The terms portfolio management and wealth management are often used interchangeably by investors, but the two are different with respect to their goals and services. Portfolio management includes the addition, management, and rebalancing of different assets in an investment portfolio. On the other hand, wealth management provides a gamut of services that caters to the management of the overall personal finances of a client. If you’re unsure of what kind of financial service is the most suitable for your unique financial requirements, consult a financial advisor for guidance.
Let’s have a closer look at both these concepts to identify key differences and understand their functionality.
What is portfolio management?
A portfolio comprises various financial assets such as stocks, bonds, commodities, cash equivalents, mutual funds, exchange-traded funds, and more. The agenda of having different asset classes in one portfolio is to mitigate risk by diversification. Portfolio management focuses on making buy-sell-hold decisions regarding investments and their appropriate mix. The process involves looking at asset allocation and balancing the risk accordingly against the estimated performance. The portfolio manager conducts the strengths, weaknesses, threats, and opportunities (SWOT) analysis for the assets and their performance and makes optimum choices in order to maximize the returns from the pool of assets.
In short, portfolio management is the skill of picking suitable financial products and forming customized portfolios that align with clients’ individual needs. A portfolio manager looks after an individual’s investments, ensuring that the targeted returns are achieved. He considers various factors like objective, risk appetite, age, and more. While making investment decisions, he ensures that the overall portfolio reaps the maximum return. Money is allocated across various investment avenues by the manager to diversify and rebalance it whenever needed. He/They might sell or manage a particular financial product as well.
Key elements of portfolio management
1. Asset Allocation
Investors with a more risk appetite might give additional weightage to more volatile investments such as growth stocks in their portfolios. In contrast, investors with a conservative profile might want additional weightage of stable investments such as bonds and blue-chip stocks. The asset manager does the asset allocation accordingly.
Diversification is spreading risk and reward within asset classes. Real diversification is made across different categories of securities, sectors of the economy, and geographical regions.
To explain, consider a portfolio that starts with a 60% equity and 40% fixed-income allocation, and after an extended market rally, the ratio between equity and fixed income amount changes to 85/15 allocation. Here, the investor made a profitable transaction, but the portfolio is now riskier than the client prefers. Hence, rebalancing generally includes selling high-priced securities and re-investing that money in lower-priced or out-of-favor securities.
Types of portfolio management
Portfolio management falls under the following categories:
1. Active portfolio management:
Under this category, the client’s portfolio is continuously monitored, and markets are constantly analyzed to be up to date with the ongoing market trends. The managers buy, sell or rebalance the portfolio to try and outperform the markets or fetch the desired returns. They are also involved in day-to-day trading.
2. Passive portfolio management:
The portfolio managers make investments that focus on the investor’s financial goals but do not track them regularly. Adhering to formula plans (which are a set of predefined rules by which the weights of aggressive (risky) portfolio and defensive (less risk/no risk) keep on changing to achieve the set targets) is an example of this type of portfolio management. Such a type of portfolio management is usually used in the case of long-term investments. For example, a manager might invest in index-based funds and keep them on the side for the long term.
3. Discretionary portfolio management:
The client gives full authority to the manager to act on his will for the latter to use his expertise and take vital steps to fulfill the client’s financial objectives.
4. Non-discretionary portfolio management:
As opposed to discretionary portfolio management, the manager can provide suggestions, advice, and recommendations under non-discretionary portfolio management. But in the end, it is up to the client to take action or make the decision.
Example of portfolio management
Let us assume an investor has a fund of $5,00,000 in the beginning, and he wishes to create a diversified portfolio to help obtain higher returns and low-risk metrics. A portfolio manager distributes the funds across different asset options like mutual funds, equities, bonds, real estate, fixed deposits, gold, and more. The bifurcation of the above-mentioned fund will be done by the portfolio manager. He will do a risk-return analysis for each asset and give them appropriate weightage to ensure maximum returns while creating a basis for a lower-risk pattern.
What is wealth management?
Wealth management is much broader as compared to asset management. While the latter focuses on investments, the former looks at an individual or family’s overall financial situation and takes steps to optimize their wealth and protect it throughout the financial life of the client. Wealth management is essentially an investment advisory service that looks to address the complex financial planning needs of affluent individuals. It may be a bucket of services that a wealth manager or a wealth advisor may offer – such as investment advice, taxation, and accounting, retirement planning, estate planning, etc.
Key elements of wealth management
Most individuals do not realize that the scope of wealth management is beyond just ordinary portfolio or investment management. It ranges from risk management to retirement planning to drafting a bill. Let us read through the key elements of wealth management.
1. Risk management
This is one of the most important components of wealth management. It is because wealth management primarily involves protecting an already existing corpus. The experts of this field are well versed with risks associated with various assets and their planning, ranging right from mutual funds to real estate. Wealth managers can help you take necessary steps to safeguard your assets, if necessary, through insurances, legal policies, etc.
2. Relationship management
With aspects of finance and legalities overlapping each other, tracking each module separately could be a daunting task. Accountants, tax planners, lawyers, all need to be managed simultaneously to ensure the client’s finances are in shape and on track to meet the financial objectives set out by the client. Wealth managers efficiently assemble and oversee a vast network of professionals and experts to help address client matters seamlessly.
