Many smart, successful professionals feel that they should have all the answers when it comes to managing their finances.
While it would sound crazy to ask a financial advisor to perform surgery or design a suspension bridge, plenty of doctors and engineers try to go it alone without getting the expertise of a financial advisor.
But how do you know which financial services you really need? The names of different services often sound similar, which may be confusing for the average investor. For instance, what’s the difference between money management and wealth management?
Money Management Vs. Wealth Management
It’s helpful to think of money management as specific, finite tasks or functions that are necessary on an issue-by-issue basis. Typically, a money manager is someone who manages an account or investment portfolio for you, making sure that it’s run in a way that aligns with your goals and objectives. When working with a money management firm, it’s important to clarify your objectives, so that the managers know what you’re trying to achieve and take appropriate action.
Wealth management, on the other hand, is more holistic. It uses more advanced strategies to address issues that affect your complete financial picture, from taxes to business ownership to financial planning for your estate. Wealth management includes analyzing cash flow and tracking personal net worth, while exploring different scenarios and future projections. These tasks are typically beyond the scope of what an accountant or money manager would provide.
Estate planning, for example, is often a complex and sophisticated process that requires a number of professionals working together. If something were to happen to you, it’s important to have a plan for how you would dispose of a business, land or other assets, for example, and ensure the financial well being of your family.
Here’s an example of how a person might use the services of a money manager and a wealth manager. Let’s say that John Smith sells his business and receives a check for $5 million. What happens next depends on John’s goals for that $5 million. His goal might be to use that pool of money to replace the income he was earning while owning the business — perhaps $100,000 per year.
At this point, John could sit down with a money manager and say, “I need to invest $5 million in a portfolio that’s going to grow and generate $100,000 in annual income.” Money management is a great tool when you have a specific task to accomplish with a specific amount of money over a specific amount of time.
A wealth management team, on the other hand, could help John structure the deal and look ahead to determine the impact of that $5 million on his overall financial picture. True wealth managers are giving financial advice and guidance based on data; selecting products and implementing a plan comes later, through any number of sources.
Building A Financial Team
Early on in your career, your financial life is fairly straightforward. If you’re just getting out of college or medical school, you probably don’t need a wealth manager — working with a money manager is usually enough to start making smart financial decisions.
As you grow older and more successful, your finances become more complex, and it’s harder to account for all of the factors necessary to make good decisions. People who receive good financial advice early are often tremendously successful. As your financial situation becomes more complex, the more you benefit from wealth management professionals.
As you build wealth, your financial matters become more complicated and time-consuming, and many successful, wealthy people essentially need a personal financial board. This team might include a tax professional, attorney, financial advisor and insurance agent, all working together. A financial advisor often leads this team, but an accountant or attorney could also take the lead.
Whether you begin building your team with money management or wealth management professionals, the most important thing is to get outside expertise, instead of trying to do it all on your own. Those who try to do it themselves may reach their destination, but with a lot of mistakes along the way.
To secure your family’s financial future, you need a smart strategy and plans to mitigate potential risks. Download our Checklist For Securing Your Family’s Financial Future.
Richard Brothers Financial Advisors