Managing your finances is crucial foreveryone, be it an individual or a firm, as it paves the way for financialfreedom through the attainment of your financial goals and objectives. Planningyour finances can sometimes get overwhelming because of the number of movingcomponents – you need to consider your risk profile, your end goal, the type ofinvestment that may be suitable to you, the taxes that you may have to pay, andalso create a back-up plan or have a contingency fund to counter any unforeseenevents.
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 offinancial management to help you assess what type of service you require togrow your corpus and whom you may contact to help you with a comprehensiveplan.
Table of Contents
What is financial planning and what is the role of a financial planner?
Financial planning involves the assessment ofyour current financial status, setting up realistic financial goals, andfinding ways to achieve them within specified timelines. It includes severalthings like saving for education, estate planning, and creating an emergencyfund. It encompasses managing your debt and planning for your retirement aswell.
Financial planners are qualified professionalswho 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, theycreate a comprehensive plan to help them reach their goal. A financial plannermay further specialize in tax planning, estate planning, insurance planning, orrisk 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 goalsand help you reach them, financial planners will take your entire financialsituation into account. They will look at your salary, savings, income fromother sources, evaluate the assets you own, and assess your debts andliabilities. Once your investible amount and financial goals are identified,your financial planner will also perform risk profile analysis and may thenhelp 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 differenttypes of financial planning?
Financial planning covers several services. Some financial planners specialize in particular areas and some financial planners offer a comprehensive service.
Hereare some of the services that financial planners offer:
- Estateplanning: Estate planning involves setting up tasks tomanage your real estate and assets in case of incapacitation or death. Itensures a smooth passage of your assets to your heirs. Estate planning mightinvolve making a will for you or establishing a trust, as the case may be.
- Taxplanning: Tax planning will help you minimize your taxliabilities and maximize returns. Every penny earned is counted towards taxableincome. However, there are measures one can take to save some tax up to certainlevels, and also some accounts such as the traditional IRA that allow fortax-deferred growth of your money. Financial planning is the best way toachieve tax efficiency.
- Educationplanning: Financial planning can help you meet therising cost of education for yourself or your children, or contribute to thecollege funds of your grandchildren, with ease.
- Retirementplanning: Retirement planning lets you save enough sothat you can live your retired life the way you imagined it, without having toworry about how to meet expenses when there is no regular stream of income suchas a salary.
- Insuranceplanning: Insurance planning can help you decide on yourinsurance needs to secure your future and prepare for unforeseen expenditurestowards damage to life or property.
What is portfoliomanagement and what is the role of a portfolio manager?
Portfolio management involves the managementof your investment account. Its main aim is to create a suitable profile ofassets and investments that will provide the investor capital appreciation aswell as preserve wealth through minimizing risks and plugging tax outgo. Theportfolio thus created would also require constant monitoring and rebalancingto capture maximum potential returns from the opportunities present in themarket.
In simpler terms, portfolio managementinvolves the day-to-day handling of all your investments, including stocks,bonds, mutual funds, real estate investments, investment in business(es), andalternative investments too. It involves decisions like how much to investwhile keeping in mind your risk tolerance and investment strategy.
A portfolio manager controls the day-to-dayactivities of investment and redemption, research, review, and rebalancing ofasset mix for high net worth individuals or institutional clients. They makeinvestment 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 organizationsin the securities industry.
They are financial professionals withexcellent research skills and innovate the approach to investing so that thegains are maximized while keeping costs, such as cost of investment and taxes,under control. Both active and passive managers need to possess these twoskills. They need to be thorough with their market knowledge, have a keen senseto identify opportunities in the market, and also notice red flags before it istoo late. Portfolio managers haveconsiderable experience, expertise, and qualifications in conducting tradingand investment activities. Most portfolio managers have proven track records ofhigh success rates in investing, and most are willing to share theircredentials 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 thequalifications needed by a portfolio manager?
A bachelor’s degree in the relevant field isthe minimum educational requirement to become a portfolio manager. One canchoose any subject ranging from Accounting to Economics. Mathematics andPhysics are also acceptable since they develop the quantitative and analyticalskills 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.
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What are the differenttypes of portfolio management services?
