Investment Management vs. Financial Planning: What’s the difference?

Investment Management and Financial Planning have a lot in common. So much so, that they are often used interchangeably. This can be confusing for consumers trying to navigate this complicated, high-stakes industry. And - let’s be honest - this industry doesn’t always have the best reputation with consumers. But the difference between investment management and financial planning is real and important. And, we’re here to help explain it.

What is Investment Management?

Investment management is a professional service that focuses on managing investment portfolios. Investment management is also known as money management, or portfolio management. Investment management includes buying and selling assets (executing trades), creating investment strategies, and managing asset allocations.

What is Financial Planning?

Financial planning is much broader than investment management. Financial planning encompasses your entire financial situation including your cash flow, tax strategy, risk management, estate plan, and - yes- your investment portfolio. Financial planning is typically goal-based. It takes all of these facets of your financial life into account to create a plan to reach your short- and long-term financial goals.

Financial planning, as described above, is often called comprehensive financial planning or holistic financial planning, in order to help clarify this meaning as opposed to the broader industry umbrella term “financial planning,” which is commonly used to describe a myriad of narrower financial services. Comprehensive financial planning is often performed by a fiduciary, a financial planner who is legally and ethically bound to always put their clients’ best interest before their own. The Certified Financial Planner™ (CFP) designation, is an industry-leading designation for fiduciary financial professionals who create comprehensive financial plans for their clients.

What are the key differences between Investment Management and Comprehensive Financial Planning?

Some of the main differences between investment management and comprehensive financial planning include:

• Focus: Investment management aims to help you grow your assets through earnings and interest. Comprehensive financial planning aims to help you create a plan for your asset needs today, tomorrow, and into the future.
• Strategy: An investment management strategy determines how to invest your assets - specifically which stocks, bonds, and funds in which to invest. A comprehensive financial plan determines how much of your assets to invest, when, and where (in what type of investment account).
• Influences: Investment management is heavily influenced by the markets and the economy. Comprehensive financial planning aims to be less influenced by external forces, by focusing instead on having a plan for the unexpected.
• Resilience: Investment management uses diversification to reduce risk exposure. Comprehensive financial planning uses asset location strategies, such as maintaining an emergency reserve, and behavioral finance strategies, such as preaching patience, to weather volatility.
• Results: Investment management results are measured by performance. Comprehensive financial planning results are measured by progress toward short- and long-term goals.
• Wealth: Investment management aims to create wealth. Comprehensive financial planning aims to define what wealth means to you, then craft a plan to achieve it.

What is included in a Comprehensive Financial Plan?

A comprehensive financial plan is meant to be just that, comprehensive. It takes into consideration all the parts of your financial life. Comprehensive financial plans are typically goal-based. Financial planners help you create short- and long-term goals and create a plan to reach them. Because of this, comprehensive financial plans are highly customized. Some of the most common features of a comprehensive financial plan are:

Cash Flow Planning

Cash flow planning is somewhat similar to budgeting, except it generally takes a higher-level approach. Cash flow planning tracks the flow of cash in (your income) and out (your spending), in order to create a plan that will keep you on track to your financial goals.

Major Goal Funding

Unlike investment management, comprehensive financial planning is goal-based. In fact, helping define your goals is a key part of the financial planning process. Some common financial goals include paying off debt, buying a home or vacation property, or funding a child’s education.

Retirement Planning

Universally high on the list of financial goals is - retirement. In today’s business environment, Social Security benefits and pensions typically take a back seat to retirement savings in corporate retirement plans, such as 401(k)s, and Individual Retirement Accounts (IRAs). This makes retirement planning a key element of comprehensive financial planning.

Investment Management

While it may not be the sole focus, strategic investment management is still a critical part of a comprehensive financial plan. Simply saving cash is rarely enough to reach long-term goals, such as funding a comfortable retirement. To pursue long-term goals, you typically need systematic savings utilizing the power of compounding.

Tax Planning

Taxes are one of the (if not the) biggest expenses over a lifetime. That’s why it’s critical for a comprehensive financial plan to include tax planning. Tax planning is not the same as tax preparation - the service accountants provide when helping you calculate and file your tax return. Tax planning is an ongoing search for opportunities to reduce the total tax bill you will pay over a lifetime.

Risk Management

No financial plan can be said to be comprehensive without taking risk management, or insurances, into account. Insurance policies can be important tools for ensuring that you stay on track to your financial goals, despite any unexpected curveballs.

Estate Planning

Comprehensive financial plans not only address lifelong goals, such as retirement, but they extend beyond your lifetime by planning the estate you will leave behind. The goal of estate planning is to preserve the wealth you have accumulated during your lifetime when it passes to the next generation.

What are the benefits of Comprehensive Financial Planning?

There are many benefits to comprehensive financial planning that are often lacking in more narrowly-focused financial services. These include:

Personalized Strategy

Comprehensive financial planning is inherently personalized. It would be nearly impossible to address all the different aspects of a comprehensive financial plan with a cookie-cutter solution. There are too many variables at play. A comprehensive financial plan is customized to fit your current financial situation, risk tolerance level, and unique financial goals.

Proactive Risk Management

By including all aspects of your financial situation, comprehensive financial planning helps you identify potential risks that might be missed in a more narrowly-focused review of your finances. This allows you to build an insurance portfolio designed to proactively protect you from life’s unforeseen events.

Long-Term Focus

While comprehensive financial planning does address short-term financial goals, the main emphasis is on creating a long-term plan. In this way, a comprehensive financial plan works to guide your financial decisions through several life stages.

Integrated Solutions

Comprehensive financial planning addresses your financial challenges as they relate to each other, rather than addressing each on its own. Thus, it is able to offer integrated solutions, such as investment management that also optimizes your tax liability, or retirement planning suited to your estate planning desires.

Enhanced Decision Making

By providing a complete view of your financial situation, comprehensive financial planning can help you make better informed decisions. Having a clear understanding of how you are progressing toward your financial goals can provide a sense of confidence that may spill from your finances into other areas of your life.

Regular Review and Adjustments

Many financial services, such as insurance policies, are static - even though life is anything but! Comprehensive financial planning performed by a Certified Financial Planner™ includes regular reviews and adjustments. Regular reviews keep your plan updated as your life changes.

Key Takeaways

Investment management and comprehensive financial planning are both important financial services, and there is a lot of overlap between them. But, there are some key differences. Investment management has a more narrow focus - specifically investment management focuses on managing assets in an investment portfolio. Comprehensive financial planning is more broad. It looks at all areas of your financial life in order to create a strategy to reach your short- and long-term financial goals. Perhaps the most important distinction is that investment management rarely includes comprehensive financial planning, whereas comprehensive financial planning almost always includes investment planning as a major component.

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The views represented are not meant to be construed as advice. Moreover, no client or prospective client should assume that this content serves as the receipt of, or a substitute for, personalized advice from Affiance Financial, or from any other professional. 

Affiance Financial is registered as an investment adviser and only conducts business in states where it is properly registered or is excluded from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. The firm is not engaged in the practice of law or accounting.

Content should not be viewed as legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation. 401(k), IRA, and tax rules are subject to change any time.

Affiance Financial does not serve as an accountant and does not prepare tax returns.

All investment strategies have the potential for profit or loss. Insurance product guarantees are subject to the claims-paying ability of the issuing company and are not FDIC insured.