Financial planning and wealth management are used synonymously by many. However, there is a stark difference between the two. Before we embark on understanding the key differences between these concepts, let’s understand the concept of these two terminologies.
Financial planning is an elaborate exercise that includes managing your day-to-day expenses and your savings to live a financially stress-free life. Financial planning involves various sub-tasks such as budgeting, debt management, investment management, tax planning, cash flow management, retirement savings, etc.
Financial planning also covers key aspects like availing adequate life insurance and health insurance to hedge your basic risks. A financial planner would help you build an expense pattern which will enable you to effectively manage all your expenses, cut down on your sundry expenses, and increase your savings to match your financial goals.Financial planning is closely associated with goal-based planning. Financial planning is required at all stages of life. It should become an integral part of your routine as you achieve financial independence. This will help you keep yourself safe from common perils such as excess spending, inconsistency in investments/savings, debt traps, etc.
While financial planning can be started with a clean slate, essentially not having any investment background at all, wealth management needs existing wealth which forms the basis upon which further wealth or capital can be built. Wealth management is typically targeted at HNIs and UHNIs. Wealth managers manage the portfolio of investments to ensure that they generate optimised returns at acceptable levels of risk.The objective of the wealth management effort would also depend on the individual’s life stage and goals; however, the essential essence of wealth management revolves around the preservation of existing wealth and identifying opportunities to accumulate further capital. Risk mitigation appears more actively in this effort when compared to that financial planning. Some of the sub-tasks of wealth management include risk management, capital gains assessment, estate planning, etc. The reporting and monitoring effort under wealth management is more intense.
|Point of difference||Financial planning||Wealth management|
|Definition||Opportunity-based investment approach||Goal–oriented and basic financial well-being approach|
|Objective||To preserve existing wealth and grow capital||To efficiently manage expenses and invest to optimise taxes and build for future financial goals|
|Audience||HNIs & UHNIs||Every individual|
|Sub-tasks covered||Risk profile assessment, portfolio re-alignment, opportunity deliberation and selection, active risk management, diversification of portfolio, strategic and tactical decision-making||Budgeting, cash-flow management, investment and tax planning, retirement planning, goal-based investment planning, life insurance, and health insurance for basic hedging of risk and tax planning|
|Types||Active wealth management – intense monitoring and frequent risk mitigation effort Passive wealth management – relatively less monitoring and less frequent risk mitigation effort||NA – however, this is passively managed with relatively less tracking and realignments; risk mitigation effort is almost negligible|
|Decision-making criterion||Based on what is best for the portfolio and how the investment opportunity could help build wealth||Based on financial goals and the time horizon applicable|
|Professionals||Wealth Managers||Financial Planners|
It is interesting to note that wealth management is built atop financial planning, the funds used for wealth management are over and above the money needed to meet your basic financial goals. A subtle amount of wealth management is also involved in financial planning. You could choose the relevant service depending on the quantum of funds available and the life stage.
The service and the intensity would depend on the phase of your investing journey. Here are the various phases and how these services are carried out.
Estate planning remains an integral part of wealth management, where you ensure the wealth accumulated is seamlessly passed on to beneficiaries without hassles in the event of incapacitation or death.
Wealth management is typically targeted toward affluent investors. However financial planning is required at all life stages. Financial planning, from a broader perspective, also encompasses wealth management.