09 July, 2011

Is Financial Planning akin to Wealth management?

When I was a boy I used to get confused between a tadpole and small fish. They looked alike, swam as effortlessly and looked so like each other. But they were different – I came to know later. One would eventually jump out of water and the other will stay in water, for life.

Financial Planning & Wealth Management are not so different from each other ( at least by definition ) and yet they are different in significant ways. But they are different actually in practice. The terms are confused and used interchangeably by lot of people… they are not the same.

Financial Plan is a blueprint to achieve client goals through appropriate financial management. The focus is always on the goals. A Financial Plan would be useful to a family that has various goals and wants to know whether they will be able to achieve them within the framework of their past investments & ongoing surpluses that will be available, over the years. Cashflows over the years will have to be worked out and it needs to be found out if the goals can be achieved within the timeframes specified or not. Once that is established planning for the near term needs to be done. Any deficits on a monthly basis or special needs that may be there needs to be addressed and provisioning needs to be done for that purpose. As part of the plan, advice is also offered on the right asset allocation for them. A proper risk assessment is also done and the correct amount of life insurance that may be needed is arrived at. It is after all these that specific recommendations are made.

How much liquidity may be needed, in what instruments to invest in, are specified. This amount would depend on the dependencies, the loans and other outflows that are there, stability of cash inflows and other factors. All past insurances would have been looked into and appropriate recommendations on whether to keep them or continue, is offered. New insurances on life, accident , medical, home etc. are suggested, after taking into account the present insurance they have, including what they have from their employer. Past investments are also looked into and reallocations are suggested based on their specific requirements and goals. After allocating for liquidity, the balance amount available in the bank needs to be deployed. Similarly, the surpluses coming out on a monthly basis would need to be deployed . Suggestions for all this would be there in the plan. The cash inflows over the period – especially over the next 12 months are looked into and specific recommendations are made for such amount coming in, in the future. Implementation is done once the client understands and agrees on the plan. Implementation can be done by the planner or any other third party.

Now coming to wealth management, it is typically for those who have already accumulated a fair amount of wealth. Ofcourse, even these people would have goals and allocations need to be made to achieve the goals. The primary point of difference here is that the planning done to achieve goals may not be required as most goals would have been achieved and the focus would be more on growing the wealth. So the focus here is different. Plus, the wealth here can be substantial and that has to be managed efficiently. Also, there would be opportunities available before such a client which may not be suitable for a normal investor. Investments in a serviced apartment, a Private Equity fund or special structured products is a case in the point. Investments in properties abroad, special asset classes like Art, collectibles, fine wines etc. would again be useful for them.
The product portfolio that a wealth manager deals would be far more varied and complex as compared to a Financial planner. The team of experts that would have to be available to a wealth management outfit would be of a higher order. A very important factor for a wealth management client is taxation. Also important would be proper estate planning. A person having substantial wealth would want to leave behind a legacy and would want it distributed as per his wishes. Wills and trusts become very important for such clients and needs to be an integral part of wealth management.

To sum it up, there are points of overlap between the two. But they are for two different audiences and hence their focus differs. To some extent, they are like that tadpole and fish!

Published in Financial Chronicle on 7/7/2011

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