Financial Planning vs Asset Management

It may sound from the title like I am setting these practices against one another, but actually this article is intended to be something of a clarification of what each of those terms means.  Hopefully what you will glean from this is that it shouldn’t be a case of deciding financial planning vs asset management but rather using both to optimise your finances.  But what do these terms mean?  Read on to find out.

Asset Management

I’m actually going to start with the second term for reasons that will hopefully become clear as the article develops.  Asset management is the process of investing your portfolios in accordance with your risk profile and timescales.  In theory, asset management can be largely separated from your specific goals, hence the asset management part of working with a financial planner is often outsourced to a range of funds or to a Managed Portfolio Service – in neither of these cases will the asset manager have any awareness of the specific goals for the clients, and instead they will be focusing on achieving returns in accordance with the overall mandate, leaving the specifics of getting to know the client and their goals to the financial planner (or leaving it to the client if no financial planner has been appointed).

Asset Management is typically achieved in one of the following ways:

• Multi-asset funds – these are designed to be “portfolio funds” that operate as self-contained investments.
• Funds of funds – similar to multi-asset funds, but instead of directly buying assets the management team will buy other investment funds.  This adds a layer of complexity and therefore charges, but if the underlying funds are passive vehicles this can ultimately still be a cost-effective means of investing.
• Managed Portfolio Services – these are designed to operate similar to multi-asset funds, but are not contained within an investment fund.  Instead, each participating client owns their own share of the assets.  This can trigger income and capital gains tax when dividends are received or disposals are made, as the asset management team will make the appropriate investment choice, not the specific tax choice that an individual client might make.
• Bespoke Portfolio Service – the client owns a portfolio of assets directly, as with the Managed Portfolio Service, but in this case the asset manager will get to know the client, their goals and their tax position, and  those facts might influence the decision made on their behalf.  Unsurprisingly, this type of service is the most expensive model, but it can also offer the most reassurance to clients wanting to safeguard their assets as best possible.

This last service is where the line between financial planning and asset management can get quite blurry.  After all, a good bespoke manager will already do things like make sure that ISA allowances are used if they are managing taxable investments.  This is traditionally under the umbrella of financial planning.

Financial Planning

That brings me on neatly to the next point in this article on financial planning vs asset management.  In its purest form, financial planning is completely separate from asset management.  It is about you as a client, so working out where you are currently (e.g. assets, liabilities, income and expenditure), where you would like to be (i.e. your goals) and what might cause you to be unable to achieve those goals – we call those risks.

You will undoubtedly have spotted that  “investment management” as a concept doesn’t appear in that definition, nor does it include any reference to tax allowances and the like.  This is again where the line between financial planning and asset management starts to blur.

To give an example, if a client, call him John, comes to me with a pension query, I can talk to him about his goals and identify his risks, but at some stage he will perhaps need to actually do something with his pension.   That something might be at the product level – like transferring from one provider to another to get better features, or activating the plan to fund retirement – or it might be focused on the  investments themselves – like investing the pension assets into a new strategy more in line with John’s risk profile and goals.  Both of these are part of what a financial adviser does, so the answer to the question of financial planning vs asset management is answered: both.

In the UK, regulated financial advice (i.e. financial advice given by someone authorised and regulated by the Financial Conduct Authority) is a blend of financial planning and asset management.  A good financial adviser (like me) will have a very firm grip of financial planning and must understand at least enough about asset management to know the various options that exist and are suitable for specific situations.  I’d like to think that my understanding of investments goes a little beyond that!

Financial Planning vs Asset Management

So in summary, neither of these can exist and thrive without the other.  A great financial plan is likely useless if you don’t have a means to invest, and investing without a financial plan opens you up to all sorts of risks, including the possibility of missing some crucial allowances through inaction.

Putting it another way, Financial Planning is setting up the structure and understanding why certain things are done a certain way within that structure.  Asset Management is what goes on when you fill the structure and want it to start doing what  you designed it for.  Financial Planning is the blueprint and foundation, Asset Management is the construction itself.  And both have a defined end goal in mind, namely a completed building.  Start building without a blueprint and you’ll end up with a very random outcome, but if you have a blueprint and never start building, you’ll end up going nowhere.

Financial Planning vs Asset Management?  You need both.  Get in touch if you’d like to have a chat about building and implementing your financial blueprint.