You can opt for different types of portfoliomanagement services depending on your needs:
- ActivePortfolio Management
In this type ofportfolio management, the portfolio manager tries to beat the market indices tomaximize the rate of returns. There is much risk involved in it. Therefore, theinvestor as well as the manager have to conduct rigorous research before makingany investment decisions, and also constantly monitor the portfolio performanceto conduct rebalancing activity once in a while, in line with the overall trendin the market.
- PassivePortfolio Management
In this type, themanager mimics the performance of a market index of choice and invests in thesame proportion and composition. Here, the task becomes to achieve returns inline with the market and not attempt to beat it. Thus, it involves acomparatively lower risk.
- DiscretionaryPortfolio Management
In this type ofportfolio management, the client entrusts the portfolio manager to representthem and make investment decisions on behalf of the client. This kind ofengagement gives the portfolio manager more leeway and independence tostructure the portfolio elements in a way that the investment bucket capturespotential opportunities from the market, without interference from the rightfulowner. The client also is relaxed that their money is in good hands and theyare free to take care of other things that matter to them such as family andbusiness rather than having to micromanage finances. The risk involved is,obviously, higher in this type of portfolio management. However, the aimremains to achieve higher returns to grow the corpus of the client.
- Non-discretionaryPortfolio Management
Here, the portfoliomanager acts in an advisory capacity only. They will advise you about theappropriate investment options for you. However, you will have to make thefinal decision and the execution may be charged separately if you need theportfolio 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 goalsand assist in achieving them. They can make a comprehensive plan to reign inyour expenses and minimize your outgo and create a systematic roadmap tofinancial freedom.
Whether you are an individual or firm, you can avail of financial planning services if:
1. Youwant to come out of debt – Financing your goals through loans are easyoptions available in the market. However, debts are a never-ending trap. Afinancial plan will help you break this cycle of debt and help manage your cashflows 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. Youhave long-term financial goals – You might want to save your child’seducation or expand your business. In any case, financial planning serviceswill make it easier for you to reach your goal within the time horizon.
On the other hand, people with high net worthcan opt for portfolio management services. It will help them systematicallygrow their wealth. That is because portfolio managers come with the experienceand expertise to make informed decisions about investments, can assess the taximplications and market-related risks, and have the tools for reading into theperformance of the investments. Portfolio management services may be moreexpensive than other kinds of financial advisories, however, the individual attentionprovided is generally worth the cost. That said, financial advice must alwaysbe considered as an investment rather than as an expense.
The Bottom Line
Whether you choose financial planning orportfolio management will depend on your goals and current financialstatus. Everyone requires financialplanning services and everyone can benefit from the expertise of the financialplanners to streamline and put our money on track for growth. Having a properfinancial plan will make one disciplined with money, especially with trimmingcosts and investing so that money can beget money. Tax planning and retirementplanning are two areas that financial planners can contribute tremendously tohelp clients make the best of available resources to try and save for the rainydays. Financial planners will help you reach your goals smoothly andseamlessly.
However, if you are a high net worthindividual and own large assets, you might consider taking portfolio managementservices. A portfolio manager will be exclusively assigned to you who will takethe responsibility to safeguard your wealth and grow your corpus while you mayturn your attention to other pressing matters. Portfolio managers are moresuitable when your investible corpus is large and you have a risk appetite toexplore the larger universe of financial investments through unique andinnovative approaches and strategies to investing.
There are a few Investment Advisors thatspecialize in both Portfolio Management and Financial Planning. This would be thebest scenario as these go hand in hand when planning for the future. Irecommend asking advisors for both their GIPS Verified Performance History andget a Complimentary Plan done by them. This will help you determine their skilllevel at both of these services. Managing your finances well is the key to ahappy and stress-free life. Reach out to a professional financial advisor forhelp who can help you manage your finances and save money for a securefinancial 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 financialadvisors for your financial needs and goals, visit Dash Investmentsor 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 investmentadvisory and financial services, which are tailored to each client’s uniqueneeds providing institutional-caliber money management services that are basedupon a solid, proven research approach. Additionally, each client receivescomprehensive financial planning to ensure they are moving toward theirfinancial 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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