The Difference Between Investment Management and Financial Planning

Understanding The Difference Between Investment Management and Financial Planning Is Critical To Securing Your Lifestyle

You‘ve probably spent most of your life trying to get to a point where you can live the life you always dreamed of.

Having a liquid net worth of $1 million, $10 million, or $300 million is not easy; all due credit to those who’ve managed to achieve it.

However, many High Net Worth (HNW) individuals tend to lose sight of what they’ve been trying to achieve when setting out to accumulate so much wealth. They forget that money is supposed to make lives easier.

See, making money for money’s sake is pointless. The real question is: will you make enough money to achieve your dreams? We often speak to these individuals who are so driven to increase their wealth, they forget how it’s affecting their lives.

Ultimately, the rush toward money is a battle to create better lifestyles for you and your loved ones.

Having a great investment portfolio is a great idea, and financial planning is also essential to living a good life. Neither of these alone can ever guarantee financial success.

We all know, without financial success, you will have to sacrifice some of your dreams.

Maybe you won’t be able to afford great healthcare; perhaps, your children won’t go to the best educational institutes—there’s no telling how you might have to compromise.

A few years ago, Forbes did a piece on financial advice from accomplished millionaires. Although the whole publication was designated as a way to inspire people, reading between the lines, you’ll find that these businessmen are very shrewd and disciplined.

Each became Ultra High Net Worth (UHNW) individuals because they had the same principle: they all realized financial planning and investment management go hand in hand.

What Is Financial Planning?

Put simply, financial planning is the science of determining an individual’s financial status, based on their income levels, and existing financial conditions.

Think of it like this: go back to when you first realized your dream. There were probably some things that you wanted, and that list definitely kept on growing as your life moved on.

At that moment, let’s say you made $100,000 annually. On the basis of certain parameters—such as whether you choose to make investments or get pay raises—it’s possible to predict (approximately) how much you will be worth within 10 years.

By identifying factors that serve as determinants of your income and wealth, a financial plan can set investment/financial benchmarks that you must meet to achieve your financial goals.

Do you know where the magic begins? When you start exploring what approach can yield the best results in the same 10-year timeframe. This is what financial planning allows you to do.

You can predict what your financial status is, and you can use this information to create the best possible financial outcome for yourself.

The beauty of this whole procedure is that it applies equally as much to High Net Worth individuals.

It doesn’t matter if someone has a liquid portfolio of $1 million or $100million. The fact of the matter is, we all need a financial plan to keep us on track.

These plans set out the financial milestones you need to achieve to help you maintain or achieve your goals. Without a plan in mind, you‘ll just keep spending your money, while increasing the potential of having to compromise on your idea of a perfect life.

Remember that you need to take stock of your entire networth before creating a comprehensive and detailed financial plan. That involves the valuation of all assets like retirement accounts, savings, real estate, investment accounts, and more.

How Do I Make A Financial Plan?

That’s a good question.

When you set out to plan your finances, it’s important that you understand what your goals and objectives are. If Mr. and Mrs. Anderson want to leave ‘x’ amount of money to their children as an inheritance, they need to evaluate certain things. These things are:

• Do we have the money now?
• Do we only have this money or have we exceeded our goals already?
• How do we maintain this amount of money?
• Can we increase the amount of money we leave behind?
  • Will there be enough money for our children?

Each of these questions, brush against some core ideas in conventional financial planning schemes. It’s astounding how commonsensical this exercise is. The couple has set a goal for themselves that they are now trying to achieve over a course of, let’s say, 20 years.

Financial planning is done to achieve objectives like reducing the risk of uncertainties in changing market trends, ensuring the access of funds when required, control the waste of funds, and help obtain the right financial schemes for resources that will be useful in the long-term. 

A good financial plan will take into account the following factors:

The Real Value Of Money

Most people don’t realize that $100 isn’t worth what it was 20 years ago. This is something called the purchasing parity of money.

As time passes and incomes rise across an entire economy, goods and services start becoming expensive. After all, wages increase the financial burdens on producers, which are then passed on to the consumer. As prices increase, more often than not, the increase is higher than the increase in wages.

Ultimately, the same amount of money can’t buy the same amount of things it could before. The purchasing parity of money begins declining. So, the ‘x’ amount of money the couple wanted to leave their kids, might not be as financially empowering as they think it is currently.

A good financial plan takes into account what is called the “real” value of money. It makes sure you can maintain your standard of living for as long as possible.

Once you understand how the real value of money declines over time, the advantages of a financial plan also become clear.

As a general principle, these plans can help identify the steps you can take to create a wealth-generation mechanism, which will make you richer in real terms. It is possible to keep on improving, or at the very least, sustain your lifestyle, if you manage to take these steps.

