Investment Management vs. Financial Advice

There’s never been a better time to be an investor.

Expenses are coming down. It’s cheaper than ever to trade. Strategies that were once reserved for large institutional funds at exorbitant fees are now available to every investor through low-cost mutual funds and ETFs. The sheer amount of data and computing power available has completely leveled the playing field in many ways between the pros and amateurs. And there is an abundance of investment books, blogs, analysis and opinions from intelligent, thoughtful people if you know where to look.

I wish I could say the same thing for financial advice, but I don’t think this side of the equation has kept up over the years. A large majority of what the financial industry calls financial advice is really just glorified product sales.

And as portfolio management functions continue to see further technological gains in the future the basics will become more and more of a commodity, so financial advice will be a huge differentiator in the financial services industry. Anyone can create a portfolio, asset allocation or investment strategy. What most people actually need is advice about how their investments fit into their overall financial plan, and more importantly their life.

Both are necessary components for long-term success, but it’s important to understand the differences.

Here goes:

Investment management is about asset allocation, expected returns, risk tolerance and time horizons.
Financial advice is about making wise choices about the use of debt, setting up college savings plans, tax efficiency, estate planning and ensuring your insurance needs are taken care of.

Investment management is about managing investments.
Financial advice is about managing investors.

Investment management is about portfolio construction and risk management.
Financial advice is about comprehensive financial planning and emotional management.

Investment management is about measuring portfolio performance by comparing results to predetermined index benchmarks.
Financial advice is about measuring your performance against your true benchmark — your goals.

Investment management is about allowing your money to work for you to help you reach your financial goals.
Financial advice is about helping people define their goals, dreams, desires and fears.

Investment management is about creating a process that guides your actions in a wide variety of market environments.
Financial advice is about implementing a plan and making corrections along the way as life or market and economic forces intervene.

Investment management is about creating a portfolio that can survive severe market disruptions.
Financial advice is about creating a financial plan that can survive severe life disruptions.

Investment management deals with financial capital.
Financial advice deals with human capital.

Investment management is about growing and/or preserving your wealth.
Financial advice is about understanding why money is important to you personally.

Investment management is about where to invest a lump sum.
Financial advice is about how and when to invest a lump sum.

Investment management is about asset allocation.
Financial advice is about asset location.

Investment management is about tax loss harvesting.
Financial advice helps you understand your own personal tax situation.

Investment management is about creating policies to guide your actions in the face of economic and market uncertainty.
Financial advice is about helping people make better decisions with their money in the face of uncertainty that is impossible to reduce.

Investment management helps you understand how much you need to earn on your investments meet your future spending needs.
Financial advice helps you understand how much you need to save meet your future spending needs.

Investment management helps you figure out where to take your money from when you need to spend it.
Financial advice helps you figure out where to spend your money in a way that makes you happy.

Investment management helps you grow your savings to meet future consumption needs.
Financial advice helps you plan and budget for future consumption needs.

Investment management is about creating a long-term process to guide your actions in the markets.
Financial advice is about creating systems that allow you to spend less time worrying about your money.

Investment management is about reducing the anxiety that comes from the volatile nature of the markets.
Financial advice is about reducing the anxiety that comes from making important decisions with your money.

Investment management involves growing your wealth so some day you can become wealthy.
Financial advice involves figuring out what a wealthy life means to you.

To get the most out of investment management you really need to also be receiving well thought-out financial advice. They go hand-in-hand because you can’t make legitimate investment recommendations until you understand someone’s personal situation.

Hopefully the financial advice business will play catch-up to investment management in the years to come. There are a lot of people who need better financial advice.

Further Reading:
Your True Risk

Now here’s the stuff I’ve been reading this week:


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