When searching for a financial professional, you may wonder whether you need asset management vs wealth management. How are they different? Advisory firms offer a range of services and may specialize in one area too. There are also many synonyms for financial advisors which makes it hard to find what subtle differences may exist.
While there is not a formal definition, here’s how we view the differences between asset management (investment only), financial planning only, and wealth management services.
Infographic: Asset Management vs Wealth Management vs Financial Planning
Money management and financial planning are usually part of wealth management
Wealth management is often referred to as comprehensive or holistic. This is because wealth managers usually manage their client’s entire financial lives, which includes financial planning and managing money. Because we like math: asset management + financial planning = wealth management.
Here’s a simplistic hypothetical case study
Marlow has a 401(k), inherited IRA, and brokerage account. He is married, works full time, and has two kids in high school.
An asset manager would manage the investments in his accounts which includes setting and maintaining an appropriate asset allocation on an ongoing basis.
A financial planner who doesn’t manage money could offer a range of services. One-off planners could answer questions or help advise on issues he identifies. For example, perhaps Marlow wants to know how to put his kids through college. The planner could put together a plan to pay for college, but miss the risk that Marlow doesn’t have an estate plan or enough life insurance.
Financial planners offering ongoing services may have a bigger picture view of Marlow’s situation and be in a better position to help manage future changes. Because the planner doesn’t manage Marlow’s investments, he needs to be the middleman to make sure everyone is on the same page. For example, if Marlow’s asset manager doesn’t know the brokerage account is paying for college next year, the money may not be there if the asset allocation is too stock-heavy. Or perhaps there could be a missed opportunity for tax planning when selling positions to pay for school.
A wealth manager could manage Marlow’s investment accounts according to his goals and cash needs, advise on current planning questions, and work to help proactively identify future financial risks. By pulling the investment and planning components together, a wealth management firm acts as a financial quarterback for Marlow. For example, a wealth advisor may prioritize the need for an estate plan. The advisor could suggest an attorney, provide asset and account information, and when the plan is done, do the heavy lifting to retitle Marlow’s brokerage account in his living trust and update beneficiary designations.
A wealth manager may also realize that due to the end of the ‘stretch’ IRA, Marlow’s inherited IRA could create issues with financial aid, and suggest alternative distribution strategies. Perhaps there’s no need to tap his brokerage account and Marlow would be better off suspending contributions to his 401(k) for a year or two instead.
This is just a simple fictitious example of how wealth management can encompass financial planning and asset management in one collective service. Wealth management can make it easier for individuals and families to get the financial advice and support they need without as much effort and even help reduce the risk of something falling through the cracks if it was outside an advisor’s purview or miscommunication about who was responsible for the oversight.
Do I need a financial advisor or wealth manager?
It’s a difficult question as titles are interchangeable. Of course, that doesn’t mean all financial professionals are the same – far from it. As you consider which advisor is best for you, consider advisor compensation, certifications, and credentials in your decision.
Fee-only wealth management
A fee-only financial advisor is only paid by their clients; they do not sell financial products (like insurance or mutual funds) and they do not receive commissions. Fee-only advisors also don’t accept compensation from third parties, like referral fees or other sales revenue.
Fee-based financial advisor
Fee-based advisors are paid by client fees and commissions for selling financial products and securities to their clients. The commissions on these products can be substantial which can create concerns about conflicts of interest. This type of advisor can also receive referral fees and other third-party revenue.
Anyone can hold themselves out as a financial planner
There is no education or licensing requirement to be a financial planner. However, to make securities recommendations or sell insurance, licensing is necessary. Requirements depend on the governing body (e.g. state vs SEC and Finra) and the type of advisory business.
Since anyone can hold themselves out to be a financial planner or advisor, additional credentials can help you compare advisors’ qualifications. For example, the CERTIFIED FINANCIAL PLANNER™ professional designation is typically considered the “gold standard” for financial advisors. Similarly, the Chartered Financial Analyst® designation is top tier for asset management.
Learn more about our team of CFA and CFP® professionals.
Registered investment advisors must act in your best interest
A fiduciary duty always requires an advisor to act in the client’s best interest. Registered investment advisors are fiduciaries, so they must always put their clients’ interests ahead of their own. This is the highest standard of care under the law.
Many fee-only financial advisors are registered investment advisors (and fiduciaries). But it is possible for a firm to be one and not the other. As such, you’ll want to understand when your advisor is (or isn’t) working in your best interest.
Independent financial advisors
Independent wealth management firms and financial advisors have no affiliations or allegiances to a particular fund family or financial product. Advisors affiliated with a bank, wirehouse, or large asset manager might not be able to make an independent recommendation.
Consider, for example, if you walked into a Bank of America branch and asked for the best type of savings account on the market. As you’d expect, they’re going to recommend one of their products.