From an analytic standpoint, these plans generally take into account multiple variables that are simulated hundreds of times and incorporate multiple variations. The only thing they achieve is pointing out the optimal path towards maintaining or increasing the real value of your wealth.

Where Does Investment Management Come In?

The point where you begin to wonder how your liquid net worth can increase is when you stumble upon what we call “investment management”.

Investment management is the process of creating a collection of investments that will help generate greater wealth and reduce the risk of losses over a long period of time. The whole process of investment management is about expected returns, asset allocation, time horizons, and risk tolerance. 

It’s an exercise that requires constant revision and one that requires a versatile, sharp, as well as a shrewd mind, to keep profitability.

Many HNW individuals actually hire investment managers to maintain their portfolios for steady gains across all of their investments.

The thing is, no one can really tell how the equities, or securities market is going to behave over a given period of time. The point we’re making is, sometimes even the best investment managers can fail to deliver results.

It’s not that they are incompetent; it’s just that no one can accurately predict how the market will behave.

With this we come to another very important question:

How Do I Make Sure That I Maintain My Wealth Indefinitely?

This depends on various factors, like your ability to take on risks and your financial and emotional condition. It also depends on how fast you want your wealth to grow.

Investment managers can create an appealing portfolio for you. However, they follow the same principles across the board. Some of these include:

Diversifying Your Investment

Consider this possibility: Mr. and Mrs. Anderson decided to invest all of their money in stocks.

At that moment, the bond market wasn’t doing as well. Therefore, they invested everything in stocks.

However, the market began experiencing some frequent fluctuations. The investors lost confidence and took out the money, which could potentially destroy the couple’s future.

One maxim of effective portfolio management is that you should never put all your eggs in the same market.

As a result of the stock market going down or crashing altogether, the bond market began rising. We realize the inter-linkages between either will possibly have both of them crash, but for the sake of the argument, bear with us.

Had they invested in bonds at the same time, they could’ve sustained the losses on their stocks. Diversification plays off in the long run. We are all here for the long haul after all.

Consulting With The Experts

Getting emotionally attached to the decisions you make is a bad idea. Investing on the basis of a hunch is as equally bad an idea if not worse. A brilliant financial strategy requires an objective analysis to create optimal asset allocation—to situate your investments in the efficient frontier.

Consulting with a financial advisor or an expert in the field can help you create portfolios with the highest returns within your accepted level of risk.

These are highly-trained individuals who can formulate long term strategies, to help you manage and improve your wealth.

Sticking To The Plan

Remember when we spoke of the financial plan and how it helps identify opportunities that can make you money? Well, once you identify the best plan of action, committing to it is the best way to achieving your goals. This might mean you having to cut back on expenses right now, or maybe make larger investments than you did before. But remember that discipline and commitment usually pays off.

How Does Financial Planning and Investment Management Work?

This is a relationship that will never dwindle.

Investment management forms a very integral part of financial planning. Once you have your eyes set on a goal, the path toward it will be marked by the investment decisions that you make. Individuals who understand this have all the tools at hand, to make sure they set themselves up for perpetual success.

Ultimately, your goal ought to be to maintain your lifestyle because that’s what you’re making money for.

Financial planning without implementing investment management is like trying to change a tire without a tire iron. These plans are unlikely to come to fruition if you don’t implement corresponding and synergistic investment strategies.

Understanding the difference between the two, and realizing how they work together, can go a long way in helping you decide what the best course of action should be.

These can set the standards that you must meet to maintain your wealth, how to manage it, and help you realize your life’s goal. That is, to make life comfortable for you and your loved ones.

There are many who have wasted their money because they were not prepared for financial trauma or emotional trauma. This lack of planning led to them losing out on millions, which they could never recover. In human history, failure to plan has left many financial giants powerless against market instability.

Don’t let yourself be listed as one of the fallen greats. Be prepared and play smart. Manage your wealth to the best of your abilities.

This is where we come in.

Hutch Ashoo and Chris Snyder are co-founders of Pillar Wealth Management. We are a fee-only expert wealth management firm for High Net Worth and Ultra High Net Worth Individuals. With years of experience in financial planning and investment management, we can help guide you toward continued financial security.

Our in-house team will work together with you to provide investment advice and help our clients make informed financial decisions.  

We have 30+ years of experience and are published authors. Our bestsellers include a hardcover book titled, “Protecting Ultra High Net Worth Portfolio Estates”

We take a very active role in helping High Net Worth clients maintain and enjoy their wealth.

Call us today for a complimentary conversation with our expert advisors. From San Francisco to Miami, wherever you live, Pillar Wealth Management can help you meet your wealth management goals.