Most people think that financial planning and portfolio management are the same thing. There is certainly some overlap but understanding the distinction between them is very important as you decide what type of financial professional you want to work with.
Specifically, portfolio management only focuses on the investment portfolio itself and not the bigger picture, such as tax strategies, retirement analysis, non-portfolio risks and estate/inheritance issues. Some people only need investment management, but the vast majority of people would benefit from having an advocate for their overall financial situation.
Is There Anything Included in Portfolio Management That Is Not Part of Financial Planning?
Generally, the answer is no. Full-scale financial planning includes portfolio management along with much more. The ability to analyze tax aspects of your investments alongside retirement needs, such as income and how to structure your investments for after tax retirement income, is extremely important. Without the big picture view of someone’s financial situation, it is nearly impossible to construct.
Comprehensive financial planners see numerous opportunities to add value beyond sheer investment rate of return such as:
Long-term income tax planning;
Analyzing required rate of return on your investment portfolio in order to achieve your retirement goals, and
Identifying risks and opportunities in the greater financial world.
A common scenario we see in the retirement planning process is when someone retires particularly early. Social Security does not start for most until their mid-60s, and the IRS does not require people to take money out of their IRA or 401(k) type of accounts until they reach 72, leaving several low-income tax years between retirement and required withdrawals. This can lead to completing Roth conversions, which moves IRA assets into Roth IRA assets. This creates a taxable event in a low tax bracket, enabling these assets to grow tax-free for the retiree and/or their beneficiaries for decades to come. This type of planning doesn’t result in a higher rate of return on someone’s investment portfolio but leads to having more dollars available in retirement and to pass on to heirs.
How Does Budgeting Play Into Financial Planning?
The most common budgeting opportunity we find is calculating exactly how much people need to save on an ongoing basis in order to achieve their financial goals. For this to fit into a financial plan, we typically see success taking one of two approaches:
Someone knows how much investment risk they are willing to take, which allows us to calculate how much they need to save to achieve their goals and often times negate the need for detailed budgeting.
Someone knows how much they can save (or want to save), so we can analyze how high of an investment rate of return they need in order to accomplish their goals.
For example, with someone’s given rate of saving that needs an 18 percent rate of return to accomplish their goals, we can determine that this is unrealistic and either additional savings are required, or another variable must be changed. This can have significant impact on construction of an investment portfolio, but typically portfolio managers alone would not dig deep enough to answer these questions.
A third category of major planning that a portfolio manager is more likely to miss would be other risks and opportunities. Analyzing someone’s existing insurances—whether life, disability, health or Medicare—we are able to spot any glaring risks. This is very important to address but is not at all a part of portfolio management.
Another opportunity that could easily be missed is proper and thorough estate planning. Proper estate planning enables beneficiaries (family, charities or otherwise) to receive the greatest amount of money possible by factoring in estate and income tax calculations. Financial planners can often spot annual opportunities to pursue within an estate plan.
Comprehensive practitioners, such as Berger Financial Group, are thorough in spotting opportunities often overlooked by others. Depending on someone’s financial situation, most people can realize huge benefits from working with a comprehensive planner rather than portfolio management alone.
Mark Berger is a certified financial planner and owner of Berger Financial Group, a full-service financial firm located in Plymouth, Minnesota.
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