These two terms Financial Planning and Wealth Management are very confusing and most people generally consider them as synonyms. But actually they are not synonyms. We have tried to find out how they both differ.
Financial Planning, like any planning for that matter, does not mean that you really execute that plan. We all have many plans and ideas. Most investors use Managers to actually execute their plan and to oversee and manage it = Wealth Management.
Wealth Management considers all aspects of asset allocation into appropriate asset classes for each client (one approach will not work for every client). You have to understand the risks of various assets classes such as U.S. equities, global equities, corporate bonds, municipal bonds, futures, physical commodities (gold, platinum, silver), real estate, gems and other collectibles. A good wealth manager will actually manage the assets, in my opinion financial planners will simple allocate investment capital into appropriate mutual funds, will sell the client various insurance products, annuities, and other ” quasi investment ” products and leave it to the mutual fund managers to perform which may upset the client if the investments chosen by the financial planner don’t perform as anticipated.
There’s a geographical issue here too. In the UK we have sweeping regulatory change on the horizon (the RDR) and this is altering how advisers badge themselves. Many IFAs now call themselves Financial Planners and increasingly use passive instruments. Their focus is on the clients objectives and meeting them with as little risk and cost as possible.
The term Wealth Manager has historically belonged to investment managers, but many of these firms are incorporating financial planning into their offerings, to give their investment performance context. Active fund managers are expecting and indeed already experiencing price pressure, brought about by increased transparency and competition from passives.
The strongest model for firms in the UK would seem to be one that includes a holistic financial plan at the core, with investment management delivered in-house (smaller firms without the resources often in source and white-label) and a range of periphery services (tax, insurance broking, estate planning and so on) round the outside. This model cements the adviser/client relationship (good for long term profit if you can get the delivery right) and makes the assets nice and sticky (another useful metric when valuing the business).
Wealth Management shall mean something wider than financial planning. Wealth management would include not only financial assets but any kind of wealth the advisor is hired for its maintenance, preservation and growing. From our point of view, domestic and international tax Law, corporate Law and Family Law should be considered as a part of the Wealth Management knowledge.
One way to view Wealth Management, would be as a comprehensive or specific set of plans and strategies designed to manage a set of assets or one large category of assets (e.g. an investment portfolio, closely held business, commercial real estate, etc.) towards specific outcomes. Whereas, Financial Planning is a supportive or auxiliary component that addresses broad goals or issues (e.g. college funding, cash flow modeling, estate tax estimates and funding, spendthrift provisions within a trust, multi-generational family lifestyle funding, etc.)
Wealth Management deals with creation, accumulation, preservation and enjoyment of wealth which includes qualitative aspects of wealth enjoyment whereas a financial plan relates to creation and execution of a strategy to achieve a set of financial goals. This strategy would necessarily deal with the financial aspects of wealth creation whereas wealth management also deals with the emotional aspect of wealth. A Financial plan is passive management of wealth through asset allocation and risk management whereas wealth management involves active management in terms of identifying and taking advantage of opportunities to create and enjoy wealth and can even include sharing of wealth through philanthropy.
Some of the distinctions drawn are a function of the countries and financial disciplines of persons who are associated with these two domains. In the US, we would argue Wealth Management is a term best understood as holistic. Wealth Management includes Financial Planning, Investment Management, as well as other disciplines such as banking, trust and estate planning. It involves requisite expertise to support a HNW individual/family as they plan and execute against their financial and non-financial goals.
Financial Planning is the construction of the basic “blueprint” for an individual or family to follow. It will include many of the following: asset allocation, taxation, cash flow management, a “safety fund”, insurance and basic risk management, educational funding if appropriate and the construction of a foundation estate plan including living documents.
Once an individual accumulates enough wealth, and this is a moving target for each person, where their wealth will survive them, now we are into “Wealth Planning”. We can’t tell you precisely where this change in thought process may occur for the client. Wealth beyond the current US applicable exclusion amount, $5,120,000, or twice this sum for a couple is a reasonable proxy.
At this wealth “breakpoint”, an individual starts to think differently. They will entertain more advanced strategic ideas to transfer wealth efficiently and minimize taxation. They are faced with the problem of potentially leaving heirs with a life changing sum of money This change in thinking may also happen at a lower level for an individual that believes in planning for responsible wealth transfer to heirs.
They may start entertaining the idea of asset protection and generational trust planning. Studies by the VIP Forum show that the vast majority of this demographic will be business owners. Planning for an orderly business transition and monetization of the owner’s equity is also a consideration.
