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What is the Difference Between Portfolio Management and Financial Planning?

Most people think that financial planning and portfolio management are the same thing. While there is some overlap between the two, understanding the distinction between them is crucial when you are searching for an experienced financial professional.

To put it simply, portfolio management only focuses on the investment portfolio itself and does not generally consider the bigger picture—tax strategies, retirement analysis, non-portfolio risks, and estate/inheritance issues are all outside the realm of portfolio management. Some people may only need investment management, but the vast majority of people would benefit from having an advocate for their overall financial situation, rather than a professional focused on only one aspect of it.

Is There Anything Included in Portfolio Management That Is Not Part of Financial Planning?

Generally, the answer is no. Full-scale financial planning includes portfolio management along with much more. The ability to analyze the tax aspects of your investments alongside retirement needs, such as income and learning how to best structure your investments to provide after-tax retirement income, is vital. Without the big picture view of someone’s financial situation, this is nearly impossible to construct properly.

As comprehensive financial planners, we see numerous opportunities to add value beyond sheer investment rate of return. Here are some broad categories that we investigate for potential opportunities:

  • Long-term income tax planning
  • Analyzing required rate of return on your investment portfolio in order to achieve your retirement goals
  • Identifying other risks and opportunities in the greater financial world

For example, a common scenario we see in the retirement planning process is when someone retires particularly early. Social Security doesn’t start for most people until they reach their mid 60’s, and the IRS does not require people to take money out of their IRA/401(k) type accounts until they reach age 70 ½, which often leaves several low-income tax years between retirement and required withdrawals.

This can lead to an opportunity to complete Roth conversions. Essentially, these conversions involve moving IRA assets into Roth IRA assets, creating a taxable event in a low tax bracket. Once converted, these assets are enabled to grow tax-free for the retiree and/or their beneficiaries for decades to come. This type of planning does not result in a higher rate of return on someone’s investment portfolio, but it does lead to having more dollars available in retirement and to pass on to heirs. Ultimately, this smart financial planning can make quite a difference.


How Does Budgeting Play Into Financial Planning?

The most common budgeting opportunity we encourage is for people to calculate exactly how much they need to save on an ongoing basis in order to achieve their own financial goals.

For this topic to fit into a financial plan, we typically see success taking one of two approaches:

  • Someone knowing how much investment risk they are willing to take, allowing us to calculate how much they need to save to achieve their goals. This often negates the need for detailed budgeting.
  • Someone knowing how much they can save (or want to save) so we can analyze how high of an investment rate of return they need in order to accomplish their goals.

For example, with someone’s given rate of saving, if we calculate that they need an 18% rate of return to accomplish their goals, we can determine that this is unrealistic and that additional savings are required or some other variable must be changed. This can have a significant impact on how an investment portfolio is constructed, but typically, portfolio managers alone would not dig deep enough to answer these types of questions.

A third category of major planning items that a portfolio manager is more likely to miss would be other types of risks and opportunities. Analyzing someone’s existing insurances—whether it be life, disability, health, or Medicare, allows us to spot and flag glaring risks that someone may not even know he or she is taking. This is very important to address and not at all a part of portfolio management.

Another opportunity that could easily be missed by only focusing on portfolio management is proper and thorough estate planning. Proper estate planning enables beneficiaries (family, charities or otherwise) to receive the greatest amount of money possible by factoring in estate and income tax calculations. Financial planners can often spot annual opportunities to pursue within an estate plan.


Berger Financial Group Financial Planning Services

As comprehensive practitioners, we thoroughly enjoy spotting these often overlooked opportunities. Every financial situation is unique, but most people can realize significant benefits by working with a comprehensive planner rather than focusing on portfolio management alone. Contact Berger Financial Group today to get started with planning and budgeting for your financial future. 

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