In today’s complex financial landscape, understanding the difference between wealth management and investment management is crucial for making informed decisions about your financial future.
What is wealth management?
Wealth management is a comprehensive approach to managing an individual’s entire financial life. This includes day-to-day financial planning, retirement planning, tax preparation strategies and tax planning, and even estate planning for passing wealth on to your heirs.
What is investment management?
Investment management, on the other hand, is somewhat narrower and focuses more on what you have invested in the market. It involves selecting the right investments to help you build return potential and meet specific financial goals. Your wealth advisor can help you with your investments, but their knowledge and experience doesn’t stop there.
An analogy to clarify the difference
An analogy I often use to describe this dichotomy with my clients is that a wealth advisor is like a personal physician, while an investment advisor is like a personal trainer. Personal trainers focus on one aspect of your financial well-being, by selecting the right workouts (investments) to help you build strength (returns) and meet specific goals. Personal physicians take a broader approach, considering your entire health picture – preventive care, long-term wellness, and coordination with specialists (estate planners, tax advisors, and risk managers). They ensure all the dots are connected and that everything is working together for your overall financial well-being, not just short-term performance.
Common misconceptions
Often when I tell people I’m in the wealth management industry or that I’m an advisor, the first question I’m asked is, “What stock should I buy? or What’s the next hot sector to invest in?” When I tell them I don’t know, I get looks of confusion, concern, or frustration.
To be clear, it’s not that I can’t give them a sound investment recommendation. Rather, I don’t know what to recommend if I don’t understand their overall financial plan. It’s akin to a physician writing you a prescription without really asking you questions to understand your needs and medical history. That wouldn’t make much sense now, would it? If that happened to me, I’d probably switch doctors!
The comprehensive approach of wealth management?
It’s easy to see why someone might confuse comprehensive wealth management advice with investment management advice. After all, the news and media certainly love to talk about the financial markets. And while investing in the market can potentially help grow your wealth over time (disclaimer: You can also lose money investing in the stock market), there are other factors that need to be considered when building your financial plan.
Most people do not understand the difference between paying someone for comprehensive wealth management advice as opposed to asset management. When we talk about wealth management, we’re typically talking about several subtopics that include financial planning, insurance analysis, tax planning, estate planning, education planning, budgeting, retirement planning, and investment management, otherwise known as asset management.
Hypothetical client scenario: The small business owner
For example, let’s say I’m working with a small business owner. She has a goal to retire at age 60 and provide for her children’s education. She asks me what kind of investments she should buy within her portfolio.
Before I can make any recommendations, I need to have a better understanding of her family’s financial situation. I can’t recommend that she buy into an aggressive (or conservative, for that matter) asset allocation because I don’t know what her risk tolerance is. I can’t recommend that she contribute a certain percentage of her income to her retirement plan and another percentage to her brokerage account because I don’t know what her income and expenses are and what her balance sheet looks like.
A great place to start with this client would be to get a better understanding of her assets and monthly income/expenses so I can determine what is available to invest after any business expenses and, more importantly, where to invest – a retirement plan, brokerage account, or both. If she is directing every penny she earns into her business, it’s going to be difficult to contribute towards retirement or save for her children’s college education. Then the conversation can naturally shift to what course adjustments need to be made for her to reach her goals.
Other important questions could be, what happens if she and her husband passed away unexpectedly? Do they have enough insurance in place? Who will take care of her kids and manage their wealth? These questions would lead to an estate plan that allows her to protect her loved ones from unanticipated life events. I want to make sure that if she gets sick or gets injured and can’t work tomorrow, her family doesn’t have to worry about finding money to pay for the mortgage. Instead, they can focus on taking care of her and aiding her in her recovery.
Benefits of a trusted relationship with a wealth management advisor
An ongoing relationship with a trusted wealth management advisor can be one of the most beneficial relationships you can have. Your financial goals and plan can change over time. A good wealth advisor will meet with their client regularly to make sure their client’s financial plan is still intact. If anything needs to be modified, they can do so. If the client’s financial goals change, they can review them together.
So, if you ask me which stocks to buy, I’ll say: What stocks do you want to buy and why? And more importantly, what do you want to do with that money? Only then can I prescribe the right prescription.
If you’re not a client and want to learn more, let’s talk.
Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. The information is believed to be accurate, but is not guaranteed or warranted by Mercer Advisors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER® certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