3. Directive process
Wealth management is far more than just plain advisory on a financial product. It includes a complex process of management, transfer, and protection of wealth. It is built primarily on leading clients to a better financial lifestyle through counseling, educating, advising, and lastly, offering them tailor-made solutions on an arena of subjects right from taxes to will.
Types of wealth management services
Wealth management takes several forms and encompasses a number of services. A few of the various services offered by a wealth manager include:
1. Estate planning
Estate management is a key element of wealth management. It may include management of your estate, trusts, legacy, and charities. A wealth manager could help you prepare a will, assign guardianship, defer responsibility after death and manage your assets after you are deceased.
2. Traditional investments
Wealth managers oversee your investment in various traditional products like equities and debt too. In fact, the core of the investment portfolio of most investors generally consists of stable returns-generating traditional investments while riskier alternate investments make smaller satellites around it. Wealth managers help create this asset allocation to primarily protect wealth with the core while seeking capital appreciation through moving in and out of alternate investments. They study your risk appetite and investment horizons intricately to help attain your financial goals.
3. Tax and insurance planning
The tax and insurance planning needs of HNWIs are a lot more complex given the large asset base and net worth of such individuals. Wealth managers not only have extensive knowledge on the subjects but also years of hands-on experience. They are well versed with the constantly changing rules and regulations and can help prepare for unforeseen contingencies. Should the wealth manager directly not possess the expertise, the advisory service is bound to have another personnel exclusively assigned to cater to your needs that your wealth manager shall oversee to ensure seamless planning and operations.
4. Retirement planning
Retirement planning is one of the key composites in the professional services provided under wealth management. Wealth managers intricately manage your retirement corpus and plan investments keeping your retirement goals in mind. They ensure that your current lifestyle is not affected and you may continue to enjoy a stress-free life even in retirement through carefully planning for your retirement during your working years. They also specialize in managing traditional Roth IRAs, taxable investment accounts, pension funds, and saving accounts, to name a few.
A wealth advisor uses a consultative process wherein he/she garners information about the client’s wants and unique situation, then comes up with a personalized strategy that is tailor-made and uses a range of financial products and services.
Wealth management mainly involves merging information and guidelines concerning the financial objectives of an individual. It provides a comprehensive approach where a manager coordinates several services to manage their client’s money and plan accordingly to meet the present and future financial requirements posed by the same.
A wealth manager forms a designated plan with the aim to increase the client’s wealth based on the financial situation, target returns, and risk tolerance levels. The manager constantly updates and reviews the plan once it is developed to rebalance the financial portfolio whenever needed. This is usually essential for wealthy individuals with a diversified portfolio and the need to have a balance between them.
Example of wealth management
In general, wealth management offices consist of a team of financial experts and professionals who give suggestions across various fields with regard to wealth creation and protection. For example, let us assume a client whose partner recently passed away has a trust set up for their grandchildren and $5 million in investable assets. A wealth manager may invest these investible funds in a discretionary account as well as provide the will and trust services, apart from tax minimization and estate planning strategies.
If some wealth management advisors are directly employed under an investment firm, they might have better knowledge in terms of investment strategies. On the other hand, the advisors who are employed at a large bank might focus on the available credit options, management of trusts and, overall estate planning or insurance options. In short, expertise can vary across different firms.
Key Differences Between Portfolio Management And Wealth Management
|Portfolio Management||Wealth Management|
|Definition||It is the art and science of identifying and managing a collection of investments that fulfill the risk-return goals of a client or an organization for the long term.||It is an investment advisory service that combines different financial services to address the overall financial requirements of an affluent client.|
|Focus Area||Different asset classes consist of high-risk, high return (e.g., stocks) and low risk, low return (e.g., bonds, gold).||Different services that focus on the overall financial planning of a client.|
|Functions||Managing various assets and giving weightage as per the risk-return appetite of the investor.||Managing client’s wealth and ensuring tax minimization, retirement planning, estate planning, etc.|
|Designated people||Portfolio/Asset managers||Wealth managers|
|Responsibility||Ensure the portfolio meets the targeted returns.||Safeguard the overall wealth of the client.|
Portfolio Management Versus Wealth Management: Which is the Right Choice For You?
The choice between hiring a portfolio manager for managing your entire portfolio or a wealth manager for financial planning ultimately depends on your financial goals and the services you require. If your sole purpose is investing, a portfolio manager would be the right choice for you. A portfolio manager will help you in finding the best investment options to maximize your portfolio returns. On the other hand, if you want holistic management of your wealth, then a wealth manager would help you in setting up all your finances, right from assets to estate management. Wealth managers are equipped to help with everything from education planning to estate planning and so on.
There is a good possibility that one might require both types of services, and thus many financial advisory firms offer both wealth management and asset management services. Though both services may be charged separately. At other firms, you might be offered to pay a wrap fee that covers the cost for both. Both these services have a similar cost pattern that involves paying through a percentage of assets under management.
To get in touch with a fiduciary advisor who may provide you with wise financial strategies and help provide the most suitable financial services for your unique needs, use Paladin Registry’s Free Advisor Match Tool and get matched with 1-3 suitable financial advisors that may be able to help you.
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