We have global certifications in both the Financial Planning and Wealth Management domains. For the financial planning domain we have the “Master Financial Planner” Certification and for Wealth Management we have the “Chartered Wealth Manager” Designation.
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I disagree with the content of your article. I think wealth managment is a component of Financial Planning. In the truest sense of finanical planning, wealth management may comprise 15-20% of what a financial planner considers in working with clients. The development of a ‘blue print’ or financial plan is merely the starting point to help the financial planner get a complete and accurate picture/understanding of all aspects of their clients’ financial lives. It is not an ends; but, a means/ a beginning step in serving one’s client. It must be adjusted, modified and adapted as the cleint moves forward implementing the strategies, mutually agreed upon, and compensating for changes in the economy and client’s personal situation over time.
In my experience, most wealth managers are limited to or focused primarily on a single aspect of wealth management – i.e. securities or real estate, while the financial planning process encompasses all aspects of wealth management, as well as estate planning, tax planning, risk management, etc. That is not to say that the financial planner will necessarily make the day-to-day tactical decisions like, which stock to buy or sell; but, may oversee the work of several investment managers as it relates to performance, style drift, return vs. risk, asset allocation, etc. Many clients of financial planners will also work with multiple investment or wealth managers regarding their investment protfolios, be they securities, real estate, both or something else.
It has also been my experience, sad to say, that many who advertise themselves as financial planners are merely looking for a way to uncover assets to manage and are really investment managers in financial planners’ clothing or ‘product peddlers’ in financial planners’ clothing. Their ultimate goal and means of personal compensation is to be paid to manage investments, to be paid for making trades or to generate commissions by selling products, rather than to be driven by providing unique, client centric, needs based service without product bias.
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It is a fact that ‘Financial Planning’ and ‘Wealth Management’ are two of the most over-used terms in our industry, and therefore fall victim to subjective definitions and ideas, along with a variety of expected services. Instead of touting Wealth Management as something superior and more comprehensive to Financial Planning, perhaps we should review the Certified Financial Planning Board of Standards, Inc.’s definition of the Financial Planning process (and Mike Roan has positioned Financial Planning correctly, in that it is much more than a blueprint event, importantly, it is an ongoing process.) The 6 step definition is as follows: 1) Establish & Define the client-planner relationship: that is, explain, agree and document the relationship and services to be provided; 2) Gather client data and goals; 3) Analyze and Evaluate financial status: taking the time to evaluate gaps and opportunities (perhaps a SWOT analysis is in order–Strengths, Weaknesses, Opportunities, & Threats); 4) Develop & Present Financial Planning Recommendations and Alternatives: this calls for activity and involvement beyond a stagnant blueprint, and should include more than investment recommendations; 5) Implement Financial Planning Recommendations: the client and the planner agree on how the plan will be implemented; the planner may actually act out the recommendations on behalf of the client (assuming he or she is licensed and able to do so), or, he may act as the coach and coordinator, bringing together the necessary resources to accomplish the desired actions; 6) Monitor the Financial Planning Recommendations: the client and planner agree on who will monitor the plan. This last step is the one most often omitted beyond the initial ‘Financial Plan’ and arguably the most critical, since this step allows the plan to remain live to changes, and part of an ongoing process. While it is true there are many people in our industry who hold themselves out as “Financial Planners”, and have added to the confusion and perhaps degradation of the role, Financial Planning in its truest sense is a comprehenisve process and should be at the heart and part of the Wealth Management process.
As the owner of a wealth management firm, I disagree with Mike’s comment (that’s why we comment, right?). However, I also disagree with the bulk of this post.
While there is a lot of confusion surrounding wealth management versus financial planning, I believe that they encompass pretty much the same tasks.
As Millie pointed out, the CFP board defines financial planning as following the 6 step process posted. So that explains financial planning. However, being a wealth manager, I utilize the same process, monitor the financial health of clients, and make changes as necessary.
Financial planning is not a once and done process, but an on-going process, as is wealth management.
Rather than debate financial planning vs. wealth management, we should debate the point Millie made about people holding themselves out to the world as “financial planner” solely to find ways to accumulate a larger amount of assets to manage, even though they have little, if any expertise in the field.
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nice discussions and comments so far; all of you are very right as per my views;
i think wp is a wider term than fp. fp is a component of wealth plans of an individual;
financial planning is on of the steps in wealth planning. yes its an ongoing process
just like a growing child ….. to a pensioner.
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