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If you’re
overwhelmed by the prospect of financial planning, you’re not alone. This world
of stocks, bonds, trusts, assets, risks, and returns can be daunting.
To start,
many people don’t understand the difference between wealth and investment
management. Beyond that, the roles of brokers, advisors, and financial planners
can be convoluted and mysterious.
The
recent Regulation Best Interest, adopted by the U.S. Securities and Exchange Commission in
June, complicates matters further. While it’s intended to require brokers to
act in the best interest of their clients, it seems to have deepened confusion about
the differences between brokers and advisors.
You can
clear up much of the uncertainty about the kind of planner you should work with
by understanding the difference between wealth management and investment
management.
Choosing
Your Path: Wealth Management vs. Investment Management
Investment
management tends to focus only on investing assets; wealth management takes a
broader approach. The former might be handled by a broker or an advisor focused
solely on managing your portfolio. If you hire a wealth manager, however, he or
she will typically look beyond assets to incorporate taxes, insurance, and the
whole estate into the planning process.
If you
feel you have a good handle on those other areas of your finances, you may only
need to get an investment manager. In an investment management scenario, your
advisor or broker may perform an assessment to determine your risk tolerance
before choosing an appropriate portfolio.
If you
don’t feel like you are seeing the full picture, though, you might consider
whether you should get a wealth manager. These holistic planners will probe to
discover all factors: income, expenses, assets and their projected annual
growth, retirement goals, college savings goals, and more. The investments
become a means of achieving specific goals. A wealth manager can help you weigh
all these factors alongside your goals and timelines to form a comprehensive
plan.
Let’s
say, for example, that you’ve retired and are trying to decide which accounts
to use to cover your expenses. A wealth manager could examine your tax
liability under different scenarios to determine if it might make sense for you
to start taking money out of your IRA before you are required to — when
required minimum distributions kick in six months after you turn 70.
Another
factor to consider in determining whether to use a wealth manager or an
investment manager is the status of your estate. If your estate is
large enough — or if you’re entering a season where change is likely — a
holistic wealth manager will monitor everything regularly and make sure all is
updated and properly titled.
Whichever
type of advisor you choose, be sure that you have a clear picture of your
financial goals and the factors at play in achieving them.
Question
Before You Commit
Whether
you ultimately choose a wealth manager or an investment manager, be prepared to
ask plenty of critical questions before you commit to the partnership. Here are
a few questions to get you started:
1. Are
you a fiduciary?
A
fiduciary is someone who has a legal duty to act in the best interest of
clients, so this is a top concern for you as a personal investor. Not all
financial advisors are legally bound to
work on your behalf, so it’s essential to know whether your advisor is acting
as a fiduciary.
Be
exceptionally thorough if you’re looking at a broker. They are known for
churning through different stocks, buying and selling to produce the highest
commission for themselves. The legal rules are a little different with them, so
you’ll want to perform due diligence to understand the difference.
2. How
are you paid?
Fee
structures often lack transparency. Don’t be afraid to put your potential
advisors under the microscope until you feel comfortable with how they’re being
paid.
To get to
the heart of the matter, ask direct questions: “Do you or a related company
receive any payments from money managers you recommend, consider, or otherwise
mention? If so, what is the extent of these payments in relation to your other
revenue?”
3. How
often do you check in?
Ask
potential advisors whether they meet with clients at least annually to assess
progress. You’ll also want to know if they review portfolio performance since
inception.
In this
regard, there really should be no difference between wealth management and
investment management. Your financial future is an important part of your life,
and your financial advisor should be willing to check in regularly about it.
4.
What’s your ethical track record?
Needless
to say, you don’t want your money tangled up in legal troubles. Steer clear of
any firm or advisor that’s been in hot water ethically or legally.
Pose
questions like: “Have you or your firm ever been subject to regulatory
discipline by a body that governs unlawful or unethical actions?”
Financial
planning can be intimidating, but a good partner will make it simple — even
exciting. When you know the difference between wealth and investment
management, and you’re equipped with good questions,
you’ll find the right partner in no time.
Sara
Gelsheimer is a senior wealth
manager at Plancorp, a
Registered Investment Advisor serving families in 48 states. Sara has a strong
financial background and an even stronger commitment to financial education —
particularly for women. Her passion for educating women about investing helped
spur InspireHer,
which empowers women to find their financial voice through a platform where
they can connect with others, ask questions, and have their concerns addressed.
In her free time, Sara volunteers as a mentor and sponsors two young women
through Hearts & Hope for Uganda. She enjoys live music, hiking, biking,
and most of all, spending time with her husband and son.
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Equities Contributor: Sara Gelsheimer
Source: Equities News
