Difference Between Financial Planning and Wealth Management

In financial parlance, we often tend to confuse with terminologies. We often get confused about financial planning vs wealth management. But there is a substantial difference between them. At a broad level, one can say that financial planning is the all-encompassing umbrella while wealth management is one such specialized focused practice targeted at high net worth individuals. That is technically right but too generic. So, What is the difference between financial planning and wealth management? Here let us look at some key points of difference between financial planning and wealth management.

Financial Planning and Wealth Management

Let us set to rest this financial planning vs wealth management debate based on several critical parameters that can add value to understand what it is all about.

Understanding financial planning vs wealth management conceptually

Let us start with understanding wealth management first. What is wealth? It is an accumulated asset or the value of existing assets a person owns, This could include equities, bonds, mutual funds, gold, property, etc. Generally, Net worth is a net measure of the wealth of an individual, which is the assets minus the liabilities. The area of wealth management is all about managing this net worth. This includes risk management, identifying and leveraging profit-making opportunities, special products, structures, etc.

Let us now turn to financial planning. Remember that Financial planning starts with a comprehensive assessment of your financial situation and tries to juxtapose with your future goals. It involves creating a well-documented financial plan to help decide how much you need for retirement, how much for children’s education, for home, etc. Financial planning essentially sets in motion a process for attaining financial goals in a systematic, gradual and meticulous manner.

Understanding financial planning vs wealth management in terms of objectives

This is an extension of the first point. The focus of wealth management is more on being opportunity-oriented in the management of money. It is largely agnostic. It focuses more on aspects like preservation of wealth, growth, and further accumulation of the existing wealth. It normally includes estate planning too. In contrast, financial planning is goal-based and about handling personal finances. It deals with building / creating wealth over long periods, insuring your risk, creating a contingency fund, monitoring the plan regularly, etc.

Whom are these activities targeted at?

As the name suggests, wealth management is for the wealthy and the well-endowed. It could be inherited wealth or acquired wealth; that is ok. Most of the targets for wealth management have already planned and even made provisions for their routine life goals. Still, they have an adequate surplus for furthering their wealth.

Financial Planning is for every individual looking to meet his / her financial goals It is sort of mandatory for anyone wanting to make the best out of their resources. It is about taking risks were warranted as long as the returns justify the risk.

Financial planning vs wealth management; what do they comprise?

Broadly, you can say that wealth management comprises of assessment of wealth and risk tolerance, asset allocation, strategy for wealth preservation and wealth enhancement as well as on how to make the best of opportunities in the market from time to time.

On the other hand, financial planning comprises managing cash flows, directing to investments, saving on taxes, handling debt, planning of retirement, handling risk to optimize post-tax and post inflation returns, etc.

Is wealth management and finance active or passive?

It can be a mix of both, but you can intuitively say that wealth management is a lot more of active or rather proactive action taken. Typically, the wealth manager makes decisions based on your existing portfolio and risk tolerance. The idea is to be focused on preserving wealth and lookout for opportunities to also enhance wealth. Of course, the preference or priority will always be for wealth preservation over wealth growth. Normally, wealth management is open to a lot more asset classes like structures, ETFs, REITs, INVITs, private placements, pre-IPO stake, etc. These don’t fit into financial planning.

While there is an active element in financial planning too, it is largely passive. That is where there is extensive use of mutual funds as an investment vehicle when it comes to financial planning. Normally, the financial planner will make and suggest a plan based on income and financial goals. The asset allocation is suggested in a more generic format compared to the wealth management clients, who need more customized services.

Dos and Don’ts for Financial Planning

Let us look at the dos of financial planning first.

  • Don’t put all eggs in one basket and diversify your risk. Spread across asset classes, asset mix, and themes. That is what is called risk diversification.
  • You need to have a corpus to fall back upon in an emergency. Build an Emergency Fund for such unpredictable needs.
  • Define your goals with as much clarity as possible. Ideally, write them down, debate the goals, and think through thoroughly.
  • Manage your taxes in the sense that don’t look at just pre-tax returns but at post-tax returns as that is what you take home.
  • Do your homework, extensively read up on your investments, your goals, and the options available to you.
  • Prefer a SIP approach to investing as it gives the advantage of rupee cost averaging.

Let us turn to some don’ts in financial planning.

  • Sounds hackneyed but it is best to repeat this again and again. Never put all the investment in one go and spread it out in a phased manner.
  • Don’t get into a debt trap. It is easy to get in but tough to get out.
  • Once a financial plan is made, don’t make investments at random. Everything has to fit into that plan.

What is a Contingency Fund

It is an emergency fund you can fall back upon in a crisis. This is normally kept at 5-6 months of pay and investing in easily accessible assets like liquid funds, money market funds, etc.

Frequently Asked Questions Expand All

Ideally, they are two different set of skills altogether. The wealth manage must have the capacity manage and preserve wealth. The financial planner has to focus more on helping people achieve long term goals.

For beginners, it is normally financial planning that is a lot more imperative. Wealth management comes much later.