made over the past few years
• Investments: Your holdings in categories such as stock, bonds, securities, and real estate
• Major assets: Valuable material possessions including homes, vehicles, art collections, and precious metals
• Debts: What you still owe when it comes to such things as student loans, mortgages, and credit cards
• Retirement accounts: Financial accounts intended to fund your retirement, including 401(k) plans, IRAs, and pensions
• Estate plan: Documents that outline how you want your affairs carried out in the event of your death or incapacitation. These should address issues such as whether you would want to be cremated or buried, who would take custody of your children, and how your estate would be distributed.

2. Identifying Goals

After sharing some insight into your financial situation, it’s time to identify your personal financial goals. If you already have concrete goals in mind, that’s great — but if not, your financial advisor can help you articulate them. You might discuss topics such as:

• How I can better support my philanthropic goals?
• How can I afford to stay in my own home as I grow older?
• How much can I afford to donate to charitable causes?
• When can I plan to comfortably retire?
• How can I build a legacy for my children and grandchildren, both during my lifetime and after I’m gone?
• How should I diversify my equity compensation?

Pro tip: When thinking about target retirement age, try not to pick abstract dates. Instead, “think about when you can afford to retire while still being able to achieve your other financial goals,” says Patrice Cresci, CFP®, Principal, Senior Financial Advisor, and Regional Director at Team Hewins.

3. Crafting a Strategy

With an accurate picture of your current finances and your future goals, your financial advisor will be able to draw up a plan to reach those goals. It will likely contain recommendations around:

• Monthly budgeting
• Investments
• Retirement planning
• Tax strategy
• Insurance planning
• Estate planning

What is Investment Management?

In the world of finance, investment management refers to the process of managing financial assets to achieve specific financial goals. While financial planning refers to coming up with a strategy to reach your goals, investing is just one branch of that strategy. Perhaps you’ve wondered: “What is investment management?” or “What is portfolio management?” It generally refers to the practice of creating an investment portfolio by selecting and trading investments, monitoring the portfolio’s performance, and adjusting it as needed.

A good investment manager will focus on several factors: asset allocation, a long-term “evidence-based” approach, risk and return, diversification, tax efficiency, and investment cost control.

Let’s explore each one below:

1. Asset Allocation

Asset allocation is the very core of your investment strategy.

When collaborating with a holistic investment advisor, every portfolio proposal should be customized to your personal goals, future financial needs, and risk tolerance.

Alternatively, an investment advisor who is focused solely on investment management will only have a partial picture to tailor your investment approach effectively. How can one determine the appropriate risk level for your portfolio if they don’t understand your risk tolerance or the returns needed to achieve your goals?

What’s more, recommendations should be driven by proven research, not just the latest market fads. This way, you can forgo dramatic short-term gains and losses in favor of long-term growth.

Pro tip: Be wary of any financial advisor who pushes a particular investment vehicle too hard. Financial planning should be a collaborative process. According to Cresci, a financial advisor’s role is to “provide the clients clarity around their options so they can make solid decisions” — not make unilateral decisions for them.

2. A Long-Term “Evidence-based” Approach

Backed by academic research, our long-term strategy doesn’t rely on market timing.

Our investment approach is comprehensive and strategic. We will not make tactical changes to your portfolio based on short-term predictions or market movements. With the right investment vehicles, your money should do the work for you — still, it’s important to continuously monitor your assets to ensure they continue to help you reach your goals.

3. Diversification

Your portfolio will benefit from broad diversification across global stocks and bonds. Diversification reduces risk—if one asset class declines, others may rise, thus moderating portfolio fluctuations.

Many people have their investments concentrated in a single vehicle, such as company equity they’ve received. However, no matter how much you believe in a particular investment, there’s no guarantee it will succeed. By spreading your investments across multiple assets, diversification allows you to access the global opportunity set and decreases the likelihood of missing out on top-performing securities.

4. Tax Efficiency and Investment Cost Control

Expensive investment management fees, taxes, and other costs can eat away at your portfolio returns. For this reason, we use low-cost investment vehicles including no-load mutual funds and exchange-traded funds. Our long-term, low-turnover approach is tax-efficient, and we further reduce taxes by actively harvesting tax losses throughout the year and employing tax-managed funds and separate account managers.

Financial Planning and Investment Management Go Hand in Hand

To achieve financial wellbeing, you can’t choose between financial planning and investment management— both are essential components of success. No financial plan is complete without an investment strategy, and no investment strategy will truly work for you unless it takes your holistic finances into account.

Fortunately, many financial advisors offer both financial planning and investment management services. Working with one professional who can provide both services is generally better than working with one for financial planning and another for investments.

That way, your advisor has a more comprehensive picture of your finances, and you don’t run the risk of miscommunications or difficulty coordinating between the two.

When evaluating potential financial advisors, look at these categories in particular:

• Professional certification: The CERTIFIED FINANCIAL PLANNER® (CFP®) designation ensures that your advisor has the formal education and experience necessary to help you shape your financial future.
• Payment structure: A fee-only payment structure greatly reduces conflict of interest. Firms that charge fees don’t receive commissions or kickbacks for the investment vehicles they recommend.
• Fiduciary status: Electing fiduciary status means a professional is legally bound to serve in their clients’ best interest — not their own.
• Investment strategy: A firm that truly understands investment management should have an evidence-based investment strategy that controls risk and focuses on long-term returns.

Related: What to Look for in a Financial Advisor for Women